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Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway and I'm Joey.
Isnt thal Joe.
It's that time of year again, Jackson Hole. It's my favorite time of year.
Yeah, I mean, it's a great time year anyway, but in Jackson HALLWI only come.
On for many reasons. Okay, So this is the Kansas City Fed's annual Economic Symposium in Jackson Hole, Wyoming, and they basically get together a bunch of different you know, FED presidents, a bunch of different speakers on economic policy, and then everyone geeks out while looking at mountains.
Basically, it's really extraordinary. So this will be the third year that will have been there. We're recording this August eighteenth, but by the time people are listening to this, the event will have just will be kicking off. It really is extraordinary because you really have the top minds and this stuff from truly all around the world. But also
it's late summer. People chill, people hike, people recognize that they're in an amazing location and they would be wasting their time if they just spent the whole time inside talking monetary pole.
This is true, but I think part of the planning of this event is this idea of, Okay, you get everyone out in this really nice place in the wilderness, and people are maybe a little bit more forthcoming or maybe a little bit more open to having creative discussions about policy. And it's interesting, you know, you mentioned people talking about like this year's theme. I have a pop quiz for you, which is do you remember the themes from the last two Jackson Holes that we went to?
We've been to this will be our third.
I'm a little embarrassed. Is monetary policy at a changing world?
No?
I Actually, here's a good question.
You're not that far off. Actually, so last year it was reassessing the effectiveness and transmission of monetary policy. The first Jackson Hole we went to in twenty twenty three, that was structural shifts in the global economy. That one, I got to say a little I could forgive you for oh forgetting that one. But this year's theme, it just came out, you know, just got announced. So this theme is labor markets in transition, demographics, productivity, and macroeconomic policy.
It's a good topic for many reasons. So obviously, you know, the future of AI and its impact on the labor force will certainly fit under that particular thematic umbrella. But also it goes straight into the heart of what a lot of FED policy makers seem to be discussing right now and arguing right.
All kinds of things, immigration, aging, et cetera. How does that bear on the data that we're seeing right now. It's a great topic for both the short term and the long term of monetary policy, so it should be a fascinating conference.
Right and so on that note, I'm very happy to say we do, in fact have the perfect guest. We are going to be speaking with Jeff Schmidt. He is, of course the president of the Kansas City FED and responsible for putting on this event every year. So Jeff, thank you so much for coming on. Odd thoughts.
Oh, it's my pleasure.
It's great to finally meet both of you officially, and we follow you quite intently, so it's really great to be on We're.
Leaving that in that's right. Well, I mean it is mutual to be fair because we follow you quite intently. So first of all, let me just extend a personal thanks for putting on an event which allows Joe and I to go to one of the most beautiful places on earth every year that is truly wonderful for both of us. And then I just going back to the theme for a second. How do you come up with
the themes for these events every year? Is there like a brainstorming session and everyone goes into a room and twelve hours later you emerge with some sort of consensus, much like an FMC meeting, I suppose.
But yeah, it's a great behind baseball question. And as you can imagine, you know, we're in our forty eighth years. So every year, you know, immediately after it's over, we get in a room and we talk about what went well, what can we make better? And I really give credit to Joe Gruber, I ri chief economists in his team.
It's probably the most nerve wracking decision that has to be made, because you know, Jackson will get over in late August, and then probably by sometime early the fourth quarter, you're starting to talk about what should we create a theme around for the following year, and so they actually end up deciding on that by the end of the year.
And it's nerve wracking because you hope that all the research you've asked these brilliant people to do and present is applicable by August because you know how fast things move in the business and economic world, and boy, they are so good at it. And they do think forward about some of the emerging issues that are going to be dealt with, but whether it be with the Central
Bank or with the global economy. And I tell you what, they hit a home run this year because I'm actually, as a you know, economist and FED president, I'm very interested in the dynamic of demographics, not just nationally but internationally. There's things going on that you'll hear and we'll be presented on Friday and Saturday that I think are going to really spur a lot of thinking and a lot of conversation about how demographic behaviors and movements move the
workforce and labor force in the US and abroad. So so it is it's a tenuous eight months because you've got you know, novel level economists doing the research and preparing these papers around a topic.
And I think this one is really going to hit a really good court.
It is definitely a great topic for right now because of you know, there's all the questions at least you know, and here is just I'm talking to us specifically, but as you mentioned, it is a global story because there is aging and the effect that that's going to have on the workforce, and especially in many advanced economies and non advanced economies frankly, and then obviously AI is a huge one. And then in the US specifically changing immigration
policy and so forth. Just on the inside baseball part a little bit more. Okay, establish the team establishes the theme, how do you then like figure out it's probably almost anyone I assume would say yes to an invite to present to Jackson Hole, But how what is that actual process like where you identify the presenters that you're looking for?
Yeah, so here again, as you can imagine, there's a community of economists and researchers both nationally and abroad. While it's a big community, it's pretty connected. And so the team's going to get together and they're going to do
a couple of things. One is they're going to try to break down maybe inside the topic, what are some of the nuances of because I think we have four papers that will be released on Friday and Saturday, and so within that topic there's subtopics and so you're going to have researchers in university settings, you're going to have researchers inside of central.
Banks, and a lot of that community is going to kind.
Of focus itself on certain micro and macro topics. So that are really good inventory of experts that they'll reach out to.
And I would say, you're right.
I mean, I think in most cases the researchers would really covet the opportunity to do this research and submit the paper, but they're also very thoughtful about it. You know, some will just maybe not take the engagement just because it's not well aligned to the research that they're either doing or they feel their experts out But by and large, it's really a great honor and we tip typically have
a very positive response. The challenge is time. You know a lot of these things might take a year or two to research, but they have a very tight window once they're asked and they agree, you know, they might have to submit within four or five months. And sometimes when you're talking about a very macro topic, that can be a super big challenge for a researcher.
So, speaking of challenges, why don't we get right into more of that theme. The idea of labor markets in transition, Why don't you go ahead and give us your sort of a high level interest in this particular topic. I guess, how does something like AI, How does something like aging demographics, lower birth rates actually complicate the task of setting monetary policy, especially when you think about things like the neutral rate of interest. Our star, you know, our star is a
nebulous concept at the best of times. I can only imagine what it's like trying to estimate our star at a time when we're also talking about, you know, AI potentially transforming the way everyone on Earth is working.
Yeah, so let me kind of set the stage for this, because, first of all, my backgrounds, I'm a little bit of a hybrid FED president. So you're going to typically have maybe FED presidents that are in two different camps. One is going to be a traditional camp of economist PhD researcher, scholar, really focusing attention on the monetary policy discussions, relating their background to making good decisions at the policy table with FOMC.
The second is going to be more in my camp.
I'm much more of a practitioner, not a professor of economics. I mean, I've run banks, I've been a bank supervisor with the FDIC early in my career. I've done a little bit of leadership teaching at SMU the last couple of years, but I'll take my banker experiences through my
thirty plus years of building banks. The most important part of that is really the workforce of people that you put together and through that thirty years to your points, There's really two big drivers on the demographic end that are of interest to me. One is just the behavioral nature of the labor force generationally, how they're changing, how
they use technology. I'm a baby boomer. The twenty to thirty something coming in has a different sense of what the job is and how they're going to be successful at that work. The second thing is just and there's a very compelling paper that's going to be released on the addresses things like fertility rates and so that's not
only a national but that's an international phenomenon. Is does how does the labor force migrate, Let's say in the US state to state, what drives that migration of labor force, and then what's happening in other large labor centric countries where the fertility rates are actually affecting the workforce Going forward? I mean, China is a really stark example, Japan. India is something a country I think everybody's really watching relative
to how their labor force is maturing, educating, growing. I think all those dynamics are going to play a really important piece to the puzzle of where are things going to be made and how are economies going to grow because most economists and people in the markets would argue, you've got to have a growing labor force for your
economy to grow. And that probably gets to the next observation you made, I think, Tracy, and that's how does technology, maybe specifically artificial intelligence weave its way into this conversation and you'll see some really good arguments about maybe the advent of AI is going to be perfectly timed for the nature of the labor force and how it's shifting. Because overall, when you add fertility rates and you add labor market at large, it's pretty static. It's not growing
in a big way. Probably the only areas that are growing significantly would be India and maybe the African continent. Though all those things are going to play into this mix of both national and global labor force.
So speak of technology. A couple weeks ago, we interviewed, said President Mary Day. She was talking about the iPhone and for example, that the current iPhone can do so much more than the first iPhone. You know, however many years that go. And then I thought of a follow up question to that, but I forgot to ask her. So I'm like, Okay, I'm just going to ask the next FED president. So I'm asking you the question that
I actually should be asking very daily. I apologize for the unfairness, but I think this could inform the AI discussion, which is that we have seen already sitting aside AI, these incredible tech advances, undeniable that have changed the world, right, no one would deny that, and yet measured productivity gains
have not been particularly extraordinary. So if you look at like since the first iPhone or the from the pre iPhone era to now, the world's changed dramatically on account to the technology changes, and yet productivity nothing particularly special,
at least in the data. And I'm curious, like, when you think about the effect of AI, do you have any sort of theory for why that is or why it is that these obvious technolog breakthroughs haven't actually moved the dial in some of these important measures.
Well, I have some personal thoughts, maybe some observations within the FED itself, at least with the Kansas City FED. One is just be patient. A lot of things are happening. I think a lot of this technology is emerging now. Now granted it'll go fast, but the adoption, I mean, even I think about the Kanasity FED itself, you know, getting comfortable with what's kind of embedded inside let's.
Say, the AI technology.
You know, the thing I worry a lot about is just things like copyright laws. You know that we're sensitive to using that technology and is it safe for us to use as we try to figure out ways to be more productive inside our bank. From a more macro standpoint, I think everybody's trying to figure out. I would kind of categorize the AI phenomena today as kind of a low fruit to high fruit process. So what everybody's trying to do is say, what are the what's the nature
job of things? Inside my job? They actually can make me more productive, just inherently more productive, whether it be narrative in a legal brief or let's say taking a bank examination report and trying to download things that would normally take you hours or days to populate an examination
report with. I think we're at that kind of cross roads where we're trying to figure out what's the easy low fruit, and then I think over time, I don't know if you're going to get this blast of productivity that all of a sudden it's this moment of epiphany.
I think you're going to.
I think it's actually perfectly time, because over time, I think you're going to be able to integrate this technology and you're going to figure out where it's best used. Now, granted, and people are doing studies on this, there are some jobs that I think I'll give Mary Daily credit coined the phrase soul sucking jobs. What are the things that people are let's say, more monotonous or boring, or things that just don't move needles, that aren't like super interesting
and challenging. And I think you're going to see that's going to be the part of the low fruit process. The upper half of the tree. I think you might see some real productivity gains.
But in the end, when.
You see shifts in like immigration policy, and you see workforce is not growing, you're actually going to need to integrate that technology to keep a balance in the supply
and demand. I think jer Paul mentioned this in his last conference after the FOMC when he was addressing some of the data that came out in the workforce in the summer, in some of the adjustments that while it was a little bit eye opening, we feel like there's a balancing and supplying demand of the labor force today, and it's probably why you're not seeing, at least today a major uptick in the unemployment rate. It's kind of rebalancing itself going into the next couple quarters.
This was going to be exactly my next question. Since you brought up immigration, why don't you go ahead and tell us what you're seeing in the labor market right now, because the debate that seems to be emerging is that, yes, we've seen these big revisions to pay rolls recently, but on the other hand, if we have a lot of people exiting the workforce because they're aging out of it or because of new immigration policies, then maybe that break
even labor rate doesn't really matter as much anymore, and we can tolerate it as long as the employment rate stays pretty strong and we are pretty close to full employment levels still. So what are you seeing now, how would you characterize it?
So, Tracy, I would say that there was a bit of a convergence of things in the first and second quarter. So when we talk about being data depend that there's two buckets of data that I really focus on. One is the kind of a hard data that's issued by third parties or internally by government agencies, things that would that they track and have tracked for a long long time. That emerged with things like unemployment rates. The second bucket is really my travels in and around the tenth district.
Were seven states, twenty million people in businesses trying to get four cornered in the district to try to get as much real time information. And so the convergence, the way I see it, I think a couple things were at odds in some of the information and data that was that emerged here in the last month or two. The first is that there was a lot you know, we could hear the word uncertainty everywhere we went. You got to change it administrations, you got some big policy rocks,
you had a budget that was being debated. All those things create uncertainty in a business person's mind.
Right.
The second thing was a major change in immigration policy, and so that created its own set of uncertainties and dynamics. And I think what we're finding, at least what we're seeing in the tenth district is a lot of those
things converged over a very short period of time. And what normally will happen, and this kind of gets me back to my banker days, is businesses will actually they'll slow their decisioning down, they'll let's say, freeze hiring for a time, They'll be a little bit more conservative what
they're spend on certain things. And so I actually think that affected some of the labor numbers that came out in the most recent tabletops we've done with businesses, they seem to be digesting a lot of that change and those changes. In the last couple of weeks, I've seen a level of confidence back in both the business sectors
and some of the discussions about labor and workforce. So we'll see I mean, I would expect maybe a bit of a rebound in some of the labor statistics, but at the end of the day, it really is about balancing the supply and demand of the labor force. What emergence from that over the next I'd say a couple of quarters.
It's interesting you talk about maybe people feeling slightly more comfortable, at least relatively compared to the beginning of the year recently, because I've seen some chatter about maybe an economic reacceleration right now. You know, some of the tariffs have now been finalized. It looks so far like we haven't had that huge inflationary uptick, although, of course producer prices that we saw last week maybe tell a slightly different story.
We did have that retail spending report out on Friday that showed people were still spending or quite a lot of money. Yeah, do you see signs of a sort of like recovery or reacceleration at the moment?
I don't know.
I mean, we got good GDP numbers, kind of a bit of a rebound sling back in the second quarter from the first quarter's weakness, and that had a lot of noise in at the first quarter. I think, I don't know if I necessarily categorize it as a rebound. I think that they're just there's a lot of things
that are kind of working themselves through. I mean, you've got a major major cycle change with a new administration, with a lot of really very interesting macro ideas that they're putting in place, and you know, I think you could make a fair argument that a lot of those are pro growth types of policies and processes and programs. So I think the nature of what we see in both the labor data and the inflation data are going
to be pretty interesting. And there's a lot yet to emerge between even this week and our September FMC meeting, But I think the nature of how people are thinking about the economy, what the markets are, how they're performing, there is an optimism I think shift from it wasn't that they were down in the first couple quarters, They just weren't sure, and so there was some pausing happening, And then I think we're sensing that the nature of the next couple cycles as we get into the holiday
seasons toward the end of the year, there just seems to be a pretty good optimism about what's going to happen in the next couple quarters.
Let me us a good question about the latest jobs report that actually sort of ties near term cyclical story with the broader term theme of the conference, which is that the two sectors that basically in the most recent jobs report, the two sectors that basically added all of the jobs were healthcare and social assistance. And these sectors
basically add employment virtually every month without fail. And it's very easy to connect that to aging, because people who are elderly are retired and you need a certain type of you know, nurses and so to take care of them. But these aren't considered to be particularly high productivity jobs. Looking in the medium term, do you worry about this, like how much of the productive labor force will be necessary to essentially take care of old people and what that means for productivity overall.
So when we kind of interview a lot of our healthcare professionals in the district, there is still a huge demand need in that sector, and so I think there's a big up potential specifically in the healthcare industry. And here again, I'm a baby boomer, so I'm using more of those services. And as you do experience that, you do see that there's a real demand need for healthcare
professionals in kind of all spectrums of that industry. And so I do think that there are pockets by industry that could still use a lot.
Of labor talent.
I'd say healthcare, certain agricultural industries in the tenth district. There's certainly some technology and manufacturing that I think could you could see a bit of nice growth in over the next several quarters. So I think what's going to be interesting, and kind of getting a little bit back to the AI conversation, is I think the nature of
jobs insight industries is going to change. So we talk a little bit about this in the Reserve Bank is we just launched a new five year strategic plan, and embedded in the plan is really to re explore the skill sets that are necessary to make this plan happen. And I think the things that we used to be doing the last five or ten years need to be shifted to something else to stay a high performing reserve bank.
So I do believe in a lot of these industry areas, with I think healthcare being at the top of the list, I think you're going to see a reskilling in a lot of these job areas as some of the jobs that can be done by a more artificial intelligence technology are going to shift to much more let's say intellectual
or behavioral based job skills going forward. So I think here again, I think that's The message I give to our business associates in the tenth district is tell us how you're reskilling your workforce.
Because I think that's where AI is.
Going to really play a big role. You can't be static in the job you're doing. You have to reimagine that job with new technologies.
You know, you mentioned markets earlier, and clearly there's a lot of enthusiasm about AI still in the markets, and that's one of the reasons we've seen stocks, you know, hovering around all time highs and credit spreads are now at what like a thirty year low. Basically, talk to us about where you see rates at the moment in terms of their restrictiveness, because some of your fellow FED presidents will say that they think rates are still restrictive.
And then when I look at something like credit spreads at you know, a three decade low, I think, actually, this doesn't look that restrictive to me.
And with inflation right, and with inflation.
Still above target, how restrictive are rates at the moment.
Yeah, it's a it's a great question, and I've been very public I believe there. I would call them modestly restrictive. They're not overly restrictive, and I think that what we have to be careful of is kind of rebasing our decisioning on rates. And I think the markets do this because look, I'm a former banker. Bankers and bank clients they love low credit rates. They like lower rates because they can perform better on their capital base. So I understand that piece. But I think we talk about being
range bound to a degree. I like to think about you know, I love the nineties, right, so if you think about how hard the eighties were. As we emerged into the nineties, we had a technology surge, and if you watched or looked at the nature of the economy, it performed early well, but there were monetary policy was
became a bit of a wave. So you would start to make decisions where if you saw things happening in either the you know, your dual mandate, you're you know, keeping stable prices and full employment, you would adjust that policy rate. And when things got maybe a little bit hotter, and then as they cooled, you bring them down.
But it was a nice range bound process for me.
The experience of the last let's say two or three shocks, so you had theight shock, you had the twenty twenty pandemic shock. You know, you're pushing rates down to deminimous levels. You probably don't want rates down there that low because if they're down there that low, you're trying to pick something off its back, and so you're trying to create a rate environment that creates stimulus.
So I think right now we seem to be in a really good place.
And so you know, it almost becomes more difficult in the debate on rates whether they should be higher or lower when you're at the margin versus when you're trying to use a monetary policy as more of a blunt force instrument to try to pound a high inflation rate down like.
We did in the twenty twenty three cycles.
So it's actually going from kind of a blunt force tool to actually more surgical And then the debate gets very interesting about where that you should turn those dials relative to the data that you're seeing. So it actually becomes more difficult when you get on the margin in that range bound area versus when you're trying to really sledge the economy on the inflation side down.
So Tracy mentioned that estimating the neutral rate of interest is a sort of difficult concept in any period. But there is this view that the neutral rate of interest today in twenty twenty five is significantly higher than it was in twenty nineteen, And probably some of the best evidence for that is the fact that even though the market is anticipating rate cuts in the short term over the next couple of years, that the long term rates still fairly elevated. Curves deepen higher rates for longer.
What changed.
What's the difference between twenty twenty five and twenty nineteen. It looks like the neutral rate of interest is so much durably higher.
Yeah, Joey, this is really interesting science. With the policy side of our mandate, we have some some influence on the short end of the curve, right so, but so taking the long end, the whole concept of the long rate, it has what we call term premiums in it, right, you know, And you have to kind of Subka doesn't.
Believe in the term premium, but I do.
I do, Sure, I don't.
I don't know if I believe in it, but I think there are pieces of a long rate that have sections of it that the market is going to try to digest.
Can I just say crazy things that I have a complete crank. But every once in a while we get a guest who's like, no, there's something to Joey ski.
No, no, no.
Ever, once we get a guest who will say, you know, it's a nuanced thing, which it is.
We all agree, keep going, keep going, okay.
So so that so what I I try, what I'm trying to do with Let's say the concept of the long end of the curve is you've got issues of Okay, some of the market's going to say they're going to be influenced by the prospect of inflation because you have to build a price into the long rate for inflation. Some of them are going to say, it's a demand and supply issue with the debt that's trying to be financed,
both government and private debt. The nature of that long rate, there's pieces of it that are going to influence it. It's interesting, you know, I talk about the Fed balance sheet quite a bit. It's hard to second guess what we did in the eight and twenty twenty cycle with our balance sheet relative to trying to keep the long rate somewhat in submission. So actually the duration of our balance sheet is influencing the long rate to some extent,
which I think is in a positive way. So when you think about it, the treasury duration is about four or five years. Are balance sheets about a little over eight years in duration. So that's that quantitative twisting that people talk about. So we're actually influencing the long rite a little bit in our balance sheet in a positive way. But I think over time, as long as the market believes that debt.
Can be financed and there's not a lot of.
Inflation expectation, you're seeing a long end of the curve drift of downboard.
So I'm going to go to what I think, you know, what is maybe the hot button topic of the moment. The formal theme of this year's Jackson Hole is of course about the labor market and various trends. The subtext theme, and I think this is going to be a lot of interest, is the attacks on the FED and concerns about central bank independent Just to your point about what's
driving that long end of the curve. If there are concerns that the political will is no longer there to keep an independent central bank, if there are concerns that in the future that the FED will more be at the beck and call of elected officials. Could that also be a factor in driving up the long end of the curve, as investors may rationally presume that a future FED may not be as committed to stable prices as the current FED.
Wow, that's Joe, Actually, there's so much. There's such an onion, and what I know.
I know, but I try, but so strip away all of my throat clearing, which I felt was necessary. If there is concern that there is no longer the political will to maintain an independent central bank, that there is concern that a future FED may not be as committed to inflation fighting as it ought to be to keep that two percent goal, could that be a factor driving up rates at the long end?
Peel the onion for us?
We have time, Okay, So the quick answer is, I don't know. I guess I wouldn't. I don't see or hear that acknowledge the debank eight Joe, and I believe. Look, our country is going to be two hundred and fifty years old next year. It's still the great experiment. It's built on legislation. And what's fascinating to me is the issue of FED independence. It's codified, right, so you know, we have a mandate. It's legislative that legislative authority can
shift and change. But it's hard to argue the efficacy of the independence piece. I mean, I think there's a bit of perfection in me being able to go to a table with eighteen other really committed and bright people to try to keep this economy on a level rail. I talk to people about the economy being this big, very massive train, the largest most powerful train economic train in the world, thirty trillion dollars, and you've got administration and in Congress that really is running the train were
the American people are are riding on that train. Now, for the FED, the FED is not the train. The FED is actually the rails. It simplifies that to me to think about the two rails being you know, stable prices in full employment, and for us, it's really it helps us not to have to worry about the market or the politic of things, to try to keep the rails steady and level so that train can go fast.
And so the nature of what we do in those two rails and the decisioning we do is really more balancing than it is trying to shoot towards some predetermined place. We know two percent is a good place to be for inflation. I think time has tested that we know full employment is a really very positive friction to the stable price mandate. So kind of getting back to the independence thing, healthy friction in a conversation just makes the Republic stronger in my opinion. So I'm happy with the debate.
I'm happy to express it, but frankly, it's it's less important that I express it as what you and your listeners believe that independence does this to the decisioning of that massive economy.
I think it works.
I think you see other countries that disentangle it to the body politic, and I think it's very difficult to keep economies level set when you don't have that independence piece.
Well, on this topic, let me ask I guess a blunter independence question, because Joe's right that this is, you know, this is the unofficial theme of the conference. I think and you yourself have previously stressed the importance of FED independence. So are there steps that the FED should be taking in order to, you know, not necessarily improve its independence or even protect its independence, but to convince people like us and the markets that it is truly making decisions independently.
So the proof is.
In the putting about you know, how is our policy action affecting the level setting of those rails. And so look, we should be held to task that are we making decisions that are rationalized on sound data and that they are in compliance with the congressional mandates that we have, and so we are kind of duty bound to that framework.
And so I would say there's a measure of perfection in the fact that even in the FED structure, where you've got seven Board of governors and twelve reserve bank presidents, where the nature of just how those individuals are seeded with let's say Senate confirmation, a White House nomination for the Board of Governors, and then the twelve reserve banks having their own in mark get in district boards, that really kind of act as a ballast to the whole
independence architecture. So I actually think that the nature of how was structured in nineteen thirteen is still effective today. We're just continuing to learn about how to make policy better relative to what to the cycles in the economy. Think about the twenties and thirties, think about the nineteen seventies and eighties cycle. We're still learning as a body to get this right, because we've got this amazing economy thirty trillion of one hundred trillion, and if we're healthy,
the globe can be healthy. And that's the way I see our role, and that's why I think independence matters.
All Right.
I have another question that I forgot to ask Mary daily and now it's and I've been thinking about it, and I was like, Okay, now you're here at the most recent FED decision through two descents, which is not crazy to have descents happened, but they're like fairly rare, et cetera. Why are descents rare? How would you articulate why descents are rare? Because I think this again could be relevant in the future depending on who the next
FED chair is. Are they rare because generally speaking, you and your colleagues roughly arrive at the same view of what's appropriate policy. Or are they rare because historically, when there is some marginal difference, the regional FED presidents and the other governors tend to defer to the judgment of the chair.
Yeah, it's I love that that question, and so I'd maybe frame it in a couple of ways. One is, I think in a lot of ways the cents are healthy. I think there are times when we get kind of criticized as being kind of fed speak.
You know that they're always aligned.
Two is rare, sometimes there's one frequently is there? So what's the reason why generally speaking they are pretty rare.
So so here again, we're at the margin on things like the policy rate today, So the data could shift people's opinions one way or the other on the dual mandate relative to their vote on dissent or not. So I think the two descents were fairly rational public statements about concern about the the labor market and the labor force. There was great debate, and so you're trying to figure out where do you settle on the debate. The other influence really is the chair. I've worked with Jerome Powell
for a couple of years now. He's a principled he's committed. I think he appreciates in his background and experience trying to collaborate with people at the table to get a sense of where they are in their opinions of where the economy is and where the policy rate should be. And I've really enjoyed working with them, and we don't always agree, but at the nature of once you get
to the table, you've got to make a decision. And I think that you just have to have good data, good back ground, good discussions in your district about where do you think that the policy rate should go?
And so I think it really does.
It's healthy discussion and at times, I suppose it's going to be a votive dissent a time or two. But we're in the margin play now relative to where that policy rate should be.
Okay, So speaking of where the policy rate should go and healthy discussion, obviously there's a lot of stuff happening between now and the September meeting. We have the Jackson Hole Economic Symposium itself. We have a couple more big data points. What specific data or developments would signal to you that perhaps it is time to start really thinking or advocating for that rate cut. What are you watching out for?
Yeah, so i'd be watching what a lot of us watch, you know, some of the inflation data. There's quite a bit of it going to come out in the next four or five weeks. Certainly we're going to be very determined to network are inside the tenth district about what's happening inside labor and the workforce, just try to get a better be on where unemployment is and supply and demand where that is. So I think those are the principal data points. Then I think that that's what's beautiful
about the Jackson Hole timing. I think there's going to be a lot of discussion, not just domestically but internationally. I mean, we've got one hundred and fifty people experts in their own rights, central bankers, some of those most amazing economists on the globe, all four corners, just to get a calibration of where everybody is just globally, and I think we'll be able to emerge with solid decisioning
in September. We'll see where that goes. Like I said, when I put everything in the basket, it just seems like we're in a pretty good place right now, but look that data can shift and change, and we're in kind of, as I mentioned, kind of the nuance of the range of where we want to be with policy rate, and we'll see where it goes in September.
My last question is, and it's basically just a restatement of Tracy's earlier question, but I'm still trying to wrap my head around this. You know, Americans have experienced years of above target inflation. It's still running a little warm. As Tracy mentioned, stock markets at all time high, credit
spreads very low, and again inflation still warm. And you also say that you think the labor market is all right, it's fine, that maybe businesses have a little confidence just articulate what is it therefore that's restrictive or even even modestly restrictive about the current stance. Well, so you're how do you demonstrate that it's restrictive.
Yeah, yeah, So look, there's a lot of market opinion about kind of the nature of where the policy rate is to say, let's say where the two year treasury is, and just that you know, everybody has kind of that they go back to this whole neutral rate conversation, which I think has some value. I mean, the are star processes of value. There's going to be some really interesting discussion on the tailor rule.
I mean, some of the tailor rule.
Data today would suggest that maybe rates ought to be a little higher. So we're gonna, I think we're going to really bear down on the nature of how restrictive things might be. And to your point, Joe, with all the data sets that you just espoused, along with the dual mandate data sets. It just seems like we're in a pretty good place. I don't think we should not talk about it. Would there be a scenario where rates could go higher. On the policy side, the PPI was a bit eye opening.
We'll see where the CPE comes.
In and later here in August and September. Not that that necessarily it needs to go higher, but you have to be willing to anchor yourself in side those mandates. So if in fact you see something that needs more restriction, you should shouldn't be unafraid to act. That's our job. So we'll see. But right now, it seems like we're in a good place. By the way, we brought that policy right down one hundred basis points since a year ago, so it's.
Not like we haven't moved it.
And the yield curve seems to be in a pretty good place too, And so I don't know. I like what I'm seeing right now, with a bit of caution on, let's just keep our eye on this inflation number as they emerge.
So I have one more question, because I realized it would be bad if we had you on and we didn't ask you at least one banking question given your
previous career history. But the other forgotten theme of our macroeconomic policy moment is quantitative tightening, right QT is still going on in the background, and recently we've seen use of our the REPO facility going to less than fifty billion, and so people are talking again about are we getting to a point where we are going to see bank preserves start to drop and maybe they will become scarce. I know the FED has been watching this. Is funding
on your radar at the moment? Is there a possibility that we do start to see some signs of additional stress in the funding market?
Okay?
So I would say that right now there's a I think a general consensus that we are in an abundant reserves policy framework. But there's also debate on both the size of the FED balance sheet and the size of the reserves in the system. There's actually actually very good debate relative to the cost or non cost of ample or abundant reserves in the system. Does it create an inefficiency? Does it create too much of a footprint of the
FED into the markets? I will say that I'm encouraged that we're in a project now that's I think, going to modernize the discount window process. So I think there's an opportunity where the FED, as the nation central bank, can make the activities inside the discount window much more
fungible and much easier for banks to access. And I think you could start to see the in future years where reserves and discount window act or react in a positive way, where you can actually see a smaller footprint of reserves, where banks are much more comfortable having the backstop and having a much much easier way to access reserves through the discount window and other tools as a way to make the market comfortable that there's plenty of liquidity in the system.
So I'm excited about that.
It's very timely that we do that because here again, two years ago we launched FED now. So I think, what's the other fascinating thing about the ecosystem of banking
is we are moving to an instant payment economy. I mean, you're starting to see even businesses start to think about paying people every day, you know, and just the nature of how we move money instantly seven days a week, twenty four hours a day, the nature of that is really going to be a very interesting dynamic, and it's going to be necessary for the Central Bank to be accommodative to the immediacy of that money movement, and so I'm excited about some of the conversations we're having to
make that to make our system a money movement movement.
Much more modern.
All right, well, Jeff, we're going to have to end it there. We could go on forever, but we'll save some of it for in person at Jackson Hall.
I so sorry, thank you, so look forward to that.
Yeah, thank you so much, so much for coming on and giving us a preview, and we'll see.
You in Wyoming. Very welcome to see that, Joe.
There was a lot to pick out of that conversation, and it was a really good preview of I think what's going to be like hot button topics. Yeah, at the event itself, but one sentence kind of jumped out at both of us, I think, which is the idea that, well, you know, there are scenarios where interest rates you could argue interest rates should be higher here.
Yeah, that was a little bit interesting, and he phrased it in an interesting way. And I have to go back to the tape because it was like I think a double negative in there. But I mean, look, you said it stock share record high credits for is a record low. He characterized, maybe we've already seen the worst of the labor market for ventum for twenty twenty five, with the unemployment rates still in the low fours and inflation is still warm.
Well, I know.
He also he pushed back on the specific use of re economic reacceleration that word, but it is true we have seen, in addition to some of the data like turning negative or showing a slow down, we have seen some of the data start to tick up at least compared to like recent months.
So this is an interesting thing. We got that recent jobs report and you say, oh, we're like slowing down. But when we did our recent episode with Scanda, he made the good point like, well, actually, maybe that data was weak because that was the immediate post Terra volatility and you slammed the brakes on the hiring and so forth. And assuming that the uncertainty measures have come down certainly since the middle of April, it is plausible that we've
already seen the softest labor market of twenty twenty five. Anyway, lots are interesting there and I think like it's a really good theme. I mean too, it's a good theme for this year's conference because it does feel like some of the things that are happening immediately right now also intersect with long term definitely, and so there's a lot of moving parts.
It's one of those conference themes that is not just like theoretical, you know, ten or twenty years in the distance. It's sort of like, yeah, it's very much now. And on that note, you know, we're going to have some good episodes that we record with people who are presenting papers almost time, very.
Excited, So listeners should be prepared for most Jackson a Hole content to come.
Yeah, all right, shall we leave it there.
Let's leave it there.
This has been another episode of the Odd Loots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
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