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We begin this sound with investors searching for direction in a pivotal year, potentially for the Federal Reserve. FED Governor Stephen Myron dumpling down on his dubbish stants calling for the Central Bank tocount interest rates by more than a percentage point in twenty twenty six. Governor Myron joins US now four more. Governor, good morning, happy.
New year, happy to hear, thanks for having me back.
It's good to say. You've been very, very transparent about where you were on the dot plot and what your forecast is. So let's start there. Where are you for this year? Where's your dot? What are you looking for?
Yeah, so I'm on surprisingly the lowest dot. I'm looking for about a point and a half of cuts. A lot of that is driven by my view of inflation. I gave a speech about this and you know about a month ago in December Columbia University. My view is that almost all of the excess inflation over target is
due to quirks of how we calculate inflation. So, as you have talked about with many of your guests many times before, shelter inflation really really lags a lot, and because average tenant rents have caught up to new tenant rents, because market rents have been running at a one percent rate for a couple of years now, I think it's appropriate to sort of think about underlying inflation as abstracting
from that a little bit. You know, the shelter inflation is indicative of a supply demand in balance from twenty twenty two to twenty twenty three, not twenty twenty seven. We need to be making policy for twenty twenty seven
because of policy lags. And their side of it is the portfolio management fees that I'm sure you've talked about again with many of your guests many times stock market went up mechanically inflation moves higher despite many of your other guests, I'm sure no doubt telling you about fee compression and the asset asset management industry for decades. So you abstract from those two things. Underlying inflation is running at two point three percent. That's with the noise of
our target. That sounds like an argument for neutral. You're making an argument though, for this year, for a combination. Where does that come from?
Why are you looking for a combinative monetary policy stats cominggain to Washington.
Yeah, so a couple things. First of all, as I just said, underlying inflation's running within noise of our target, and that's a good indication of where overall inflation is going to be going in the medium term. But then the unemployment rate is four point six percent, right, So that means that there's about a million Americans who don't have jobs, who could have jobs without causing unwanted and
without causing unwanted upward pressure on inflation. I don't think it's right to tell those people that they shouldn't have jobs because we're just mechanically calculating inflation in some silly way. I just don't think that makes a lot of sense. The other thing is that because we've kept policy tighter than I think it ought to be, that makes me mark down our growth forecast for the future relative to
where it should be. And so if we didn't need if we hadn't kept been keeping policy in my view too tight over the last year or so, it wouldn't be necessary to provide that type.
Correctly, say, marked down in the future. Because they fed actually marked up GDP for twenty six What do you mean in the future no.
So like when you look at these dots right in the set, they're projections of appropriate policy and projections of economic fundamentals like growth and inflation conditional upon appropriate policy. So my projections for growth and inflation are conditional upon getting my policy forecast right, my policy projection. If I don't get my policy projection because the rest of the committee is more hawkish than I am, then we wouldn't
meet my growth and inflation projection. We'd underperform then. And so because policy has been in my view too tight for the last year, that means that my expectations of growth will ultimately be will ultimately be unsatisfied because we didn't get the policy that I wanted.
You have GDP two point six percent roughly over the next few years. Are you saying that the appropriate growth rate is something like that two percent and two point six percent and not necessarily three percent are.
Above Well, so that's conditional getting upon getting the policy projection that I want, right, I think, and I think, and part of that is due. So part of the reason why it's a little bit lower than I think two point eight two point nine is probably where more where it would be if we got if we sort of had the right policy the entire time. Part of the reason it's a little bit lower than that is because we got to account for policy having been too tight over the last twelve months.
There's also a question about the reaction function. We're talking about the data that we're going to be getting tomorrow. What would you have to see to change your view? I mean, if we saw, let's say the unemployment rate go down to four point four percent, would you start to question whether one hundred and fifty basis points of cuts is really necessary this year.
That's a great question. And before I answer it, let me step back a foot and say that my forecast is conditional upon shelter inflation coming down, right, And there's people who agree with me, by the way, Like you look at the research from Goldman Sachs. You know, it's pretty similar to where I am on shelter. They've got shelter inflation running below the pre COVID rate by the end of the year, similar to where I have it.
Where I differ from a lot of my colleagues again, is thinking that goods inflation is not being driven by tariffs. Don't see tariffs being driven by goods inflation. I see goods inflation. I'm not sure what's driving I listed a few possibilities in the speech in December. I think the jury is still out on that one. But if I end up being right on inflation and gold sorry on shelter.
If I end up being read in shelter and Goldman ends up being read in shelter, and I end up being wrong on tariffs and everybody else is right on tariffs, then we're going to undershoot our target. Two sided risk is back, and I think that people haven't really internalized that yet, and I think it's important to appreciate that. Now, where would I be wrong Because so much of my disinflation forecast is based upon shelter, I'm going to be wrong if market rents pick up again.
So you're saying this is all an inflation issue and not anything to do with the labor market.
Now, as I said before, unemployment is unemployment is somewhat above the somewhat above what where I view the natural rate, And so it's sixty basis points a million people you know of unnecessary unemployment that we could reduce by having a more appropriate policies.
Now it's Toalsa's point. Is there a line in the sand and the unemployment rate tomorrow that would maybe have you think about this a little bit differently. What if the unemployment rate drops down four point five percent or even four point four percent.
Yeah, I would absolutely addst I would absolute adjust my projection. So if you look at the September step, right, I was fifty business points higher than I was in the December step. Part of the reason why I adjusted my dot down by fifty basis points is because the labor market didn't perform for my expectations that I had in September, and because inflation actually I performed to the downside, right, So it was appropriate to adjust my dot down. And then on top of that, we had the two type
policies I described. So if the data come in a little bit better, yeah, of course I'm going to adjust my expectation.
In just the past few weeks, we've heard from a number of your colleagues talking about how actually they feel like we're pretty close to neutral. Have you any inroads convincing them that they're not right about this the way you.
See the world, You know, can't I can't speak for them, but you know, I think that every month we come in and the unemployment rate ticks up a little bit, and the inflation, you know, and the inflation data sort of seemed to be doing a little bit better. I think it's really difficult to argue that policy is neutral, especially when we've been on this course of gradual listening or the labor market for a couple of years now.
It's just really difficult in my mind to sort of argue that policy is not restricting the economy.
A couple of words to want to pick out, and one is neutral and the other is correct. I think it's very difficult to say this is where I think neutral is, and this should be the correct policy rate, because it's such a guessing game as to where neutral is. And I think you understand that. Of course. I also want to pick up the difference between being an economist and being a policy maker. When you say two way risk, I think that really makes us all think about speed
and the appropriate speed to adjust monetary policy. When there is two sided risk, why do you think we should be going this fast this year in your mind to cut that aggressively in twenty twenty six.
So same thing as I said in the lest few times I've been here, we're still materially above neutral in my mind, and there's not really a reason to be materially above neutral if the labor market is an a weakening path and inflation is underlying inflation's already running close stort target and on trajectory to hit it. To hit the target, there's just not a real reason to be
so restrictive. And we're running unnecessary risks on the labor market by being so restrictive, and so in my mind, it's like we're selling options for nothing, and I don't see why we're selling those options.
This just requires such a strong amount of conviction. Though, coming down of the pandemic, I think what we all learn was a massive degree of humidity because there were so many things that we thought were obvious that actually things just turned out to be completely the opposite. And I wonder if this year we should have the same
approach to monetary policy. As a monetary policy official, do you have to sit here and say, actually, the prudent way to do things is actually to move slowly and work things out meeting by meeting, Because that's why I hear from other members of the committee, and I'm wondering why you see things so differently.
Sure, So first of all, I'll say that I was right about inflation at coming out of the pandemic. And if you sort of go back to twenty twenty when I was in the Treasury Department, you know, we were arguing for a smaller stimulus package because we didn't see we didn't see COVID as a similar type of recession that we had POSTGFC, post dot com bubble, where you had persistently leveraging dragging on demand that caused the balance
sheet recession with a persistent, slow, crappy recovery. Right, COVID was like a switch turned off. Right, people stayed at home, and the switch turned on when they started going out again. And so there wasn't going to be that slow recovery. And that's why we were pushing for for smaller stimulus packages because we didn't think that it narrated that type of package. We were concerned about inflation picking up. So
I did I did get that. I did get that right, And I do understand the value of of being cautions and having humiliating these things. I will say my forecast, as I said before, is predicated upon shelter inflation and shelter is a weird thing where market rents give us a window into measured into the path of measured inflation that's very different than other sections of the inflation index.
We know that market rents, a weighted average of single family multi family market rents have been growing at a one percent rate for two years now. We know that average tenant rents have caught up to new tenant rents.
Right.
There are statistically mechanical relationships that give you a lot of confidence that measured shelter inflation is going to come down a lot.
Right.
You don't have that type of confidence when you're talking about goods. I said before, I don't know what's driving goods inflation, Right, I don't have this forecast that goods inflation is going to come down because it's just driven by tariffs that my colleagues seem to have.
Right.
I don't have that type of confidence on areas the index that I think are much more difficult to understand. Shelter is a mechanical thing from market rents to measured inflation, and therefore it's in my mind appropriate to have that high degree confidence. And to least's point, where would I
be wrong if the market rents pick up again. If the market rents pick up, then I'm going to say my mechanical pass through from market rents into measured shelter inflation is getting invalided, and we'll see that.
Just to hone in a little bit on the housing aspect, since that has been a really hot topic, how much signal would you take if you did start cutting more aggressively at the fetcher reserve and tenure yield rows and that actually created an issue for mortgage rights and the pass through there. It might actually help with disinflation, but it might as exactly be the outcome that you're looking for.
Yeah, so this is an area where i'd want to where I'd want to have I'd want to not jump to conclusions because I want to sort of try and analyze and very carefully and thinking about what the market is saying, think about what the economy is doing. And if it's the case that you cut rates and you sort of get a burst of activity in some sector of the economy that's not housing and that ends up crowding out housing, then you know, you wouldn't really mind.
You're focused on aggregates, you're focused on inflation, on area inflation, You're focused on aggregate unemployment. Right, If it looks like you cut rates and the bottom market is giving you a very clear signal. And I'm not just talking about like,
you know, trading behavior for a week. I'm talking about a very clear signal over the course of a period of time that it's not the right move, then I think, yeah, you want to you want to take that signal, and you want to think about what's the market telling me that I missed? Is the market right? Am I wrong? Let me rethink my framework.
You're going to miss this when it sort of it feels like you're enjoying this? Are you going to miss this when you have to leave the Federal Reserve?
Well, you know, uh, that's not part of my forecast.
How are you going to hang around?
Oh? I have no idea. You know, we'll see. I don't I don't make personal decisions.
Okay, you've had nothing at all from anybody.
Uh, you know, I think that you know, we're very clearly now getting into getting into the new year, and the president. You know, the President has said in the past that he would make announcements as we got there, So you know, I imagine we'll be getting some at some point. But you know, I don't know. I don't know anything about my future, so I would, I would, I wouldn't mind it.
What a position to be in. We're all sitting here waiting, just like you. Governor. Thank you, it's good to see you. Thanks for having thanks for saying so generous with your time. The Federal Reserve Governor there, Stephen Myron