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Us around the table. I'm pleased to say here in New York the Fed Governor, Chris Wallach, Governor wantok, good to see us, sir.
It's good to see you all again.
When we planned this, I thought you'd come in and talk about the labor market, but something else has taken over. What's your assessment of developments in the Middle East and ultimately what it means for you and a committee.
Yeah, I mean, I guess that's exactly The thing is, what you're going to see is you're going to see a spike and gasoline prices after the American citizens are going to see when they go to the pump, and they're going to stare at it and be a little shocked in terms of how things go. But for us thinking about policy going forward, this is unlikely to cause sustained inflation. This one reason we don't look at energy prices where we look at core. Core is a better
predictor of future inflation. You're going to see this, but once these kind of supply chain issues that you laid out, Lisa, once they unravel, this will start coming back down. So it's kind of a very odd to think about the FEDS maybe changing rates six months from now based on this. If it's unwound in a like as you said, Jonathan, in a couple of weeks or even two months.
It's not going to be a big factor down the road.
So this is why we never look at energy prices. They bounce up, they come back down. It's not that it's something that we don't feel sympathy for people that that's what they have to pay when they put the gas in their cars. But for us thinking about the longer term in terms of policy, this is something we're just gonna have to kind of put off.
Or now, when does it become something bigger?
If it's so it.
Becomes bigger, if it becomes more permanent, because then what's going to happen. You're going to see this jump in prices, then it'll start bleeding through to other parts of the the economy.
Energy is a big part.
It feeds into everything else, and then somehow those energy costs get passed along like everything else.
Well, that's what we're more worried about.
Economists. On any given day, Lisa might myself and they'll talk about the experience of the seven season coming out of the pandemic, and they'll say things like the officials of the fenders of a somewhere, conditions god by some of that. It's not your experience of things.
Well, in the seventies, remember we didn't just have one. We had massive oil shocks. If you take seventy three, the price of oil quadrupled overnight.
It went from four dollars of barrels at.
Twelve dollars a barrow or three, or went from three or whatever the numbers were. But that was a shock, and it never came back down, and then there was another one. Every time he turned around, there was another oil shock. Then I ran oil embargo in seventy nine. So that was kind of the problem with the oil shocks. They just kept coming and coming and coming. So it's not clear this will be one shock after another after another.
So that's why I'm more willing to say this is, I hate to say, but more like a one off event than what we saw in the nineteen seventies.
Rosenn Rosennadena used to say, it's always something because if it's not just it's not just the oil shocks.
It's the whole idea.
Now we're going to have a whole new round of tariffs coming through the economy, and we've got this low fire, low higher economy. How long do you think that continues? Does this just push out the time period for companies to sit on their hands not invest because they don't know what's going to happen.
Yeah, I mean, this is one of the things I've been concerned about since last June, is how week the labor market has been. There were a lot of factors last summer that we're driving this kind of low higher, low fire. It looked like maybe in January we might be turning a corner. We'll find out today whether that was,
as I said last week, signal or noise. But you know, when you're in this world in which the labor market, even with one hundred and thirty thousand jobs, it was really concentrating a couple of sectors eighty percent of the economy, the labor market wasn't doing anything.
It was zero negative.
So that kind of fragility wouldn't take much for some sort of a serious shock to sort of start pushing people in another direction. Whether this is that kind of shock or not, we'll start finding out.
Yeah, it's early, because of course, these are going to be January numbers. But you've been on record as saying you'd like to cut more because you're still worried about where the labor market is. What would it take to get you to back off on that feeling, Because if we get the same sort of numbers we had in December, it still shows very narrow breadth of hiring, and it still shows some reasonably good numbers for hiring.
Yeah, the even with the January report, like I said, it was all concentrated in a couple of sectors, So that was good.
They were robust.
We got a big number, well above everybody's estimate to break even, But the concentration didn't give me a lot of comfort that the economy as a whole was doing really well. So that's where my brain is telling me. The number was good, the economy looks okay, it was above break even, but my guts are telling me it may not be that good. And that's where I'm waiting
to see what today's number is. I'm almost certain it's going to get revised down because they have this has been a pattern in January the last few years.
A pair of these two ideas, The idea of the oil shock that's creating some concerns about inflation, and then a labor market that kind of is in question, right, is it decelerating or is it reaccelerating. How much has your reaction changed potential to fridays today's report given the fact that we do see energy prices pushing on inflation. In other words, would you be less inclined to cut rates if there is strength that's demonstrated in the labor market today.
Yeah, that's kind of what I was hinting at last week that if we get another solid job report, then last month, this month looks like the labor market's turning around. A lot of the downside risk I've been worried about for six months is kind of going away. We got a hot We're going to get a hot PCE number given what we already have seen coming in, that's going to probably print from everything I've seen about a point four. Okay, usually that comes down again. We've had this January effect.
We have some more passories of tariffs, but because that inflation's hot, it's going to look even worse now with the oil prices, at least on headline. And then if you get a solid job it does say there's you can sit there and wait, let's.
Say the counterfactual. Let's say we don't get a good print. Let's go we see the weakness that you see right now when you talk to people district and that you speak to in the different districts, as well as beyond. How much do you think the FED should react to this because it's sort of the dual mandate is in conflict and absolutely the wrong way.
Yeah, I mean, that's the tension we've had for the last years. I've been more worried about the labor market risk the inflation risk. I've always believed inflation was going to come back down once tear if effects passed through. My other colleagues on the committee are much more concerned about the inflation.
It's been high for five years.
They're not seeing it coming down, and they think the labor market is.
All stabilized, it's all supply side.
So these are the two different views that people have about thinking about policy. And I was more willing to cut rates because I was more worried about the labor market, not as worried about inflation coming down. But like I said, if the labor market continues to go weak, if this thing comes in. I mean, ADP was promising the other day. So if the labor market is good, inflation's hotter than we think, it's fine to kind of wait another meeting
and kind of see. But if we get a bad number or January's revise down to some really low number like ADP got revised in half length marks is just not that good. And so the question is why are you just sitting on your hands? So I could certainly see this meeting going other way depending on the data this week and the CPI next week comes in.
I hate to be the ones who asked this question, but what's a good report? Because at eight thirty easton sign but A'll be asking that question aboutselves. What's good to you? What does good look like?
Well?
I think good would be if you saw another number like January, that would be really good because you're well above everybody's break even estimates at that point, and that'd be two in a row.
Looks like it's going through.
We got very good numbers off the ISM manufacturing and services this week. That's another indication that maybe things are turning around. So if that's the case, I'm starting to see less downside risk now on the tariff stuff, I still have a view that all the tariff risk is to the downside. I just don't see big increases in tariffs spread all over the place. If anything, they're going to come down. Estimates of this are coming down. Deals
are going to potentially get made. So I don't see a lot of terror for risk going even though there's more uncertain there's always the uncertainty. I don't see a lot of price pressures from what we think could happen going forward. So that's going to bring I think that's going to bring inflation down or take pressure off, and it'll take some of the uncertainty off.
At some point, well, it becomes a question of what problem are you trying to solve and what tool are you using to do it. How would cutting rates by twenty five or fifty basis points help the labor market. If companies are sitting on their hands because they're still waiting for tariff news and we've got a war going.
On, yeah, I mean we can always say, ah, we can't do anything, just sit there.
That's not my job.
My job is trying to help the economy and achieve our dual mandate. And if the labor market's not looking good, then I have to make this trade off.
But does it make a difference to the CEOs?
Well, maybe not. I mean that's what I'm saying.
We could argue about whether monetary policy has any effect in general on the labor market. There's you know, you go back in economics, back to the eighties and nineties, there's a whole camp people that said marchur policy is completely irrelevant for the economy.
So quit wasting your time.
You're opening up a very different conversation. Yeah, that's a whole bitt we can spend a long time on. I wanted to squeeze this in. I actually think it's one of the more important topics at the moment. We're not seeing a tightning of financial conditions of material one in public markets. I don't see that in stocks, I don't see that in bonb yeats. I'm wondering what on earth
you see in private markets. Because every day there's another headline about another fund, another company struggling to meet redemptions. What is the Federal Reserve assessment of what is happening? Because that is powered this economy, some people might say, in a bigger way than the feeder reserve or for that matter, public markets have.
What is going on, Well, there's a couple things.
I mean, in general, I'm not I don't see big, really big, widespread problems in the private credit market. What you're seeing is a couple of cases of certainly fraud.
Is that fraud widespread? I don't.
You know, it's hard to believe that the entire correct private credit market is being driven by fraud or bubble posting of collateral. So these are kind of these one off things that get a lot of headlines, but it's not clear it's systemic. You have to kind of look at whether there are a lot of you know, there's different types of private credit. There's stuff that's in high yield, you know, risky junk bond stuff, and there's other stuff that's better quality in terms of what they're funding.
So I don't think as a whole.
The private credit market is in any serious trouble. But you're going to have these things popping up here and there. But I don't think there's enough of it that's going to somehow drive down the financial markets and create any kind of financial stability problems.
Going to see it all, thank you so longer conversation about your row in the future. Looking forward to that, Governor. Thank you, Federal Zev Governor Chris Waller. There on the economy, the shock in the Middle East and on markets too,