Bloomberg Audio Studios, podcasts, radio news.
We welcome our Bloomberg TV and radio audience worldwide. I'm Matt Miller alongside Danny Berger. Joining us now is Federal Reserve Governor Steven Myron here at the desk.
We're honored to have you here.
Along with Michael McKee, our international economics and policy correspondent.
Might take it away.
Well, good morning, Steve, Thank you for joining us on this non jobs day, job's day. We get no government primary economic data because of the shutdown right now, So let me start by asking if that continues. As a member of the Open Market Committee, would you feel comfortable voting for a significant cut in interest rates if you don't have data on employment and on inflation.
Good morning, and thanks for having me. Look, I think it's important to recognize, first of all, that, as you're pointing out, access to high quality data is of utmost importance when making Montary Paul's decisions. However, it's also the case that we don't make monetary policisions every day. Right
The FOMC meets to vote once every six weeks or so. Now, I think that's a bit longer than most shutdowns have historically lasted, so I'm hopeful that we'll get the data by the time we actually have to make the decision.
Well, despite what the President says, as you well know, inflation is rising, food prices are up, gasoline prices higher than when he took office. Those are the prices that Americans notice and hate. So isn't it a risk to cut rates significantly in an regime where where inflation is rising.
So my view is that policy should be forward looking. Right, I don't necessarily have a forecast that those items are going to continue rising. In fact, I think that a lot of them will actually reverse somewhat. But for my process, what matters most of all is the cost of housing, because that is the single largest component of the inflation process, and it's also one of the things that people notice
the most. They notice when their rent surges, they notice when the cost of shelter increases, and that's why it gets the largest weight in the inflation in disease. And my expectation is that we've just experienced, you know, the biggest population shocks to both the upside and the downside in my lifetime, and I think in most people's lifetimes, and to me, it'd be very surprising if that left
no lingering trace on the price of shelter. And so I am expecting a significant disinflation to the services component of the inflation disease driven by shelter, which is affected to an extent by changes in population growth.
Well, we were talking before we came on about your view of our start the neutral rate. We've got inflation running at basically three percent. You've got unemployment at four point three percent, which is historically very low. The Atlanta Fed says we're growing three point eight percent, or grow three point eight percent in the third quarter. There's no economic model that I know of that would get you to a near zero neutral rate with those kind of conditions.
Yeah.
So, first of all, I have seen some folks argue that they think that my conception of the neutral rate is he That's not the case. I think that's a misreading of the speech. If you read the speech carefully, you'll notice that I do a weighted average of a model implied X and ty and at market implied XANTY rate and gets so.
About a half.
And that's consistent with the dot that I put down on the statement on the Summary of Economic Projections. And so I basically thought, you know, sort of going into things last year, there were all these policies that were pushing our star higher, Like the highest population growth we'd seen in decades, the largest fiscal sustainable fiscal deficits we'd seen, sustained fiscal deficits we'd seen in a really long time.
Those are pushing our star higher. So last year I really thought it was at the top of the range of where everyone else in the committee thought it was. And I think it's now come down this year to the bottom end of the range.
Of where everyone else thinks it is. But you can't model that. What do you mean? I can't mombel the models.
If you put in the numbers that we have right now, it wouldn't spit out year zero or half a percent oh real rate.
Well no, but what I've done.
What I've done is modeled my expectations for inflation based on the changes that I see happening from from housing.
As we talked about a moment ago.
I've modeled out changes to the output gap that I expect to see from policies that expand the supply side of the economy therefore expand potential output faster than they would expand actual output. And some policies that we've seen and acted over the course of this year would push out potential and actual by the same amount or bring in potential and actual by the same amount. Other policies would push out one more than the other. And so for an example of one that would push out one
more than the other would be deregulation, right. I think that the regulatory state has been being peeled back over the course of this year, and all indications are that will accelerate, particularly as the pace of confirmations of appointees has just picked up as well. That, in my mind, will accelerate the pace of deregulation too. And when you remove regulations, you expand the potential output of the economy faster than actual output, and so that creates a positive output gap.
I actually, you know, I'm not as deep into this as Mike, and certainly neither of us is as deep into it as you. But I have the tailor rule function on my Bloomberg terminal. I love to play with it, and I always ask important economists when they come on what variables they would plug into it.
I put in zero point.
Five for you in the neutral rate here and I put in four percent in the Nehru, I'm still only getting three and a half for the tailor rule estimate. I know this is a very elementary, you know function here on the Bloomberg, But what would you change to get you know, your rate down to where you think it should be, which is even I think less than the three percent terminal rate that the market is pricing in.
Yes, so let me be clear, montary policy works with lacks, right, And yes, those lags are long and variable, but nevertheless they exist. And so I think it's inappropriate to put in the currents backward looking data as opposed to where you expect those data to be in the near term, right over the course of the next.
Year to two years or so.
And so that's why when I work through the calculations that I work through in the speech, which also used actually a couple of different specifications of the tailor rule, I put in my expectations for.
Where I think inflation is going to be.
I put in my expectations for where I think where I think the output gap is going to be. And so when you look at inflation now on a year over year basis, you're including lots of stuff that occurred before the overall policy space shifted. And as I just said a moment ago, we just lived through the largest population growth shocks on both the upside and the downside in very rapid succession to a variable the structure of the economy. Population growth that usually changes only very very slowly,
changed incredibly rapidly in both directions. Right to use backward looking data that just ignores that shock on the upside of the downside, which was of monumental historical significance to the US economy, I think is deeply misguided. I think it's imperative to use forward looking forecasts that incorporate something like that.
While we can do that with the tailor rule on the Bloomberg terminal. As I'm sure you know, if you click on the second tab of the function, you can put in your inflation forecasts and your unemployment forecast going forward. I won't ask you what all of your variables were, but I will ask about inflation, because, as a kid who grew up under Ronald Reagan, I've always been skeptical
of government policy when it comes to inflation. I've been hearing for so many years that the FED wants to get it to two percent, but I find it hard to believe. And we've averaged three percent essentially on the core since World War Two? Do you think most people feel comfortable with that level? With a three percent level?
Well, you know, I think what you're asking sort of invites a previous question, which is what did Congress assigned the FED to do? And Congress assigned the FED to pursue stable prices? Now, historically the FED has had lots of leeway and how to interpret that, and it's chosen to interpret that as two percent growth and measured personal consumption expenditure inflation.
Right.
The way that you calculate inflation is sort of you know, it's a very complex thing and there's lots of methological choices that get made when you're sort of deciding how the sausage gets made, and it can really affect how things are measured. Right, And so when you say, do households have faith that the FED is pursuing and achieving
its inflation? I think that, you know, sort of small changes in measured inflation are difficult for households to detect because they can be you know, because the way that measured inflation is measured is there's lots of noise in it, and I think that small changes in measured inflation are usually dominated by the noise relative to what households are experiencing.
But nevertheless, when you look at inflation expectations, I think that they remain reasonably well anchored, which indicates that households and firms the United States have faith in the Fed's ability and willingness and future of hitting its inflation it's inflation target.
Governor Martin, you've been extremely transparent with your view and have been very generous with that. You've always been very transparent with your views. You're probably the most prolific social media poster of anyone that the Fed's ever had. In twenty twenty three, I saw you had tweeted something out saying, basically, the case against adjustment cuts is that financial conditions have eased massively, and policy works via financial conditions. Real rates
don't exist in a vacuum. Given that view, the fact we have record high stock prices right now, well, is it a sign of unsustainable froth of even a bubble that will make bringing down inflation that much more difficult.
Yeah, So that's a great point.
Financial conditions are the channel through wich monetary policy works, and so they matter when you're thinking about where monetary policy.
Should be set now.
As we were saying moments ago, my view is that last year neutral was much higher because immigration was much higher, because fiscal deficits were much higher than I expect.
Them to be going forward.
If you look at fiscal deficits this year in February through August, which are the data that we have available and that encompass after the policy space changed, there are about four hundred billion dollars at an annualized rate below where they were in the comparable period in the previous fiscal year. So physical deficits are coming in also, and
that also helps drive down our star. So my view is that policy, even though financial conditions appear to be on some measures loose, policy has actually grown tighter because neutral has migrated down.
Now.
I do want to be clear that financial conditions can also be driven by variety of non monetary factors. There have been substantial changes to the supply side of economy this year, both through the tax code and through the regulatory code, as well as trade renegotiation. Right, all of that can affect financial conditions for non monetary purposes, sorry,
through non monetary channels. And so it can be a little bit of a mistake to look at financial conditions and infer something necessarily about the stance of monetary policy, because they can be driven up by other things.
And also they're not all loose.
I mean, you know, housing finances arguably still a relatively tight short.
But a lot of this view is incredibly forwardlooking. And that's the point, right that we're not looking at backward data. But is there any data that we could get Governor Myron that would change your mind, and it would change your mind to have you believe that we should not be pushing towards more rate cuts right now?
Oh? Absolutely.
Look, my view is that services inflation is the most persistent and sticky part of inflation. A lot of my view about services inflation is driven by the housing sector, as shelter costs are the largest costs for most families. My view about shelter inflation, as I said, is driven by two things, as I said in the speech, One the facts that average rents have finally up to market rents,
meaning the catch a period is done. You know, people don't reset their leases every day, they reset every year, every couple of years, and so that means that a change in market rents takes time to feed through to when it's experienced by households. When you look at the data, it seems to me that that catch a period is done, which means that I expect shelter rents to come down CPI rents to come down, bring shelter inflation down. The second thing is the immigration shock that we talked about.
My view is that immigration was pushing rents up in previous years, and now that shock has not only gone to zero, I think it's actually reversed. I think we have negative net migration when it comes.
To the United States this year. Right. So my view is driven by two things.
Shelter sorry services are the more persistent and sticky part of inflation. Services are driven in large part by housing, and I expect housing inflation to come down through those channels. If something were to happen that were to tell me that that channel is invalidated, that there's some shock that's going to be pushing rents materially higher, the benign inflation forecast that I have would have to be adjusted as a result. All else EQL right. If nothing else were
to change to off set that. But to me, that's the core of my inflation view, and I would want to see something come along and tell me that that channel is wrong and that I'm thinking about it the wrong way.
I want to ask you about something in your speech that has confused a lot of people, including me. You argue that tax cuts are going to help lower the deficit by increasing economic activity, and at the same time you argue that tariffs, which are taxes on the American people, are going to lower the deficit. You have one way raising taxes and the other cutting taxes at the same time lowering the deficit.
How does that work? Yeah, So.
You know, it's important when you think about economics to think about the elsses of supply and demand. And when you cut taxes on American production, whether that's labor or whether it's corporate income, you want to think about theses supply of those activity and is going to lead to additional labor supply?
Is it going to lead to additional investment? Right?
And so that's the way that cutting access can actually generate economic growth in the United States. When you think about tariffs again, you think about the ASSSITT as a demand and supply. And in this case, American consumers and firms are the demand and foreign producers are the supply. Now, the economic evidence is overwhelmingly that the elasticity of the demand in imports is much higher than the elasticity of
the supply. Put another way, foreign producers are inelastic. Right, You've got a factory in China or somewhere else, and it's stuck in China or wherever it is, it's installed capital.
It's inelastic.
Whereas American consumers can, American importers can alter their demand power patterns.
They could import from.
China, but they also could import from Vietnam, or they could or they could make stuff at home. That flexibility gives them the ability to avoid the burden of the tariff. Now, this is just tax incidence theory in public finance economics one oh one. And when you look at it this way, the argument that economists always reached. The conclusion that economists always reach is that the burden of a tax, a tariff,
a substate, anything falls on the more inelastic party. Right now, the evidence is overwhelmingly that the FIGM producers are the more inelastic party because the factory is stuck in place it can't move, whereas import demand can can substitute across borders. So it is the case that the negative effects of any tariff fall on the fall on the more inelastic party,
which is overwhelmingly the exporter and not the importer. And so as a result, the positive effects of tax cuts in the United States get felt by production and they increase economic growth. Where is the negative effects of raising revenue from tariffs get born by the get born by the exporting country.
Well, we haven't seen any evidence in import prices that that's happening.
Well, you know, import prices, as your points, dollar denominated import prices, as you're pointing out, have been relatively flat.
However, I want to and people.
I think you're you're alluding to an argument that people make, which is that you would think you would see import prices decline if foreigners were reducing their selling prices. Is that that's the argument referring to Yeah. To me, that logic doesn't follow for two reasons. One, you know, it's there's an implicit all else equal clause that's not being stated,
and all else is not equal. Because we also had to move down to the dollar this year, which ought to increase import prices by a comparable amount, and so the fact that import prices look relatively flat could just be the increase in import prices from the weeker dollar just offsetting the decrease in dollar prices from the incidents
of the tariff being borne by the exporter. The other reason why it doesn't really make sense to me is because I think that a lot of the a lot of the importers of record are ultimately US subsidiaries of foreign companies. And so you've got a Japanese or German exporter selling to the United States, but the exports are bought by the exports are bought by US subsidiary of them, so Mitsubishi Japan or whoever is selling to Mitsubishi US
or whoever right. And then if this is the case, then what winds up happening is that the incidence ends up falling on the falling on the importer of record, without necessarily pushing a decline down in import prices. And so I'm not exactly sure on the magnitude of this channel yet. It's something that I'm looking into, but it is a possible disruptor of that argument.
But in any case, for sure, what we're.
Seeing is not a broad based increase in consumer inflation as resultive tariffs.
Governor, I want to ask about a piece that Mark Summerlin wrote in the Wall Street Journal Today previously of the NEEC under the Bush administration. Basically says that the FED suffers from the same kind of bias inherent in media or academia because it's so focused in the northeast. Right, we have four FED banks between Richmond and Boston, and only one west of Kansas, right, only two in the South. He says there should be a FED bank in Miami and Phoenix, which would make sense.
He also points out that of the six.
Hundred thousand dollars donated by FED staffers in the twenty twenty four election cycle, ninety two percent went to Democratic candidates. I assume that's because they're in the Northeast and they're underpaid relative to Wall Street.
So can you make reforms.
Especially on those two issues, while you're at the FED.
Well, look, you know, reforms to the Federal Reserve, to the structure of the Federal Reserve are ultimately an issue for Congress to take up and not one for me to address. But I do see part of my job as bringing fresh an out of consensus ideas to what can be you know, at times a settled way of thinking. And that's what I'm going to continue doing. And so, for example, you know, you sort of you think about
tariffs and whether they're causing inflation or not. I think there's an attitude among a lot of people which is that the correct counterfactual for thinking about tariffs is to compare them to pre trends for what was the trend in those goods before the pandemic? Right, to me, that's the wrong counterfactional because there was so much else different
about the structure of the economy. When you look at long from trends before the pandemic, they include you know, you look at twenty year trends before the pandemic, which is what a lot of people do. It includes the entry of China to the WTO and shipping deflation to
the entire world. Is that the correct counterfactual for thinking about the impact of tariffs on the economy today if we're not experiencing the same deflation we experienced in two thousand and four and goods when China had just entered the WTO, and then attributing all excess inflation relative to that pre trend to tariffs. I think that's the wrong counterfactual for me. My mind is the right counterfactual is
non import goods. And that's why the way that I've looked at it is to compare the prices of import intensive.
Core goods to overall core goods.
And I would think that if terrorists are driving inflation, import intensive core goods would inflate at a materially higher rate than overall core goods. And that is just not the case. That is not what you see in the data. That's the study that I did when I was the CAA chairman, and I asked the FED staff to replicate it, and they found that when you use this counterfactual, you get the same outcome. Right, So the question is what's the choice of the counterfactual, and that drives the decision,
that drives the inference from me. The other counterfacture that I think appropriate to use is to say, our core goods in the United States inflating at a faster rate, at a noticeably faster rate or markedly different trend than core goods in other countries. And again when I run that experiment, I see no discernible, substantial difference that would make me think that core goods inflation the United States have broken away from core goods inflation globally, and so for me, I think.
That there's a question of how do you think about these things?
And I think everyone was thinking about it one way and I think about it a different way. And I view my job as bringing in new and interesting ideas to try and get people to think about things different.
Can you do that when the ideological heart of the FED is in New York, it's at Harvard University, it's in the Democratic Party, how do you move it away?
Well?
I am also of New York and of Harvard University, and have no trouble saying my view even when it's wildly out of consensus, and you know, speaking my mind. As long as I believe what I'm saying, I have no problem sort of speaking in my mind and getting my thoughts out there.
Well, Governor Miyane, it's not only the rest of the FMC you have to convince. You have to convince these markets as well, especially if you are concerned about housing. You were very outspoken last year when the FED was cutting and long term rates were going higher. If that were to happen again, would you be proponent, especially as you see one of the FED goals should be for moderate long term rates, that the FED should be using the balance sheet in order to keep long term rates lower.
So two things there. One, last year I was an opponent of the Federal Reserve cutting rates because I thought that neutral was higher and that therefore the FED was not as restrictive as they thought that they were, and therefore I viewed the accommodation being provided as inappropriate. And I think, as you're pointing out that long yields moving higher meant that I was actually kind of right. You know, I think that that bears that out this time thus
far and still early days. The meeting was, you know, two weeks ago, three weeks ago. You know, it's still early days, but you know, thus far, we haven't seen that type of increase in long eels that we saw last year.
What if it were to happen, though, well, I'd be using its spella sheet.
If it were to happen, The first thing I would want to do is ask why, right, why is it happening? And if I came to the conclusion that it was happening because it was inappropriate to cut rates because my inflation analysis was wrong, or my analysis of neutral or the apput gap was wrong, then the first thing to do is probably to reverse course on the front rate. My view is probably not to sort of resort to
balance sheet at the first opportunity. That balance sheet is the tool that you use when your more standard tools can't work for the problem at hand.
A couple of lightning round questions here, as we're getting a little short on time, do you think that if you'd take in a sort of less extreme position, do come in arguing for one hundred and fifty basis points or so of cuts, that you might have more influence on your peers on the Open Market Committee.
I don't think my position as extreme as you make it sound. My dots for next year and the year after are not so dissimilar from the rest of the committee. All that's different is the fact that I want to get there a little bit faster. I think that most people on the on the FED, you know, sort of they operate with. In your tailor rule application, you probably have an inertial parameter right where there's a sluggish adjustment. So wherever policy should be set, you sort of phase
it in slowly from where you are. So if you're wildly off from where you are now, there would still be a very slow adjustment to where policy should be set. And I think that that's the type of thing that some people sort of default have in their mind, right, that's not my view. My view is that if policy is out of whack you you should adjust it at a reasonably at a reasonably brisk pace, in part because if you stay restrictive for too long, you really run the risk of bringing an applecap.
Materially wider that you that you don't want.
And in my mind, we're not at that point yet because policy just became more restrictive, because monetary policy just became more restrictive, because our star just moved down, Right, We're not at the point yet where if you sort of keep it there another day, it's a crisis. But if you keep it there for an extra year, yeah, I think you have you have problems on your hand.
Given the import that the President has attached to the FED. As a member of the Board of Governors of the Federal Reserve, do you feel like you exercise executive authority?
No, I don't exercise executive authority. Whatsoever?
Have you talked with the President or anybody at the White House since you came to the FED.
Well, as I said, I think ago two weeks ago.
I don't remember. Time runs together for me these days.
The President called me after I was sworn into congratulating and that was very generous of him to sort of say congratulations. And he has never you know, he has never asked me to sort of do to take a specific policy action. He shares his views about where monetary policy should be, but he shares that with the work we talked to him.
Since that congratulatory call. No, no, one, very quick question. Have you had your interview for FED chair yet?
No? I have not. And personal decisions are not decisions that I make.
All right, Hey, thank you so much for coming in. It's been a fantastic in you really appreciate you being so forthright. Federal Reserve Governor Stephen Myron, as well as Bloomberg's Michael McKee, our policy and economics correspondent. I will add to our terminal clients that we do have an adjustment for policy inertia in the tailor rule function. You can see it on the terminal typing t A y l go