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The FED Governor Stephen Maron joins us now for more. Governor Maren, good.
Morning, good morning, Thanks for having me.
It's good to see you as always, sir. So let's spend some time. How did you approach the committee meeting just last week and what was the argument for fifty basis points?
So I approached it the same way approached the first one, which is that I think that the FED is too restrictive. I think that neutral is quite a ways below where current policy is, and given my rather more sanguine outlook on inflation than some of the other members of the committee, I don't see a reason for keeping policy as restrictive
for a long period of time as we are. The longer you keep policy restrictive, the more you run the risk that monetary policy itself causes a downturn in the economy.
What was interesting about last week, as you know, is that a send cup both ways. We also had this argument from Presidents Smith of Kansas City FED, who put out a long staymen, I've cherry picked a quote forgive me. I see the starts of policy as being only modestly restrictive financial market conditions appear to be easy across many metrics. When you heard that kind of argument, what was the a point to what he's saying in markets?
Yeah, so I'd say a couple things. First of all, I'd say that the financial markets are driven by a lot of things, not just monetary policy. They're driven, of course, in part by monitary policy, but there's a lot of things that drive financial markets. For example, I think on this program you probably spend a lot of time thinking
about AI and new technologies. If you have AI or a new technology, it could push financial markets higher, which would look like an easing and financial conditions, But that
doesn't necessarily tell you anything about the stance of monitary policy. Indeed, very often, in response to a supply shock or a positive supply shock, although of course it depends what kind of supply shock, you might think that the appropriate sense of monitary policy would be lower and not tighter, all lse equal, But of course there's a lot of sort of what ifs and thinking about the type of the
supply shock. But I think that it's a mistake to look at financial conditions and sort of conclude something automatically about the stance of monitary policy. And I also want to point out that some of the financial conditions that look the easiest, things like the stock market, things like you know, sort of various parts of credit spreads. You know, those are not necessarily the financial conditions that feed the
most into economic activity. Yes, the stock marketing, credit spreads matter, they matter a lot, But then you sort of think about something like housing. I think housing matters a lot more for the cyclical position of the economy, and some of these things don't matter, but it's that they're only part of the picture. And if you look at financial conditions that affect housing, I think they're quite tighter. You look at financial conditions that are affecting parts of the
private credit market, that also looks tighter. And I wonder if what we're seeing now in some of the distresses that you see in private markets means that financial conditions have actually been tighter, but it's been masked by the fact that we don't get marks for those on a regular basis.
So, Governor, I think I want to give you some time. I think we should give you some time on a central lignment of yours that this year you believe policy is actually passively tightened through twenty twenty five. And I don't think that's an argument I've heard many people make. You just spend some time fleshing that out. What do you mean by that?
Sure, So my perspective is that there's been a number of shocks that have hit the economy, driven in large part by economic policy not from the FED, from outside of the FED, that pushed neutral rates higher last year and lower this year. And so I think if you look where my neutral rate is, it's not that I'm out of bound for where the rest of the committee is unneutral. It's just that I flipped from having one of the highest neutral rates last year to now one
of the lowest neutral rates. And that's driven by things like population growth, right, It's driven by things like fiscal deficits, and if you think about population growth, right, that's normally considered to be one of the biggest drivers of neutral rates. And it's part of the reason why people think that neutral usually moves very very slowly, because population growth changes only very very slowly as new technologies and cultural trends
drive people to have fewer kids over time. But we experienced the last few years thirty years worth of population growth change in only three years. Right, when you look at the rate of population growth, it changed more in the last three years than it did in the previous
thirty years. In both directions. It round tripped completely. And so if the drivers, if the drivers of changes the neutral rate, accelerate over time, it would only make sense to me that the neutral rate itself would change more rapidly over time as well. And so that's pushed neutral higher last year and lower this year, which means that policy is passively tightened. Because what matters for the stance of policy is where you are relative to the neutral rate.
And the neutral is here and policies up here, you're very tight. If neutral's here and policies down here, you're very loose. But if you stay where you are and then neutral goes down, you've passively tightened because the neutral rate has shifted, and so policy has grown tighter over the course of the year. Now, it's not the case that you would expect to see a significant downturn in the economy immediately as a result of that, because Montera
policy works with lags. It hits the economy with long and variable lags, as we all know. But if you maintain that very restrictive stance of policy for a long period of time, you really increase the chances that those lags come to manifest and that Montera policy then itself induces a downturn in the economy. Why wasn't your descent bigger?
You were talking about a fifty basis point cut that you would have preferred to see in the September meeting. Why didn't you go for a seventy five basis basis point cut descent last month?
Of course? So look, you know, I think that we're a fair way from neutral, and I think that we could get there a bit faster. I could imagine getting there in a series of fifty clips. I don't think it's the case that we need to get there and more than that, because I don't think that I don't think the economy is dysfunctional right now. I don't think that financial markets are dysfunctional right now. I don't think we need to move even faster than that for those
for those reasons. If I did, then you know, I would have no problem voting for voting for bigger cuts. But I think sort of getting there in fifties instead of twenty five's is fine.
So you would be open to dissenting again for a fifty basis point cut if the rest of the committee wasn't around.
For that next month or in December rather. Yeah, well, I don't want to commit to that because a lot can happen between now and the next meeting. We're getting a lot of data, I hope, between now and then, and only data about the near term. The data about the recent past as well that we don't have, so things could change. But if things play out according to my forecast, then yes I would Governor.
Do you think your advocacy for a fifty bait cut is hardening the opposition to cuts at all?
I don't think so. I think everybody is. Everybody is doing their own analysis of the economy and inflation in the labor market and financial markets too, and coming to a conclusion. And you know, I don't think anybody is necessarily changing your mind sort of to not support a cut just because I want to cut more.
Is there a lot of discussion at the FED about the fact that you're all doing your own analysis, But what data are you all using if we're in the mis still in the middle of a government shutdown thirty four days today?
Yeah, so there's a lot of talk about that. Let me say a couple things about that. First of all, you know, it's my perspective that being excessively data dependent makes you backward looking because the data are always backward looking, and because of collection lags, because the amount of time that you're doing comparisons over right, and given montary policy takes lags to hit the economy. You want to be forward looking, so you want to make policy based in
your forecast. Now, there are times when you might not have a lot of confidence in your forecast, and so you need to be data dependent, but you should be data dependent only to the extent that you don't have confidence in your forecast. My perspective is that we know the size of the shocks that have hit the economy this year, things like population growth. That's a known quantity. We know what it does to the economy, we know what it does to neutral we know the size of that.
It's not a mystery. So therefore I have a lot of confidence in my forecast. And therefore, to the extent that we would get data that would make me change my forecast, I would then change my policy outlook. Right, So the question is that am I missing data because of the government shutdown, that would lead me to change
my forecast. And given so much of my forecast for inflation depends on the housing market and depends on the housing market, I would assume that I would see that in the reporting that Bloomberg and others do, even if I'm not getting data in the short term. Now, something like that lasts a couple of months, right, Can I continue to sort of have this degree of confidence if we go six months without data? Absolutely not. So. I do think this is something people are attentive to, And
there's also alternative data, as you guys are aware. I find the alternative data on inflation to be not super useful. I do find it to be more useful on the labor market. And when you sort of look at alternative data on the labor market, you see data that's consistent with continual ebbing of demand, which again is a signal
that policy is too tight. If the decline in hiring was a result of negative supply shocks from immigration, you would see higher wages, and you would see and you would see firms and people giving answering surveys in a way that indicated that jobs were plentiful or it was difficult to find workers. From the firm perspective, you're not seeing.
Say, developments in private credit as as well as evidence that we're restrictive. Perhaps it was the fault of our pairs that this didn't come up much of the news conference. I was somewhat surprised did it come up much in the meeting, the two day meeting last week.
Well, I mentioned it at the meetings as a reason why it was potentially a mistake to make to make very confident inferences from the stance of equity markets to the stance of monetary policy. But other than that, I think that sort of folks were focused on it on private credit as a financial stability risk and sort of thinking about how much should we care about this? What are the risks? You know, you know, what are the risks?
Where could this go? Just sort of analyzing it from a financial stability perspective, Whereas I was making the point as well that there's a chance that because we don't get marks on these things very frequently, that distresses are actually greater than we thought they were, especially when you think about the share of credit that has been created in private markets in the last few years, you know, so it's slowed down recently, but over the last few
years it's been a greater share of credit that's been extend into the economy, and so it could be that we're just not seeing it.
Do you think we're missing something here because somebody guests come on the program and say it's idiosyncratic, just signs of isolated fraud, not a big deal, not systemic, not broad enough.
Do you share that view? So, you know, look, I think that probably at the end of the day, that's what it is. However, I do want to make the point that when you get series of seemingly uncorrelated, non systematic problem sorry, non systematic issues like that, it can be an indication that montary policy is restrictive. We've seen
this in the past. When you have a series of seemingly uncorrelated, uncorrelated credit problems that had been masked for a while and then suddenly come to light, it tells you something about the stance of montary policy.