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Us today, Thanks for having me.
They were just talking Carolyn too. We're just talking about how we might see another record in the markets today, and I'm wondering how you look at that, because everybody says the Fed has let financial conditions get too loose and that is going to lead to inflation again. But financial conditions indexes really measure asset prices, and if asset prices go up, then financial conditions get looser. It's sort of circular. Do you think that you're restrictive at this point?
Oh, I think monetary policy is restrictive. We're in restrictive territory. But no doubt the economy has performed strong in the first you know, three months of the year. Then we probably had anticipated than I had anticipated. At the same time we saw that inflation progress stalled in the first three months. We did get an April CPI report, which was welcome news, but I think it's too soon to tell what path inflation's on, so we just need to
collect more information on that. But we're seeing moderation on some of the real side of the economy. Still a strong economy, but we are seeing the impact of the monetary policy that we put in place.
Well, do you reject the idea that financial conditions got loose, and that's the reason the first four months of the year we saw inflation level out or go up a little bit.
Yeah, the markets are going to be the markets, right, they move up and down. I think the way I look at it is, you know, we have a restrictive monetary policy in place. It has shown up in terms of moderating the labor markets. They're becoming better balance between labor demand and labor supply, and so we're seeing that kind of work work its way through, and that rebalancing
is going to put downward pressure on inflation. I think as things play out, it's just that we didn't see that in the first three months of the year, and we're just going to need to gather more evidence on what exact path inflation's on in order to sort of determine whether it's on that sustainable downward path of two percent that we're all looking for.
There's been some thought because of the nature of changes in the economy, part of the Fed's problem is that monetary policy doesn't reach a lot of the areas that have been showing price increases. Do you think you have a broad enough anchor on the economy to bring it all down or are there still going to be hotspots you have to deal with.
Well, I think a lot of things happen during the pandemic, and we're still seeing sort of those pandemic effects. I don't think we can conclude that monetary policy isn't having an effect as it used to. But the transmission mechanism is something that changes over time, and we'll have to monitor, you know, moderate monitor that in order to sort of calibrate policy to where the economy is and where it's going, balancing those risks of both sides of our mandate. And
that's what we're in the process of doing that. We gather information, right, we look to see where the economy is at the moment, where it's headed, and then we calibrate our policy in order to reach both parts of our dual mandate and really, frankly, in the first part of the year, what we saw is the risks that we were too restrictive of gone down. You know, last year people were worried about, oh, the FED maybe getting too restrictive and therefore it's going to dampen the economy.
Those risks went down. At the same time the risk to inflation, I think, are tilted to the upside and remain so. And so that's the balancing that we have to do. As we said policy going forward.
Well, you and most of your colleges have basically said, we don't have to do anything right now. We can afford to sit and watch because the economy is in pretty good shape. So the markets are fascinated with when you will have your first rate cut, are.
You well, I don't think about it in terms of when right. It really is dependent on how the economy is fair and where it's going and is in the progress on our dual mandate goals. So what we're going to be doing is looking at that progress. The first three months of the year we didn't see progress. The CPI report welcome numbers, but still elevated too high inflation and in fact there's monthly reading in April was higher
than what we saw last year. Now, I wasn't one of the people who thought that we would continue to see the great progress who saw in the second half of the year continue this year. I always thought we'd see some slowing progress, partly because I think we got a lot of help from the supply side last year, and at supply Chaine have become more normal, and as labor markets have become in better balance, I wouldn't have
expected to see as much progress. Nonetheless, the lack of progress, I think is something that certainly I didn't find welcome at all, and so that's why we have to continue to gather data and really see it. But as you say, there's no real risk in doing that at the moment, because the real side of the economy growth, labor markets earn in good shape.
Well as old sort of saw. The recessions don't happen slowly. They come on rather immediately, and there are people on Wall Street who are worried that if that'll be behind the curve on growth. Do you have any concerns that there may be something happening that you're not able to measure correctly well?
You know, we look at data for sure, we have models, for sure, but we do a lot of speaking to businesses. We gather a lot of information from contacts all across My district is supports district, but every president of a federal reserve is doing the same thing, and so that's very good information because it's more forward looking than the data.
And a lot of the people that we talked to in the first quarter of the year were actually telling us that, Wow, things are stronger than even we anticipated that they would be. So it wasn't just the data showing strong it was they were also saying. Nonetheless, they did say that they're being more cautious, you know, and more careful. Some projects have been put on hold because they want to sort of see how the economy fares. And that's kind of the mechanism that monetary policy is having.
It is starting to moderate demand. It just hasn't moderated as fast as some of us might have expected it to this year. In fact, the last time we put in forecasts, you know, I had up my forecast for growth this year to be above trend as opposed to below trends. So I think we're all sort of looking at the data businesses are doing so, we're doing so, and we're trying to calibrate to where the economy is and where it's going.
Well, speaking of forecasts, you get to put in one more before you're retirement at the correct and of June. What's your outlook for inflation the rest of the year.
Yeah, well, you know, we're going to gather all the data that we're going to put together, and I'm going to put my forecasts in there. I still think, broadly speaking, that inflation is going to come down. That's my modal forecast that we'll see inflation come down. I just don't think it's going to come down quickly. And so that's why it's really going to be this risk management kind of proposition, as the Fed always has to do, is sort of managing the risks around both of our dual
mandate goals. If you remember back to the beginning when we started raising rates, monetary policy was not well positioned for the high inflation readings we were getting, and so we had to increase rates at a very quick uh pace and to a high level. You know, right now, I think monetary policy is well positioned for risk on either side, and so that's kind of what I think what we're gonna be doing going forward is making sure that we're well calibrated for whatever risk end up happening.
And so we're well calibrated now if if there is some deterioration on the real sun of the economy that we aren't foreseeing, as you said, you know, we're well positioned to address that by lowering rates. If it turns out that inflation is stalling out not my base case, or even going up, not my base case, we're well positioned to deal with that too, either by holding rates at current levels for longer or if if appropriate, raising
the rate. That again, that's not my base case. My base case is that inflation is going to start moving back down on a slow, gradual path back to two percent. But we'll have to see, and that's what we're going to be doing, is gathering information.
What odds would you put on the idea of inflation accelerating again forcing you to maybe raise rates.
Well, I think there are upside risks my base cases that inflation will gradually move back down, But I think we have to be open to the fact that, you know, the economy can surprise you. We've seen that during this episode of high inflation, Partly, I think because the pandemic was a significant event and then the reaction to it was significant, and the economy may be changing, and so we have to be open to the possibility and be prepared for it. But again, my motive forecast is that
we'll see inflation move down. But that's why we're going to be having to be very careful and monitoring what's actually happening in the economy.
When you do start cutting rates, how far do you think the FED will go what would be maybe the kind of neutral rate that Americans should expect.
So I we do think that there are reasons to believe that the neutral rate is higher than it used to be. And in fact, as you mentioned, we put in these forecasts four times a year, and the last one I actually raised my view of the long run neutral rate. But you know, we're gonna be setting policy again to to achieve our dual mandate goals, and so that's kind of what guides are everyday policy decisions over over the coming months and over the next year or so.
And that's where we're kind of getting to the reason I thought that it was it was likely that the real rate would have to be higher than it was pre pandemic is because there are reasons to think that investment will be higher. It's this balance between investments and savings that kind of drive where that neutral rate is. And there are reasons to think that investments higher, that productivity growth may end up being higher than it's been
pre pandemic. And we've seen a lot of automation going into firms that had to deal with labor shortages, and that automation will pay off in terms of higher productivity growth. So again, you know, not saying necessarily that we know where the neutral rate is, because we know that that can be estimated with a great uncertainty, But I do think there's reason to think that it may be higher now than it was in the past.
Only got about thirty seconds left, but one last question. This is gonna be your last time to vote on policy and to put out a duct plot. Where's your dot going to be? How many moves?
Well, I haven't determined that yet. You know, I was on the record before saying I was at the media, which was three the developments I've seen in the economy right now, I would not think that that's still appropriate because the inflation risks are moved up given the progress on inflation. It's stalled out in the first quarter, and frankly the real sight is a little bit stronger than
I anticipated. So but again we're going to be guided by progress on those dual mandate goals and we need to be more confident that is one, that sustainable downward path of two percent before we cut all.
Right, I'll take that as somewhere between zero and three, probably not three. Loreena Vester, thank you very much for joining us today here at Amelia Island.