The word that everybody uses is solid.
And you know, when you have Lorettamester coming up, the answer solid doesn't cut it because a mathematicians going, what in God's name is solid?
But there are we have a solid economy? Well know what that means?
Well, we'll find out from Lurettamester, who's sitting us. She is former Cleveland FED President Loretta Master. This is the first time that she's joining us as a non FED member in ten years at this Jackson Hole meeting. Lorettamester, President Mester, I will still call you that you've always been a thought leader. How much do you hear more dissent than usual among members at a time where we really are at a pivot.
I'm not hearing that much to send Frankly, I think we're in a good place in terms of where the economy is. If you think about inflation, look how much it's come down.
You know, we're in two and.
A half percent range and the lad market is moderating. There's definite signs of that. But it's not weak, right, It hasn't turned into a strong you know, weakness coming into it. So we're in a good place spot. And now what the FED needs to do is make sure that it can maintain the momentum of inflation going all the way back down to two percent while keeping the labor market healthy. And I think that's where the focus
is gonna be. If you remember at the start of the tightening cycle, you know, we had to go very aggressively because policy wasn't well calibrated to where the economy is and where it was going. Uh or was and where it was going. And now we wanna make sure that you know, the FED wants to make sure that policy stays well calibrated to the economy. So the discussion now, I think is about we have a dual mandate. We have to focus on both parts of that. We have
to be forward looking. You know, it's where the economy is going, not necessarily where it death is here today, but where it's going. And that's why I think now it's it's actually appropriate to really be thinking about, Okay, it's time now to enter this new phase where we can start normalizing the policy rate.
Wall Street and the financial media wants specificity, they want certitude, they want single point statements.
About exactly where we are.
The reality is just to look at productivity is a capital analysis, a labor analysis, and an all in analysis. Call it total factor productivity. The noise in there, to me with the overlay of technology is highly uncertain. Do you have any handle of the overlay of productivity and technologies effect that Cleveland and American economy.
Well, I mean we've seen over history, right, that technology can be very additive to productivity growth, right, I mean, that's kind of the engine of an economy that's increasing and having potential growth rise. But in any point in time, it's very hard to measure productivity growth. Even if we didn't have this big technological innovation of AI, it's very difficult to measure it. So you have to take into
account that there's uncertainty around productivity growth. I mean, some estimates say that we're still in a low productivity regime. Other restamates are saying, well, let's look forward, maybe we're going to be in a higher But for the FED right now, right, that's not sort of the focus. The focus is, you know, are we calibrated, Well, it's policy calibrating.
Well, to the CAT, you've been great on this. She just said they're not focused on productivity.
We have to be because business leaders every day are focused on those outcomes, and they're investment.
Well, they've sort of been forced to by inflation and a lack of workers, and they've been forced to put investment into productivity.
We'll see if it starts to pay off. But Loretta is right.
At the moment, you know, you don't, you're not seeing it.
But that's not the key for them.
But I do want to know how you respond to the criticism that the Fed has not communicated well what it's thinking and what it's planning, or if not planning, you know, what are the potential outcomes because we've some very wild swings in the markets as data comes around.
Have you said data dependent too much?
I think there's a misunderstanding what data dependant means, and that means that I think Chairpal today will be explaining where he sees policy going, not necessarily at the next meeting, whether fifteen to twenty five, which in some sense is really not the big issue. I know for financial markets it is, but not in terms of monetary policy. It's
really what's the path forward? Are we beginning now to bring policy down and the pace, of course, and the magnitude eventually of how far our indust rates go down that's going to depend on how the economy evolves, right, But we're going to enter this new phase, I think, and appropriately so in July. I probably wouldn't have supported actually moving the rate down in July, and of course the Committee didn't, but I could have made a case
for it. And that's a change, right, that's the economy has changed enough, Inflation has come down quite a bit. It's on a path I think where we can be pretty confident it'll get back to two percent. And now we really have to balance both sides of the mandate. So it's basically keep the momentum going on inflation at the same time making sure that labor markets remain healthy.
What do you think it would take for the committee to decide you needed to do more than the standard twenty five basis point cut?
So I think it would have to be that, you know, somehow they thought they were a little behind and they needed to catch up, and frankly, I don't see that in the data. I think they're actually in a very good place now. If it turns out that, you know, the forecasts are saying, wow, you know, we may be seeing the moderation in labor markets being more than moderation and we actually see a weakening, they may have to
adjust that and then do more. But I think there's sort of a record if you think about when we started to raise rates, right, we started at the twenty five, then at fifty, then we did our seventy five, and that's sort of the preferred paths. That means you know, you're not doing too much too ahead of time. And the other thing I think I would be worried about is if you do a fifty to start with the
market send you know, building even more. And I think that's a calibration that you have to think about when you're doing this. So I think being steady right, thinking about what the right pace is gear to how the economy is working and evolving, it's the right way to go.
You said that you expect j. Powell to come out and give a sense of where we're going, and I think that's actually the frustration for a lot of people in markets. We don't know where we're going. We don't have a sense of what the neutral rate is. Right now, the market has about two hundred basis points of rate cuts priced in by the end of next year. Is that appropriate? What is neutral?
Well? Remember what the markets are doing is and appropriately so looking at different scenarios, right, and they're waiting and then when they when you get those kind of things out of the financial markets about how many rate cuts, it's balancing different scenarios. When the fence talking about you know where they're seeing is they're talking about, here's what we think is if the economy evolves as we expect,
wouldn't be appropriate policy path. But they also have to think through alternative scenarios too, So it's kind of a different answer or different question answer to a question, and that's I think the frustration is that the FED is trying to answer a different question is here's where we see policy going, But of course they don't want to commit themselves to something because the economy could evolve differently, and that's been hard to communicate.
You founded an inflation lab at the Cleveland FED.
What do you think inflation dynamics are now?
Is this a completely different kind of situation post pandemic than models coming out of other recessions have.
Worked with well, I think one thing that we saw during the pandemic and the aftermath was that the supply side, right had a lot to do with inflation dynamics. But the key thing to remember is that those supplies shocks would not have necessarily resulted in higher inflation if we hadn't had a very strong demand side of the economy. So it's this balance between supplying demand. Typically right in the past, right, it was all about demand. Supply you could sort of say it was sort of stable, and
it was all about how demand was moving around. In this event, right, it was both supply and demand, and that made it more challenging. And so in that sense, I think there's a renewed understanding that dynamics on inflation. It's both sides, it's supply and demand, and understanding both I think is going to be a focus going forward.
Well as if it goes into its review process for its monetary policy framework, does what happened change the way you think the committee should look at policy? In other words, maybe you want to be a little bit more preemptive than you were.
So, I know a lot of people characterized the FED in the framework that came out in twenty twenty as walking away from being preempted, But if you actually look at the language in there still says preempto. I agree with you that it sounded like we were just being data dependent in the moment, But we've always were focused on where is the economy going? So it's data coming in.
Assess that data relative to your outlook. If it's materially different than you expect, you might have to change your outlook, and therefore you might have to change policy, your policy expected policy paths. So I think we've always been forward looking. I expect the FED to remain forward looking. They may change the language in the statement so that that's a little bit more transparent, if you will, so that people actually understand that, you know, policy has to look forward.
I would never ask you this question if you're on the watch, But now that you're gainfully retired and in the real world, I'm going to ask you this question. Cleveland has reasonable real estate, but Shaker Heights as a boom.
Real estate economy.
And part of that asset success of Shaker Heights in the Shaker Heights of America is the gains the halves are getting from this financial system. How does the FED distribute the benefit more across America? Rather than this illusion that only the have nots that own the havelves that own Nvidia are making way.
Yeah, I mean, the FED always focuses on the macro economy, right, it doesn't have tools that can really do much about red distributing or fairness or making sure that everyone gains.
But what we can do at the FED, and what the new committee will be doing at the FED, is making sure that we maintain healthy labor markets, which again helps distribute and brings inflation, and you know, the inflation rate down and getting back to price stability is also very key to having a strong economy so that everyone
can prosper from the economy. The FED really can't do the other part of what you're talking about, and that's what the federal government policies are about, and the fiscal policy is about.
We thought that you were going to retire and pelt homes you try to offset some of the supply issues. Lreida, there is this question Mike was talking about how the Queen of Inflation studies and how the Cleveland FED really does have an incredible metric for that. Do you have a sense of how much more inflationary this post pandemic economy is and that really speaks to what is the new neutral.
Well, there are certain factors that really affect inflation, right, But the basics are similar to what we saw before. Right. Inflation expectations are still an important driver of inflation. Making sure they remain stable is helping to keep inflation moving down, which is important. Supply side conditions matter, and the labor
market tightness matters. We're going to hear a paper at Jackson Home that's really addressing that how much tightness in the labor market affects what you might see when demand gets out of whack with supply. So again it's the same basic factors, but of course the supply side during the pandemic changed quite a bit, and those factors are going to be I think more significant going forward than perhaps they were in the past.
Are you having more fun now that you're not on the committee?
I'm having fun.
Well, hopefully you can go hiking or enjoy the beautiful Wyoming Lordemester formerly of the Cleveland Federal Reserve. Just going back to the end of June when you step down, and she is here for the first time in ten years, not as a member of the committee, but as a civilian who is planning to do lots of things in her free time.