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What is sort of technically your last twenty four hours as a FED governor? Your term is up tomorrow, but you're staying on. Thanks for having me back. It's good to see you again.
Look, as you say, my term expires over the weekend, but for the Federal Reserve Act, I'll be staying in my seat until someone is confirmed to replace me, presumably Chairman Designate Kevin Walsh. This is common practice and has happened many times by other governors who have waited for someone else to be confirmed into their seat.
Now, the question is how long is that going to take?
Have you had any indication from the White House or from anybody on Capitol Hill. We know that Senator Tillis is threatening to block denomination, but that could easily be handled.
That could go away anytime.
Do you have any idea how long you're going to be still at the FED?
I have no idea. I mean, I wish I knew.
You know, my confirmation process took what six weeks or so a little bit more a little bit more than that, So you know, I have no idea how long it will take for Chairman designant marsh but you know, I'm confident that you know that the process will work and the Senate and will come together.
All right, So you get to March eighteenth, that's the next FOMC meeting. You're still going to descend for lower rates. And I asked, because this time you only descended for twenty five basis points instead of fifty.
Yeah, so I descended for twenty five instead of fifty for a couple of reasons. One of them is that we did cut. Since I joined the f and C in September, we cut three times. You know, we reduced the federal funds rate by seventy five basis points. That means we're less far from neutral than we were when I arrived in September. Now, I still think rates are too restrictive, as I've made very clear. I still think we need to cut in straits substantially further from here.
However, given that we've moved, we've made.
Some progress reducing rates, we can now sort of I think, in my view, proceed at a at a slower pace of a quarter point per meeting. It's no longer as imperative to move to move in fifty clips as it was. The other thing that happened is the labor market data did come in a little bit better, and they didn't come in to an extent that they alleviated all my
concerns about the labor market, you know, far from it. Indeed, the labor market has been on this gradual cooling trend for over two years now, and it should take much more than just one data print to make you change your mind about the trend of the labor market. But nevertheless, we did get a little bit of better data and that helped alleviate, you know, some concerns free, but not all of them.
You know, I still have some concerns there.
Well, we got a four point four percent unemployment rate last month, and the next friday we're expecting to get the same thing. So that's two months at least of evidence that the labor market is somewhat stabilized, which is what the Fed was saying in its statement this last time. And yet Jay Polish had given the numbers that you've got to work with. It looks like PCE inflation on the core is going to go to three percent or more.
The optics don't look good for cutting rates when inflation is going up and the labor market is stabilized.
So I just regar with a couple of things you said.
First of all, the unemployment rate, even though it's the single and most important indicator, is far from the total of information that we know about the labor market. There's plenty of evidence in the there's plenty of evidence in the labor market data that indicates that we can accommodate additional demand for labor. There have been signs like it taking longer for some folks to find jobs, pockets of weakness among you know, younger folks, and folks and folks
at college degrees. That all indicates that they're you know, increased part time work for economic reasons. All this indicates that there's additional slack in the labor market beyond what's indicated in the.
Unemployment rate alone.
If you look at the employment population ratio for younger folks, it's been trending downwards for a long period of time, and it has shown and it has shown less stabilization and the overall unemployment rates. And this is the type of thing that is concerning for me. So I disagree with the assessment that there's labor market, that there's enough labor market stabilization, that we can drop our concerns about the labor market.
I still have some concerns.
Now I'm not as concerned to some as as some others, but those concerns still do exist for me. And on inflation, I think you know I've been making this argument that almost all of the inflation overage over our target is due to quirks of how we measure inflation.
It's due to two things.
It's due to the portfolio management services, which pick up just the stock market prices. So AI pushes stock prices higher. That mechanically feeds through into portfolio management services, which contributed thirty six basis points to core year and year. A normal year is six basis points, right, So there's over a quarter of a point of core inflation access.
That's basically just the stock market moving higher.
And all of the professional investors in the audience know there's been decades of fee deflation in that industry, not inflation, So there's an error in how this thing is measured and interpreted.
The other thing is housing.
The way the housing inflation is measured, it's picking up the housing market rents of twenty twenty two and twenty twenty three, not twenty twenty six or twenty twenty seven. We shouldn't be making policy based on what happened in twenty twenty two. We should be making policy based on
what's happening in the next twelve months. So, once you correct for these two errors, the backward looking nature of shelter and the messed up portfolio management fees, you look at market based core x housing instead of looking at regular core. Inflation is running two point two percent. That's within noise of our target. We don't have inflation access of any inflation that's relevant for supplyed demand imbalances of the type of monetary policy we'll respond to. We should
not be making monetary policy. We should not be asking people to give up their jobs because of quirks of how inflation is measured. That just to me, is not a good idea for policy. It's a bit it's a grotesque interpretation of stable prices.
I am curious as to you just about how we start to measure things going forward.
And I just want to go back to the labor market for.
A second, because there's been a lot of discussion about the stability or maybe the potential instability there I spoke this morning with the CEO of American Express, and he actually talked a lot about small businesses, the kind of middle market businesses, if you will, that at least in his view, weren't as healthy as some of the larger businesses. And I'm curious that there's been any meaningful discussion at the FED about that kind of middle market of our economy.
You know, excuse me, there is conversations about that. You know, people talk a lot about shaped, you know, sort of case shaped economies and things like that, and I think usually they're talking about households when they talk about that, but there certainly is an element of that on the firm side as well. You know, from my perspective, some of that stuff is helpful for understanding where the economy is going. But I don't believe in targeting a specific
sector of the economy. I believe that, you know, the statutes that Congress gave us instructs us to target the overall macroeconomy as a whole and then focused on aggregate employments.
I'm focused on aggregate inflation, and so.
I do see, you know, there is there are definitely are pockets of weakness here and there but I'm focused on on the overall levels.
But there was some discussion a few years back with J. Powell when he did start to look at certain segments. The idea that when you look at the economy and as aggregate, sometimes it obscures you know certain things, whether it's to the upside or the downside. Is there not any value in maybe trying, I guess, bisect or dissect things into different sections.
Oh?
No, there absolutely is, because it can help you. It
can help you predict where the overall is going to go. Right, And I did that a moment ago with the with the labor market when you as I was saying, if you look at if you look at younger folks, if you look at folks at college degrees, if you look at folks that are marginally attached to the labor market, I think that they're often they're leading indicators of where the overall labor market is going to go, and they portray additional slack beyond what just the unemployment rated stuff
would give you.
And I think you know, to the.
Extent you're seeing weakness in some smaller business some small business segments like the annex CEO that you mentioned before that is the type of thing that I would be interested in knowing more about it in terms what it pretends for the overall economy.
Stephen Myron, I want to talk about Kevin Worsh. Of course, that's the big news of this morning, President Trump posting on truth Social that he will nominate Kevin Walsh as the next FED or as the next Chair of the Federal Reserve. This has been the horse race that has been captivating Wall Street. I want to bring you this note from Neil Dutta over at Renaissance Macro. He writes that if you get a few cuts now to appease
the President, you may well get tougher hikes later. Moreover, because Walsh has been a policyhawk his entire life, his newfound duvishness looks very suspect. Now that's maybe a little bit more blunt than I would have phrased it. But there's a lot of people on Wall Street on the cell side who share the view. And I'm curious how confident you are that you know, as a FED chair, Worsh will be the dove that it seems that President Trump wants.
Look, I think Neil is fantastic.
I'm a huge I'm a huge Neil fan, but I think that Chairman design At Warsh has a long and illustrious career in history as a very insightful thinker on monetary policy. I think he's a fantastic pick for the from the President. I think he's got enormous credibility. I think he's got enormous gravitas.
I think he's got.
Enormous enormous respect from financial markets, from economists, from everyone. I think he's going to do just a knockout job. What specific policies he supports or he's going to support going forward.
You know, I can't answer that. I'm not him. You got to ask him those questions.
Certain well, I would love to, so fingers crossed there, But as a FED governor, I mean, as you know, well, the job of the Fed chair is not just their opinions on where policies should go, but it's building consensus, you know, in the room itself. And so with the current makeup of the FLMC, I mean you think about some of the views on interest rates on the balance sheet, do you think that worsh will be able to basically build that consensus with that makeup?
I do, I do, and The reason is that he's been there before. He knows how the place operates, he knows a lot of the key figures involved, and he's got the respect and the credibility that you need to do that. And I think that people want people want him to succeed. I think people want the FED to sort of have a good role in the economy, a good role in the country. And I think that they'll want him to succeed. And I think that he will be able to marshal the arguments and the evidence.
That he needs to persuade people of his policy views.
I want to talk about your experience.
You came to the FED from the White House, and I'm sure you know people said he was just put there to do what Donald Trump told him to do. Did Donald Trump tell you to do anything in particular? And do you think he told Kevin Warsh that even if he didn't, how do you how did you and how would Kevin fight the perception that he's the President's man inside the FED?
Look, the President has never ever asked me to do anything on Montaria policy. He has never asked me to do any specific action on Montara policy. He's told me his views on Montera policy. But he tells the whole world his views on Montera policy. You know them as well as I do. Right, that's not a secret. He's
never asked me to do anything. And I wasn't in the room with any of you know, Chairman Designant Warshes conversations with the President or anybody else involved in this selection process, So I don't know what those conversations were like. But if they were anything like the conversations I had with the President about Montera policy, then.
He wouldn't have asked him to take any specific actions.
Well, how do you get the public to realize that?
You do that by taking policy actions that are consistent with the data. And I think that, you know, I've laid out a case where the inflation measures that are consistent with supplied demand and balances in the economy, the inflation measures that are relevant for Montaria policy are indicating that there's no material overheating, that there's no material inflation.
Issues in this country right now.
So by taking policy steps that are consistent with the economic data that are justified by the state of the economy, I think you're delivering the right policy.
At the end of the day, the.
Financial markets, the economy respond to whether the policy is the appropriate policy or not right.
They don't respond to why the policy is there. Right.
The interest rate doesn't really care why, you know, the long end of the yield curve ultimately doesn't really care why the short rate is where the short rate is. It cares whether the short rate is appropriately set and what the consequences of the short rate are for the economy. The motives of the people who went into started setting the short rate, those aren't really important. Is it the right policy for the economy or not is what matters.
And I think that that's what I've that's what I've labored to labored to work for is to sort of is to do a lot of a lot of analysis of the inflation scenario, a lot of analysis of the labor market, a lot of analysis of the economy, and put that all out there. And I put all of my analysis out there all the time. I try and be as transparent as possibly can with my calculations.
Everybody knows exactly why I hold the views I hold.
See, I am curious, once you move on back to your original role over at the National Economic Council, how is fiscal policy meaning fiscal policy dictated from the White House and obviously through Congress itself.
Is that going to be in sync?
Do you think with what at least what you know now with regards to the Fed's thinking and Kevin warsh is thinking, is that going to be in sync?
Well, first, let me say that I honestly have no idea what I'm going to be doing. Uh, you know, after after chairman doesn't at wash is confirmed, I have no idea.
You're not to come back to the White House.
I have no idea. I have no idea. You know, it's it's people want to go back.
Well, you know, I think I'm going to be doing a lot of thinking over overcoming weeks about about you know, about what will happen and what things will look like.
But I don't know. You know, we'll we'll see, we'll see, we'll see how things shake out.
But you know, with respect to fiscal policy, you know, as a member of the FED Board, it's it's just it's not really appropriate for me to comment on it one way or another. And you'd have to talk to folks, you know, in the White House and in Treasury, and I'm sure they've got plenty of views on appropriate fiscal policy.
That they'd be very happy to give you if.
You want to come work here. You make a great co host. Well they know, I mean, no offense. Mikey's great too, but you.
Know, I mean there are some pretty great snacks there, so you know, it's it's it's it's not unappealing.
Yeah, we have a lot of good snacks on the desk right now. Actually, but we should talk about the balance sheet because one of the differentiating factors of Kevin worsh is also his views on the balance sheet. We know that he's skeptical about expanding it to the extent that the Central Bank has very skeptical about QI as well. And the point has been made to me today on
Bloomberg Television. You know, if the Fed is going to step away from a stance where it's using the balance sheet to influence the shape of the curve, that you could see long end rates go high or that obviously wouldn't be good news for mortgage rates with China that President Trump is very focused on. And I wonder you know, whether those views hold any water with you.
About about whether to do something with the balance sheet.
Yeah, whether or not you know, stepping away from expanding the balance sheet will translate into higher long end rates.
So you know, my perspective is that it is a good idea to shrink the balance sheet.
I've said this numerous times.
But I also think that in order to shrink the balance sheet, we need to do some regulatory reform because there are regulatory requirements that create demand for reserves in the banks. We require the banks to hold reserves because of the various requirements under the Bossle system. Right, So once we do some regulatory reform, then I think we can get back to shrinking the balance sheet. It is something that I would like to do. Whether that has an effect on long rates, I think depends on a
lot of stuff. It depends on how you're shrinking the balance sheet, whether you're doing roll off or or whether you're selling securities.
I think doing roll off is.
Passive and is less likely to have a substantial effect on long rates. But I think at the end of the day, you know what really matters is the overall stands of policy as combined short rates and balance sheet policy. And if you're at the zero lower bound, then the short rate can't do anything, and then it's the balance sheet policy that's really setting.
The tone for the bodom market. Right.
But if you're not the zero lower bound, then in theory, you can be moving the short right around to offset whatever you're doing on the balance sheet. And so what you're doing when you set policies, you're targeting a particular level of financial conditions that let you hit your monetary
policy targets statle prices and maximum employment. And if for some reason financial conditions were to deviate from what allowed you to hit stalar prices and maximum employment, you can change the short rate to offset that and thereby get
back to stalar prices and maximum employment. So if you want to shrink the balance sheet because you have a principle that you want the FED to have a minimal footprint in the economy, for example, right, then if that were to cause an increase in long rates, you can offset that tightening of financial conditions by reducing the short rate. So as long as you're not the zero lower bounds, you have multiple tools to affect this situation.
One last question.
We know now who the next chair of the FED is likely to be, but we don't know what's going to happen to the current chair of the fed. Would it be uncomfortable for the committee? Would be difficult to have J. Powell stay and be in the room when Kevin warsh is trying to lead people perhaps in a different direction.
Look, you know, I think that I think that Chairman Powell, uh you know, deserves a thank you from all Americans. I think his work during the during the pandemic recession, uh you know, was part of a critical effort that really helped save the country from a second Great depression. And everyone, everyone knows him a thank you for that. However, I really can't tell you what he's going to design to do, uh you know. And you got to get it, you know, you got to get it from the source, you know.
I don't I don't know.