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I'm SMALLI Batik. I'm here at the Citadel Securities Global Macro Conference, of course for Bloomberg Open Interest, and I'm standing by now with former Kansas City Fed President Esther George. What a great time to have you a day before CPI, just after the last jobsprint. That's actually just where I want to start, because of course, with jobs coming in hotter than every analyst and economy is surveyed by Bloomberg,
even revisions for the month before revised hire. Do you think, and I think this is the most direct question here, do you think that fifty basis points was too much?
Well, that will be something for history to judge, I think in this scenario. But certainly, how great to see a jobs report like that, But I would just keep in mind it is one that will come in a series, and we have seen because of how this economy is really trying to reach its footing post pandem that we've seen things move up and down from inflation to the job market. So very much a welcome report, but too soon to draw big conclusions about what it might mean longer term.
Even in the near term, how much more room do you think it gives the fad to cut for the rest of this year alone.
So I think what the FED is trying to figure out is how to balance its two objectives for thinking about the labor market, for making sure that it gets back to its two percent target in a timely way. It means now they have to judge risk around each of those and as those come into better balance, as they say, they're trying to decide where to put the
weight on that. And I think when you heard the chairman talk at the NAME conference that we're going to look at our SEP forecast, which shows two more cuts the rest of the year. That's a baseline, but I think not a given yet until we see how some of the other data, including tomorrow's print.
Well, let's out go right there. How comfortable are you that we're on a path sustainably to two percent?
So I think, like others, I'm confident that we have seen that inflation come down. But I've always been among those that believe this last mile can be the most difficult, because now you're trying to get from something in the neighborhood of three percent inflation to two and over what period of time can you do that and still ensure that the public believes you will get back there, that
those inflation expectations stay anchored. So I remain pretty focused on where we are with the current inflation dynamics.
Hey Esther Matt Miller here in the studio at seven thirty one. Lex really appreciate you joining us today. I want to ask about the Fed's data dependency. Is it too sort of immediate, too much in the now? Do they need to look ahead if we get, for example, you know, more deficit spending from the US government, bigger debt, inflationary policies from whomever wins the residential election, should the FEDS start to worry about that now or just wait until it happens.
Well, they have to worry about it now in terms of developing what I call a set of scenarios that could unfold in the economy. And of course that's at the root of how a committee, how forecasters develop a view of what the future looks like. So yes, they have to look at today's data to help shape that forecast. And that's why you hear them talk about being data dependent, is because each one of those data points has the potential to give them a different read on trends or
something that's changing in the economy. But as you've noted, there are many things that right now maybe question marks that lie ahead that they will have to prepare for when they think about it. And I think they have also noted we think our policy is in a good place.
In other words, we can move more aggressively the economy weekends, we can stay longer at this interest rate if it looks like things are heating up again, and so they've given themselves some latitude, some options if you will, for how to think about an uncertain future.
I also wonder about the FED balance sheet. On the Bloomberg we have a great function. If you type FED bal go you can see the enormity of it. It's come down, of course, from eight and a half trillion dollars, but we're still looking at about more than six and a half trillion. Can the Fed continue to run this off? Is there more room for quantitative tightening?
Well, if you follow the FED stated game plan, which is a goal to shrink that balance sheet to the smallest size needed to continue their operating framework, you would have to say yes, there is more room to go, and it's a little bit of a dynamic of saying you are tightening by rolling off your balance sheet while
you are easing the short term interest rate. But of course this is important I think in the long run for how the FED conducts monetary policy, for the implications of that balance sheet, should they need more capacity at some point due to a disruption, And of course they don't know this stated endpoint for this. So when people say what will be the size of the balance sheet
when they finish, that's an unknown. They have to watch the demand for reserves from the banking system, they have to watch treasury market functioning to make sure that that remains healthy. And so I think it's an unknown destination at this point. The direction of travel, I think really important in terms of how they've laid out their plan to reduce that balance sheet.
And so this is Katie Greifeld sitting at Samat in seven thirty one.
Lex.
I do want to build on what Shanali asked you, of course about how much room the Fed has to cut rates. I'm curious about when you look at the dynamics of the inflation that we have in this economy right now. Of course, we got hotter than expected wage growth last Friday and the jobs report. There's some people saying that we could get a hotter than expected CPI
report tomorrow. Could you see a scenario where actually the Fed stays on hold in November and potentially entering into service stop and start rate cutting cycle.
Well, I think they will have to think about that, depending on how again this report comes in the composition of it very important. So they've seen goods inflation really back off, services inflation has started come down, the housing component is continuing to stay sticky. And so with the CPI currently at a core level running closer to three, the PCE also running well over their target, they have to be very mindful because in the long run, inflation
is what their policy toolkit is able to control. The labor market, of course, is a byproduct of how stable that inflationary dynamic is, so it remains a very key aspect of decision making, I think for this committee.
And a sir, I know it's an impossible question, but I am curious about where you think the neutral rate might be in this cycle. Of course, in sort of a range. I mean, do you think that we're going back to and a half percent neutral rate or do you think that maybe it could be a little bit higher nowadays.
Yeah, Well, my view is that I think it is a little bit higher, And of course we don't know. The economy is still trying to find an equilibrium, I would argue, as is the FED trying to judge. We don't want to stimulate the economy, we don't want to slow it down unnecessarily. But knowing where that neutral rate is is a tough call, and I believe you've heard the Chairman say we're going to kind of feel our way.
We'll know it by its works. There are two things that I think though are important to look and why I would think that neutral rate is higher. One is looking at productivity growth, so that can bounce around, but we have seen some pretty interesting productivity come out of this period that could mean that that neutral rate is higher. And of course the other thing is looking at fiscal policy.
With the level of interest that's compounding and the deficits that we see underway right now, that could also suggest we're going to have higher levels of interest rates. And this idea that we will be going back pre pandemic looks a little more iffy to me than the period we've just come off.
Of now, I want to double down on just that point, because you were a co signer to a report that came out this week from the Committee of a Response for a Responsible Federal Budget that says Vice President Harris, if elected, would add three point five trillion dollars through the federal debt through twenty thirty five. President Trump would however, add seven point five trillion no matter what you have more.
But it's the degree of how much more you see through their policies, how much uncertainty does that add to the interest rate outlook in addition to the current out load that you were talking about.
So for the Federal Reserve, they're not able to make decisions based on those kinds of potential policy agendas, and of course a lot will have to happen next year
for us to see how that unfolds. I think what's really important, and I hope what the sentiment of this letter was, We're already in a place that we need to address our fiscal situation, and depending on how elections go and how Congress and policymakers think about the US fiscal position, it will have dramatic implications for the country. And so the sooner those are addressed. The more specifically they're addressed, the better it will be in terms of tackling what is an enormous problem.
We only have about thirty seconds left here, But do you think that there could even be a chance for an interest rate in increase next year if these policies become inflationary, well.
I think under different scenarios, of course, that could be an outcome, because that, of course is a direct mandate for the Federal Reserve is to try to head toward its two percent targets. So a lot can happen between now and next year, and we'll have to stay tuned. As I know, the Fed is.
Ester George, We thank you so very much for your time. Of course, that is former Kansas City Fed President Ester George