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There's been a lot of talk about how persistent inflation has shown itself to be. You're pretty early on, at least amongst FED members are saying don't get too ahead of yourselves and talking about cutting rates.
A lot's change, at least from the.
Data that we've gotten over the last I don't know three months or so. Has that changed your view as well about staying where we are?
Well?
The second half of twenty twenty three surprised us at how rapidly inflation fell. That was really good news, and the economy remains strong. We all hope that was going to continue. The first quarter of this year, it seems.
Like it's stalled out.
So it's a little too soon to declare that we're definitely stalled out, or maybe it's just taking more time. I think we're in a good place right now. Labor market is still strong. We could take our time to get more data to see if disinflation is going to continue, and if it does, great, If.
It doesn't, then we need to take that on board.
What is the complexion right now of disinflation?
What actually drove us at least down to the level where we're at right now.
Most of the gains that we saw last year were supply side improvements, Supply chains getting better, Americans coming back to work, a lot more workers entering the labor force.
That's really positive.
I don't think monetary policy actually brought demand down that much, and so most of the gains well because of the supply side. Now, the question is if monetary policy has to take us the rest of the way there, is it tight enough to do that. I wrote an essay today on our website raising that question, and I'm not sure how tight monetary policy is.
We need more data to assess it.
How do we know that the inflationary process has still some ways to go, or how do we know that maybe this is it, this is the new normal.
Well, it's not the new normal because it's three percent and the Fed can and will achieve two percent. The question is if disinflation is still underway, then maybe it'll continue on its own, and we.
Can then take that on board. If we need to hold rates where they.
Are for an extended period of time to tap the brakes on the economy, or if we even needed to raise we would do what we need to do to get inflation back down.
I have to dis ask you though about two percent.
And I know why the FED stands by that two percent, But I talk to people around the room this week here and their cost of capital. They're basing that more on closer to a three percent rate. And the idea is they're saying, look, the two percent target that needs to come up. That that's not the reality long term structurally, at least not for the folks in this room.
Yeah, I disagree with that. I mean, I think that.
Ultimately the central bank, whether it's the FED or the ECB or the Bank of England, can determine whatever the inflation rate is, and over time, if they conduct their policy appropriately, people will come to understand that will adjust their behavior.
We're committed to.
Two percent, we will get to two percent, and we will get an interest rate environment necessary in order to achieve two percent.
You know, one of the arguments, though, Neil, is that the idea of near shoring, bringing things back home, building chips in America, that's going to create They're going to be more expensive than if we were building them overseas, and that is going to be you know, consistent inflationary pressures longer term, there are some macro forces underway, why not think that it's got to be about two percent?
I think those trends are real, but those would suggest to me a one time increase in the price level, not necessarily an ongoing increase of inflation at a higher level that we believe and I believe that the monetary authority can ultimately long run determine the inflation of the economy, but the rate environment necessary to achieve that may be different depending on these broader macro forces.
So rate cut this year?
Should we take it off the table?
Is it still a possibility?
It's certainly still a possibility. We need to let the inflation data tell us.
I mean, I think my colleagues and I we all have a range of views on where the economy is going, but we're all committed to letting the data guide us.
And if the data.
Comes in in a pause, the manner suggesting disinflation continues will adjust.
Oh, go ahead, But is it just housing pressure?
Like you write a lot about housing pressure, We talk about it, We're talking to with a lot of people in the real estate sector. There's not enough supply of houses out there, and that's creating inflation on the housing front.
Is it just housing pressures that you guys.
Are really focusing on, or that you're focusing on.
I'm focusing on housing first of all, because it's traditionally the most interst rate sensitive sector of the economy.
And if the most interst rate.
Sensitive sector is not showing as much disinflation as I would have thought, for example, new lease rates appear to be climbing back again.
Yeah, that's surprising to me. Why is that?
That makes me wonder is policy as tight as I would have otherwise assumed. We are seeing some effect of monetary policy on credit card delinquencies, on auto loan delinquencies, especially for lower credit score borrowers. So it is having some effect, but it's not having as much effect as I would have guessed.
By now, I know we have the benefit of hindsight.
But you go back to when the rate high king cycle effectively pause. Do you think that the Feds should have kept going with hikes meeting additional heights.
I don't know.
I mean, I think that there are lags in monetary policy, and we saw such rapid disinflation in the second half of last year.
I mean, it was a really.
Wonderful scenario that was real and that surprised us, and so it's reasonable to say, let's just let that continue.
Maybe it'll take us all the way home. It ended up shawling out at least for a little bit.
You feel like you can accurately assess those lags, what those lags are, because even when you talk about this inflation, you acknowledge yourself a lot of that is driven by supply side issues and not just monetary policy.
How do you assess what the balance is?
Yeah, it's hard.
You know.
For example, in the housing market, which we're talking about, we know a lot of Americans refinanced their homes that when the mortgage rates were very low, and so they're not feeling the pinch of higher rates because they have not had to refinance. And so that happens that happened in the late nineteen seventies and early eighties as well. That's of the lag in the policy process. So we have a lot of data that we look at and we ultimately have to use judgment to try to put it together.
Speaking of data growth, we're doing okay. Jay Powell consistently reminds us this is a good thing.
We hear it.
We feel it here at Milken. Is there the possibility that you don't even have to cut rights at all this year because the economy is strong?
Well, no, that's you're right.
So if inflation moves sideways, and if the labor market continues to be strong and growth continues to be strong, then I would be in the camp of we shouldn't do anything, just let this play out for an extended period of time. If, on the other hand, we start to see inflation come back down or meaningful weakness in the labor market, then that might say we need to start dialing back, or if inflation proves to.
Be more entrench we could have to go up.
Yeah, but is the economy is it strong for everyone?
Well, no, it's of course not. And we know that.
We know that the way policy works, it slows down parts of the economy, and the lower income workers tend to feel.
Pain the most. And that's I mean, I wish that were not the case.
It's also frustrating that every time there's a piece of good news, you see Wall Street rally, euphoria returns to Wall Street, and yet there are people who are.
Feeling the pain.
So it's definitely uneven how this gets felt you did mention that.
If inflation starts to go up, I thought I heard you say we could have to increase the FED. That's a smart narrative still to have out there, that you could that the FED could possibly have to raise rates again.
Well, of course, I mean, we are data dependent.
We are committed to getting inflation back to our two percent target, and we will do what we need to do. Nobody has taken any rates completely off the table.
I think the bar is high.
Much more likely we would stay put for an extended period of time and then we'll see where we are.
How would you actually prepare those the markets for that.
That's not the kind of thing you just want to go into a meeting and surprise the markets line, I mean, you need a little build up there.
I agree, But like there's no shortage OFFFED, there is no shortage of ass to signal when people's perspectives are changing.
Is that FED communication?
Though?
Do you think it's fair? And by that, I mean is it too much? Because you get so many different opinions and in the media it's great, we love it, but I feel like for investors sometimes it feels like, Okay, we're getting too many people.
Telling them I understand their concerns. They're twelve ers are banks.
We represent regions of the country, so people across the six states that the Minneapolis FED represents want to hear from us.
Often I turn down ninety.
Five percent of my speaking invitations that I get, so I go out across the district. I'm usually saying the same thing, but in the spirit of transparency, I live stream it so that can so I'm not giving any secrets away, and if people want to watch it and cover it, I can't control that, And so it's a balancing act where we want to be transparent to the constituents that we represent, and yet we also want to show that we're not giving secrets away.
Doesn't cost curry.
I feel like there is more clarity of thought about what the FED may do next, certainly here at milcine this year around. But having talked to you, we could cut rates, we could raise rates through data dependent I get it. Do you at the FED and the FMC feel like there is We're clarity about kind of where we are in the economy and where the.
Trouble spots are. Well.
I think there's more clarity on our reaction function, which is we are all committed to watching the data. We've been Our models have not worked very well in the last few years, so we have to watch the actual inflation data that will guide us. We all agree on that now, whether inflation goes sideways or continues to fall, we have a range of perspectives on that. That's where the deviations lie. But our commitments are doing what we need to do. There's no deviation around the table on that.
Are you still paying a lot of attention to financial markets and how they are reacting to Absolutely?
I mean it is a channel through which monetary policy affects the real economy.
And when you know it took three negative inflation prints in a row.
Markets started to take that on board, and then one positive job report euphoria returns