Heading into the opening, let's turn to the Federal Reserve. The newest Federal Reserve Governor, Stephen Myron, making the case for aggressively luring interest rates to avoid damaging the economy, diverging from some other FMC members, and pleased to say that joining us this morning life from the Federal Reserve is Governor Myron himself. Governor, Welcome to the program, sir. We've got tons of time to talk about what's going to happen next, your force on the labor market, the
balance of risk, the broader economy. I actually wanted to lead the conversation with this one. Governor. What was your experience like, I'm sure this was unexpected twelve months ago. What was it like walking into the room and was it different to what you expected?
Good morning, and thanks for having me. It's great to see you again. Look, you know, walking into the room, you know I had had a good briefing ahead of time about what the meeting would what the meeting would be like, and so that was very helpful. But I will say that everyone was extremely friendly and welcoming and
kind and collegial, and I really appreciated that. And you know, it's important to understand that the FMC is a body, the Federal Open Mark Committee as a body that makes decisions by arguing on the merits of the economics and the economics and the merits of policy. And that's how it was, and everyone was very collegial and airing their views, and I the same, and that's how it will continue
to be. You know, we make policy, as the chairman said last week, by persuasion, and so I will continue to try to lay up my views and make the case as best as I can.
Governor, I essentially got the opportunity to articulate your argument. Just how much daylight did you sense was there was between you and everyone else on the committee?
Well, I mean, you know, it's sort of funny. If you look at the dots and the summary of economic projections, you know, obviously there's a divergence between my projection for appropriate policy for twenty twenty five versus where the weight of everyone else's is. But if you look at next year in the year after, you know, I'm sure I'm still on the low end, But you know, there's not really that much daylight between all the rest of the
dots and myself and following years. So it's really just about the speed where which we come down to what's closer to neutral.
Well, let's get into the neutral argument. I think that's what separates you from a lot of people. So you've got it in the mid twos, governor, and you think we should get there quickly. Can you just build out why you believe that's the case and why we should get there so fast?
Sure? So, look, you know, I discussed a number of forces which have kicked in over the course of this year and which are I think can start contrast to where they were last year. So I've argued that neutral was higher in the past than it is now, and
that neutral was higher for a variety of reasons. But I've highlighted recently fiscal policy, you know, sort of driving up net national borrowing, decreasing net national savings, as well as immigration policy driving what was the biggest positive population growth shock in my lifetime and has now turned into the biggest negative population growth shock in my lifetime in very rapid succession relative to how changes in population growth you normally normally occur in the data, and so to me,
when you have huge swings in that national safe driven by fiscal policy and you have huge swings in population growth driven by changes to border policy. It would be bizarre for me to think that that wouldn't have implications for the fundamental structure of the economy that gets reflected for montey policy in the neutral rate. So my view is that neutral was higher last year because of these reasons, and so last year policy was not as tight as
a lot of people believed. And now neutral has come down or is in the process of coming down, and now neutral and now policy is more tight than people believe. And this has happened recently. You know, these policies didn't change, you know, sort of overnight. They've been kicking in over the course of the year. And that means that policy is becoming tighter every day as these policies continue to kick in. And my view is not one of enormous
economic pessimism. You know, I don't think the economy is about to create or I don't think the labor market's about to fall off a cliff. However, the neutral rate is drifting down, and as a result of that, it's in comment upon policy to adjust in response. And the longer that policy stayed isccessively excessively restrictive, the greater the
risks to the downside for the economy. If policy stays excessively restrictive for too long, then you do get to in a situation in which you have a meaningful and meaningful increase in unemployment rate and a failure of the employment man data.
So, Governor, that's the tension. I think in your view, that's worth exploring just a little bit more. On the one hand, you don't think the economies at risks are breaking down, but you also think we are excessively tight at the moment and getting tighter. There are some people who would say, and we've had this conversation around the table this morning, if we were as tight as you're suggesting, why is the market within one percent of record highs?
Why credit spreads super tight? And why does this economy still doing Okay?
Yeah, so that's a perfectly natural thing to ask. Sorry, and let me see, let me say two things. One, I don't think that all financial conditions are universally loose like that. In particular, if you look at the housing market, I think it's in quite a different state than you know, sort of some financial markets and you know, sort of security markets. So I don't think that that's necessarily a whole stick look at the world of financial conditions in
the economy. But even that aside, I think that, you know, people in financial markets tend to focus a lot on monetary policy because interest rates are you know, sort of huge tradable instruments, right, But there's so much more that goes into determining economic growth and the state of the economy and inflation and employment than monetary policy. And I think that attributing all changes in financial assets to monetary
policy can be a mistake. And in particular, that's what I tried to do in my speech, you know, was to draw out some of these some of these effects from non monetary policies that are affecting the economy and of course therefore also financial markets. And so if you have changes in tax policy, right, like significant incentives for investing that lower the effective tax rate on capital, of
course that's going to get reflected into capital assets. If you have significant changes to the regulatory environment where you're removing barriers to operations that companies can make more more cheaply, which by the way, is disinflationary pushes at the apple gap, then of course that's also going to be reflected in asset markets. So I think it's a mistake to conflate
the state of financial conditions with monte policy. They're connected, they're related, they affect each other, but they're not exactly the same thing. And in the speech, I go line by line through these different items. And the reason why monetary policy doesn't have to react to the hawkish side in response to these act into these policy changes is because they push out the supply side of the economy
at the same time that they push out demand. And so if you're increasing supply and demand at the same time, there's no change to the apput gap. And of course it's Montari's policy job at the end of the day to be balancing the apple gap, to be balancing aggregate supply and aggregate demandity economy so it doesn't overheat or underheat.
I think there are a lot of people, Governor Myron, who'd agree with you that probably the neutral rate is quite a bit below where we are now. You said, even the other FED governors did seem to agree with that,
but not necessarily the speed. And I'm still unclear why do you think it is so important to get rates down by one hundred and twenty five or one hundred five one hundred and fifty basis points more this year if inflation is still running hot and you're not seeing anything alarming in the underlying economy.
Yeah, so this year is merely a function of where the calendar is. So my view is that policy is quite restrictive, and so I'd like to adjust quickly to get back to a more neutral area. Right, that just means a series of fifties until you get until you get much closer to zero. The fact that it's this year is just a function, just to function of the calendar. But again it comes back to the longer that you
stay restrictive, the greater the risks. And let me put it this way, like it was just a few years ago that we were having endless conversations about declining population growth rates in the whole world's becoming Japan in terms of interest rate profiles. Right, those forces are still real, those dynamics are still real. They didn't go away. Those channels, you know, those channels by which population growth affects neutral rates didn't disappear. I would rather react, I would rather
act proactively. Right, And sort of we know that we just had the biggest population growth shock in many people's lifetimes, mine included. I would we know what the consequences of those are Economically, I would rather act proactively in lower rates as a result ahead of time, rather than wait for some giant catastrophe to occur, because you suddenly wake up and find out that you are sort of resuming
those dynamics. In my mind, if you wait to sort of to see the result of that, you have waited too long, and there will be there will have been a potentially quite material downside myst to the employment mandate.
A lot of people on the show have been wondering what the reaction mechanism is going to be for a federal reserve. This does start to see inflation as transitory. Once again, the idea that we have been above two percent the two percent target for the federal reserve for fifty three consecutive months, for more than four years. If there is an upsurge in inflation, how long are you willing to look through that? If you are cutting rates before you say, hold on a second, maybe we need to stop.
Yeah. So I would want to understand why there was an ubsurge in inflation and what was driving it, and and then sort of think about whether that shock is likely to be persistent or whether the shock is likely to be transitory. And it's the nature. It's the nature of the shock. It's not just as inflation higher for a certain number of months, it's why is it higher or why is it lower? And how long are those
and how long are those shocks likely to persist? And if you have a situation in which inflation is much higher because there's you know, sort of let's say a very significant expansion in national borrowing that drives up demand, could be driven by fiscal it could be driven by something else. That might be the type of thing that
you would expect to be to be more persistent. In my mind, if you have the type of shock that's driven by a you know, basically one off change to tax rates, right, whether that's a vat tax or tariffs or anything else, you know, that, in my mind is not the type of shock that would lead you to think that inflation is is going to be sticky for
a long period of time. And in fact, there's you know, most central banks around the world, I think actually all of them would sort of you know, encounter this in a much more direct manner through changes in value at taxes, and they always look through them, you know, they always say, Okay, look the VAT went up or the VAT went down, and that's going to affect the inflations stistics for a
period of time. But then we all know that this was basically a fiscally mandated price change, and monetary policies shouldn't respond necessarily to fiscally mandated price changes because that's not indicative of changes to the underlying supply demand balance in the economy, which ultimately drives the type of persons in inflation that the Central Bank cares about.
Governor Martin, I'd love to get your thoughts a little bit more deeper on housing this thing. Matt Misk and Neil Dudda have talked a lot on this program about going into next year. Do you think the housing market will weigh on a deceleration of inflation? Is that part of your thesis on inflation coming down?
Yeah? I mean it explicitly is I mean? Look, you know, supply and demand dominates all things economically, right, and if you're increasing the demand for housing by dramatically increasing population growth without a material increase in the supply of housing at the same time, of course, you are going to get upward pressure on shelter inflation, and then vice versa.
If you start decreasing population growth because of a change in border policies without destroying shelter supply, or if shelter supply keeps an expanding at a rate that it has been in previous years, then you get a relative change in shelter inflation once again. So it's just it's simple, you know, it's simple supply and demand. If we have a material downward population shock because we have negative net migration,
that's an increase in the supply of shelter. And I think that the study that I cited in the speech on Monday work where Albert says found that in Needless city of one basically that a one percent increase in the in the in the number of immigrant renters leads to a one percentage point change in the rents.
Right, But immigration is short term, right, this is a short term story. Would you be willing to revise up neutral if immigration is not much of a drag?
Well, I mean, you know, I have good reason for expecting that the immigration story is going to persist at least for another three and a half years, and I quite likely potentially after that also, So I'm not convinced that immigration is really a short term story.
He Governor, just before you go, because I know you've got to run. Have you got a taste for this? Is this a position you'd like to keep beyond the end of this year?
Look, you know, I love this country and I'm happy to serve this country in any way that I'm asked to do so. But personal decisions are not decisions that I make.
Governor Maron, appreciate your time. Diplomatic end, Thank you, sir, Thank you very much, Governor Maron from the Federal Reserve. Are the next views from the FED and his argument very much lower neutral rate