Bloomberg Audio Studios, podcasts, radio news.
Turning to the Federal Reserve cunning interest rates by another twenty five basis points this month, but signaling the path is unclear for twenty twenty five, Fedchaed J. Powell saying he feels good about the economy, but we are in a new phase in the fight against inflation. Pleased to say they're joining us around the table alongside Mike m Key and us is the San Francisco Fed President, Mary Daily, President Daily. It's good to see you, Nice to see you.
Thank you for giving us some time. Let's start with the forecast. Some controversy around the forecast. I'll go through the controversy. We don't speculate, we don't assume, we don't guess. And then a month later it found like there was some speculation and some guessing about policy next year. I just want to talk about your approach to the forecast. Was it about the data for you? Or was it about the incoming administration?
It's about the data. It's always about the data for me. We don't know what the incoming administration is going to do. You know, new administrations, no matter when they come, always put a slate of programs together, and really, as a policy maker, I look at I want to see the net net effects once I see clarity about what those policies will be. So I was focused on the incoming
information and what it means for the outlook. And today I feel like we've got policy in a good place, the economy is in a good place, and we are prepared for whatever comes before us.
What happened in the past three months that caused the FED and perhaps yourself to be much more concerned about the stickiness and inflation.
Well, the data happened, and you look at the data, and what's happened is that there's two things that have occurred. First of all, the economy remains in a good place, and the risks to the outlook are equally balanced between a risk to inflation or a risk to employment. That's where we wanted our goals to be. And we adjusted policy when we had confidence that inflation was heading down, and we adjusted policy some more to ensure that we
have a balanced labor market that continues. So that's where we are. But then the data on inflation have been coming in a little slower. I wouldn't even say sticky or stalled. I would say the progress is just slowed relative to what we had wanted. But that's a typical pattern. It's bumpy as you get to the you know, from point five or two point eight to two it's just a bumpy path. This okay, go ahead.
At the same time, some people were wondering if there was the stickiness. And I'm looking right now at say the Cleveland CPI now and it actually has ticked up for the month of December from November. There was this question, why did the FED cut it all?
Sure, and again I'm going to reassert that it's bumpy. You know, remember earlier in the year we had two months of data and people said, oh my gosh, it's reaccelerating, and then we had it come down. So inflation data can't you can't focus on one month or two months. The most important thing for me was that we needed to recalibrate policy. I saw this as a close call. You know, I was seventy five enough to be the recalibration. We were looking for right size policy to meet the
economy we expect, or do we need more. Ultimately, I determined that the one hundred basis points was really the right level. Now I feel we've got that recalibration phase behind us and we're in the next phase. And the
next phase is really looking at the incoming information. We can return to a more typical pattern of gradualism for the fad you know we've been we've practiced that where you with a lot of uncertainty, you adjust the policy rate, then you wait watchfully and you see what transpires, and then you make further adjustments. That's the phase I think we're now entering.
From September, the expectation in the markets was going into every meeting that you'd be cutting Has that changed now? Should the expectation be that you won't be doing anything at any particular meeting? And from that question flows a second question, what are the criteria that you need to see to decide to go back to cutting rates?
Well, as you saw from the SEP the median projection is to rate cuts next year, so that's already not in every meeting or every other meeting. That's two rate cuts. I was very comfortable with that meeting, and that makes sense to me. But we have to agile. I mean, you know, the thing that's got us here is being resolute to achieve our dual mandate goals. Price stability was our focus when inflation was very high. The employment has come into the frame so that we're focused on both.
But then we also have to be agile. You know, the world is uncertain, so we pencil into and you know, as that estimate or that projection gets further from when we made it, the accuracy of it probably falls. And so we're just going to continually take in more information, consider it, and every meeting your listener should think about this. Every meeting is live from the standpoint that you're debating, you're discussing, you're thinking what's the right level of policy.
But my projection is that it will take much many fewer rate cuts next year than we thought. But I'll watch the economy and see if that works out.
When we went into the cutting cycle, you were out front and saying you were concerned about the labor market and that we needed to make sure that we didn't lose the gains that we had. Now, at least coming out of Chairman Powell's press conference, it sounds like the focus has shifted to inflation again. Are you comfortable with that as this new phase that he's talking.
About, Well, I think of it as a new phase as well, and I would characterize it slightly differently. I would say that for a long time, a persistent amount of time protracted, we were focused almost entirely on inflation. That's because the labor market was quite robust and inflation was seven six ' five. That was the right way to focus. Then the labor market came into the frame. That didn't mean we turned our focus totally to it. It just meant that after a long period of focusing
only on inflation, we were now focused on both. I think that is still the case, but I see policy as already in that position where it's supporting both. That policy is restrictive. It's going to continue to bring inflation down, and it's going to do so in a way that doesn't strangle the labor market, break it and then give people lower price, lower inflation, but take their jobs. And that's not what we're trying to do. We're really working towards that soft landing.
Mat Now you've used the word we a lot when you talk about what's happening in the Federal Reserve. We've had some people who are quite critical of the Federal Reserve, and Chairman Pouse performance specifically in this news conference. One excuse that was given was that maybe he was struggling to reflect the lack of a consensus on the committee. How much diversity of thought disagreement is there on the committee?
You call it a close call for yourself, but was there some disagreement on the committee at this meeting?
Well, you know, I'm not going to speak about the entire committee when I say, focused on the things we all agree on, which is price stability and full employment, on our efforts to get there. You know, what I would offer is that we have, in my mind, the healthy level of discussion and disagreement. You know, you don't want an FMC that things exactly alike. And I believe that what people are looking at is the fact that now the world is more uncertain and people are debating
and bringing in their views. And that's appropriate. When it was a pandemic and there was only one direction that we were interest rates, we had to do it quickly. It was obvious everyone agreed. When inflation's high, there was no disagreement. Right, we're all merging up. Now. You should expect more disagreement, more differences of opinion, but they're always framed to the same thing, how do we get inflation to do and restore or keep full employment.
When I hear the world is more uncertain a lot of people here, Well, that's not about the data, that's about the incoming administration.
I would disagree. Why would you disagree, because we have a variety of risks that are the ones we always deal with. Right the housing inflation. Right now, there's a substantial housing imbalance in the United States. The models, in our data and our past experience, I'll say housing inflation will come down, but we are uncertain about that. Right. It hasn't come down as quickly as the models would
have predicted, and so that's an issue. The labor market and consumer spending and growth are much faster and stronger than people would have predicted at this point. Given the titaning we've done. There's a lot of uncertainty about the natural rate of interest, where's the stopping point? And then of course there's geopolitical risks, the risks of global growth. That's going to be the backdrop. And then you have
a change in administration. So I would say this level of uncertainty is normal in the sense that we've had all those things going on, and it's not as excessive uncertainty as after the pandemic, the financial crisis. Those were really big periods of uncertainty. So I think if you're a central banker, you just get used to uncertainty and you manage.
It before we get into what some of the uncertainty about next year could look like. I am curious about how you're weighing how to preserve the job gains with the risk of running the economy for too long. And that's I think something people are struggling with. Is there an emphasis on the labor market even at the behease of inflation, just because it's been deemed better for inflation to be a little hotter as long as people keep their jobs.
Yeah, I would characterize it a little differently, But that is a terrific question. So when we spend you know, as you know, reserve bank presidents spend a lot of time in the field work in our district, I have the whole Western United States, And so I ask people the question, you know, where are you on this? And again and again I hear that the economy is sort of in a good place right. Inflation's coming down, it's gradual, and the labor market is solid, but there's one job
for every unemployed worker. You know, that's in perfect balance. And our firms are saying we can find workers, and our workers are saying we can find jobs, and no one really wants that to break. So what people do not want is a recession. And I think one of the reasons sentiments been rising since the middle of this year is because the recession risk is now behind us
in people's minds, and they feel good about that. So what I hear more than you would think is don't get one tenth off inflation just and then break the economy. That's like, we can be patient, but you just have to head for two and we don't want the economy to break.
That's why I thought it was interesting that the inflation forecast for next year was shifted upward even at a time where the unemployment rate was shifted downward. There was a sense that that was okay to tap two and a half percent inflation at the end of next year, even though it was above two percent. Is that the sort of feeling right now on the FED to be more patient with inflation because it's thought of as less punitive at a level below three percent. Than say, arise in unemployment.
Well, let me just say how I think about it, because here I will speak for myself. I'm not comfortable with the rate of inflation being two point five, but we're continuing to work on it, and so we might end up cutting rates cutting rates less if inflation is as sticky as that. But what I'm also balancing is I don't want to see an unnecessary rise in the unemployment rate just to get a quarter ahead on the
two percent goal. So that is a balancing act. And I think ultimately we were just looking at the information coming in and saying, you know, there's a lot of risks out there. Inflation could rise, but you'll see the inflation rising was a partly why you saw the rate cuts pulling back is absent the if we had four you'd see inflation go up more. And so this is a balancing act. But I think it also points you to the dispersion that you saw in the SEPA, which
I see as a feature, not a bug. You should have some dispersion when the world's uncertain, Otherwise you would wonder if we're all in an echo chamber. But we're not. You can see that clearly and you see the dispersion, and I think that dispersion really represents what we're facing. We might end up with fewer cuts than two. We might have to respond and end up with more if inflation falls faster or you see a significant weakening in
the labor market. And I'm comfortable sitting in that center court position and waiting for the data to come in and we'll actually respond as they do.
Well, do you think there's any chance that you might have to raise rates next year?
You know, I don't see that on the horizon right now, but if we will always remain prepared to do what it's needed to achieve our goals. But I don't see that in the span of the most salient risks right now that I faced. But you know, absolutely that's something that we never take off the table.
Who owns the dealt with no cunts? Next year? Come on, reveal, Who's is that?
Twenty twenty five reveal?
Salas.
No, I'm not going to tell you. I'm not rookie. You know, I know it's not a holiday gift. I'm willing to give gifts.
I'm just checking reveal.
President Day is going to stick with it someplace to say thank you, Mia Kay, thank you as well, Sir President Mary Danny is still with US. President Daidy, you were all about the data, not about the administration change. We do want to talk to you about how you would approach changes in policies from the incoming administration though across many dimensions immigration taxes, but the big one I think for many tariffs, what's your approach going to be next year?
So we have all the tools and evidence from prass historical periods, we can think about how these things will affect the economy. You know, one of our biggest tools of figuring out how things will affect the economy is talking to CEOs of small, medium, and large companies, and we've already engaged in doing that. So when we're out there in the field talking to people from across the country, and I'm spending my time in the twelfth district, we're
hearing that their sentiment is up. They're really optimistic that they've been cautiously optimistic. They see the Fed's interest rate path falling and they feel good about that. They see the economy as the procession risk is behind us, and they feel positive in general about some of the things that they think may change going forward. Now, whether that materializes or not, we will wait and see. But I feel that sentiment alone is causing us to have some enthusiasm,
some cautious enthusiasm, if you will. One thing that we hear is that for firms that are worried about the immediate impacts of tariffs on their business, they're just building up some inventory so that they can have some insurance. And so that's something you'll start to see in the data already, but I haven't seen that in such an outsized way that I think it's going to change the course of the economy.
One thing that you say President daily is that we have experienced from the past of tariffs, of some of the immigration bands or limits, but is this time more difficult just because of where we're coming from. It is a more inflationary time after a pretty big stimulus package injected into the economy.
You're feeling like an economist, like when you think of state dependence, right, The impacts of policies affect are affected by the state of the economy. So one thing that is on my mind is that we already have inflation above two percent, and so we have to work hard to get inflation down to two percent, and that is an economy that's just a little more vulnerable than it would be if we had inflation, you know, at two percent, or when we came in to the tariff discussion or
trade discussions last time, it was below two percent. So I feel, on the other side, the real side of the economy is very is very strong or solid, and so we're in a good position. But it does it is on my mind, and inflation is already elevated.
Well, does that make it that tariffs are more likely to be inflationary than they have?
And it's really hard to sa. I mean, one of the things you learned from doing this kind of a job at while is that it really depends on the scope, magnitude, timing of tariffs and whether our companies in the United States are positioned to use substitutes and manage and you see this happening. We already went through. Another feature that might make it less challenging is that in the pandemic, firms reshored, near shored, friendshured, and you saw a lot
of that behavior already taking place. So we'll see we just have about a minute.
But in being agile, how concerned are you that people are going to label decisions as political.
I don't feel concerned about that. I think what we've done well and is talk to the American people. That chair does that in meetings. We do that, and we're telling them we are only focused on inflation and full employment. Those are the goals Congress gave us. We're going to do our best to navigate the incoming information, whatever causes it, and make the good decisions, make the best posicians, and then be humble about having made the wrong one or the right one and redo it so and think about
it again. So that's how we're going to approach it, and I think ultimately people will judge us by whether we're successful.
You've been generous with your time this morning. We appreciate it, enjoyed the holidays. Happy to thank you. I was Mary Daddy there, the San Francisco Fed President,