Bloomberg Daybreak: Asia EditionBloomberg's Surveillance hosts Tom Keene and Lisa Abramowicz head out to Wyoming for the Fed's Jackson Hole Symposium.They speak with some of the biggest names in Central Banking, including:
- Raphael Bostic, Atlanta Fed President
- Loretta Mester, Former Cleveland Fed President
- James Bullard, Former St Louis Fed President
- Thomas Hoenig, Former Kansas City Fed President
- Patrick Harker, Philadelphia Fed President
Bloomberg Audio Studios, Podcasts, radio news.
This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And always I'm Bloomberg Radio, the Bloomberg Terminal and the Bloomberg Business app from Wyoming. From Jackson Hole, Wyoming for our audience worldwide, Bloomberg Surveillance on television, on radio.
And it is a perfect, perfect.
August Friday here in Jackson Hall with a back to up with the political miles from the Democratic Convention. I know you stayed up Lisa time and watch the entire every minute of it as well.
But now we turn to the Powell speech.
The key question here is how much can this fed share ratify what we're seeing in markets, which is the expectation for a rate cutting cycle after one of the longest periods without any move whatsoever after a rate hiking cycle by a federal reserve and modern history.
A question here, can they stick this.
Soft landing and will think give any guidance whatsoever to a lot of people think.
That it's not.
I'm data dependent of at fourteen cups of coffee this morning.
They're data dependent.
They're going to get out to the speech today and then on to the September sixth employment report, and maybe we staggered to the believe it's September twenty.
One, meeting September eighteen. They're going to give us ense whether they of whether they actually are.
Going to cut rates or not.
A key question that I have is how far have we already come. Take a look at We are seeing a rally right now in markets after yesterday's sell off, which is the biggest.
In two weeks. But what I find fascinating is just.
That we've seen the two year yield to move so much more than anything else. It is down more than a percentage point from the last time that we were here in Jackson Hole August twenty sixth, and.
You see that move.
We're up more than twenty five percent since that day on the s and P five.
I'm going to get out front with an essay that I only discovered. Thank you Peter or zagat Lazard for this and that. What we're battling with here in the years and years i've come here is we're still coming off the pandemic. Peter or Zag with Robin Brooks at Brookings writing a beautiful essay about do we really know where we are off the pandemic? And that's an overlain not being discussed here is where are we in that continuum and.
Just sort of accentuating that overlay where the jobs or visions that we had just earlier this week the idea of eight hundred and eighteen thousand jobs fewer that were added in the year ended in March versus the initially reported we've got an incredible lineup today. We do have about a six ten percent gain in the SMP. I want to just get set up with Michael McHugh sitting on set with us not wearing his hat. He's been told not to by HMRT. Why because I think your ten gallon hat looks absolutely fabulous when you head to the rodeo, Mike, what are you expecting today?
Smaller hat this year? Maybe only five six gallons.
We're expecting kind of what you laid out with Tom, the idea that the FED is fed chairman is going to ratify the idea that rate cuts are coming without absolutely promising it or giving any kind of amount, And I think the markets have basically priced that in. The rate cuts are coming is what's got the two year yield lower. But going beyond that, the question then becomes where do they stop? How far do they go and how fast do they get there? And that's something else we probably won't hear today.
What's so important? Mike McKee's the expert on this, much less so me. The number one question I get here at Jackson Hole, particularly by media, why hasn't there been a recession?
Mike McKee? Why haven't we had the recession?
Everyone except Rafaelbostis predicted since time began we sent at least out shopping.
We've had a number of reasons. Two things in particular, well three things in particular. One is the pandemic savings. The people got extra checks during the pandemic and they had extra money to spend. We've also had some government fiscal spending with the IRA and the other acts that the Biden administration got passed. Most of that money hasn't gone out yet, but some has and businesses have started committing based on the idea that it's going to come in. And then, of course, because unemployment was low, wages were rising, and on the political side, wages have been rising faster than inflation. But nobody really gets that. But people have had enough money to spend well.
I will say that when I went shopping, I went shopping in the Atlanta Airport because we were laid over there for about.
Three and a half hours.
So that really is the key place that we want to focus right now, and we are so glad to have shopping expert in the Atlanta Airport.
Atlanta fed price is it at.
Raphael Bostik, who is with us here on site, really appreciate you being with us. President bos Tak, I want to start with a change in tone that we have heard from you over the past couple of weeks. It seems like three months ago you were not that urgent, urgently feeling like we needed to see lower rates. You've kind of changed recently and really seen the need for it.
What's caused that change, Well, I think two things have really happened to lead to that change.
First of all, good morning.
It's good to see Y'all's good to see, really good to be here. The one change is that inflation has moved a lot faster than I had anticipated. We've for the last two years have really been in a mission of getting inflation back to our two percent goal. We had seen a lot of progress early this year, it seemed like it may have been stalling out.
I'm really gratified.
To see that it's continuing back on that pace, and that's a very good thing. And then the second part is the employment side. So we know that unemployment rates have gone from about three point four percent to four point three percent. That's a big change. Now it's from super hot to solid, right. So I don't want to make it seem like labor markets are a week, but it really starts to tell me that things are much more in balance than they have been for quite some time. And that's really a sign that our policy has done his job, and now we need to start the path back to our more neutral stance.
More than anyone at the FED, you've got a more holistic view with John Show and at Stanford, with all the academics you've done in southern California about racism, about society and all. We're in the maelstream of a political election. Greg Ypp, writing in the Wall Street Journal in the last twenty four hours, says, the politicians are not practicing economics.
How does the FED get to the.
September meeting, get to the November meeting and avoid the first Tuesday of November. How do you maintain FED independence with this crazy economic dialogue?
We're here so I actually don't think it's that hard to remain independent. I think for us us the job is to keep our heads down, do our work, read the data, study it, get input from businesses and people all over this country to get a good handle about where the economy is, how it's moving, and how people feel is going to move forward, and then use that information to figure out what the most appropriate policy is. The worst thing that we can do is not do the right thing for reasons other than this not being the right thing right and to me, I think we must at all times be true to Our job is to set up a long run environment for this economy so that it's got a firm foundation, and that means we can't be focused and pulled into the shorter run issues.
So I'm just gonna keep my head down.
The FED has a long history of doing whatever it takes, whenever it takes, and that's what I expect we'll do too.
You've been criticized. The Fed's been criticized by a lot of people on Wall Street who say you're too data dependent, you're looking backwards too much. I don't think they realize that you're constantly talking to people in your district to get the current lay of the land.
So what is that lay of the lane?
What are CEOs telling you about their plans and their view of demand and business going forward?
Well, you should tell people more often. We spend a lot of time looking forward. That's actually a really important thing. We do surveys. Our bank has a lot of surveys that we do, asking what's your outlook for the next six months, for the next twelve months.
In the light we hear a couple things.
So one we hear the demand for product is weakening.
But it's still quite solid.
We hear that businesses are not expecting to expand their workforces in a very significant way, but they're also not expecting to light people off that that is not the mode. That they're really in a steady state where they can handle where things are, and their outlook for the next six to twelve months is by and large positive. Maybe a little lower in terms of revenues and profits from where we've been last two or three years, but last two or three years have been record breaking pretty much in every sector, every industry. So it's a solid picture, and it's one of the reasons why I do think that we've had some space to be patient with our policy moves, and we'll just have to see.
Whether their outlook plays out. I'm hopeful that it does.
Given the problems least we talked about earlier with the data and coming out of the pandemic and everything. How certain are you that your data is correct enough that you're not behind the curve?
Well, I mean, we try really hard to get our view based on the pulse that business leaders are showing at every moment. We talked to folks day to day, week to week, and we ask two questions all the time. One, what's your outlooked for the next six months, and how has that changed relative to where you were two weeks ago or three weeks ago. We are trying really hard to notice those inflection points so that we can speak to that, we can bring that to our policy table and make sure that we're not behind the curve. But this is a turbulent as you know. I mean, you'll recover the economy. Things are happening in unexpected ways, in many different venues and many different parts of the economy, and so there is a natural trend. There's always some uncertainty, and we've just got to sort of navigate our way through and do the best that we can to get as much information so we can make good policy. What does gradual means, Well, that's a very good question. So to me, I think it is taking one step at a time and after each step, looking around to see how the economy is evolved.
Okay, what everyone's asking is really is that step twenty five basis points?
Is it fifty basis points? Does one mean gradual? And whatnot?
So I would say this the first step. It will depend on what the next couple of data points come in. The next couple of data points come in, and inflation is moving and unemployment is staying pretty stable, I think a move would be on.
The lower side.
But there's a there's a narrative that says inflation comes in super hot and maybe we don't move at all, or that unemployment spikes in an unexpected way and we have to move bigger.
I don't want to really.
Be sitting on any one action as my modal expectation today. I'm really gonna let things play out. And you know, one of the things I've learned very much in the last four years is that getting too far out ahead of what actually happens just causes me. There's been a lot of extra energy that I wind up having to sort of undo and then get to where the reality is. So I really am trying as much as possible to be in the moment and of the moment.
Well, markets are forward looking, they're not in the moment. So everybody wants to know where do you end up? Where do you think neutral is going to end up when you finish your cutting cycle.
So I'll say two things on this one. In the SEPs and the dot plus, we have to put a long run number for me. Right now, that long run number is three percent. I think it's a little higher than where it was that the depths of the pandemic, But where that is precisely is unclear. The second thing I would say, though, is I've really been focused much more on making sure that inflation gets to two percent than what a long run number is, and now that we're close to moving on that way, that's a question that I will spend a lot more time with my team trying to figure out. In my building, we started to have discussion slash arguments about this, and in my book, I get views ranging from two and a half to four and a quarter. Right, that's a large range, and we're going to have to narrow that down, and so I'm really looking forward to a robust discussion that will help me get a sense of where I think it is.
Two years ago, J. Powell's speech was eight minutes long. How long do you think this speech.
Is going to be?
So you know, I don't get any insights on that. Eight is historically a record breaking short. I'm not expecting a break records today, but we'll have to see what happens.
President of the Atlanta Fed, thank you so much for being with us. She is former Cleveland FED president Loretta Mester. This is the first time that she's joining us as a non FED member in ten years. At this Jackson Hole meeting, Lorettamester, President Master, I will still call you that You've always been a thought leader. How much do you hear more dissent than usual among members at a time where we really are at a pivot.
I'm not hearing that much to send Frankly, I think we're in a good place in terms of where the economy is. If you think about inflation, look how much it's come down. You know, we're in two and a half percent range, and the labor market is moderating. There's definite signs of that, but it's not weak, right, It hasn't turned into a strong you know, weakness coming into it. So we're in a good spot. And now what the Fed needs to do is make sure that it can maintain the momentum of inflation going all the way back down to two percent while keeping the labor market healthy. And I think that's where the focus is gonna be. If you remember at the start of the tightening cycle, you know, we had to go very aggressively because policy wasn't well calibrated to where the economy is and where it was going, uh or was and where it was going. And now we wanna make sure that you know, the FED wants to make sure that policy stays well calibrated to the economy. So the discussion now, I think, is about we have a dual mandate. We have to focus on both parts of that. We have to be forward looking. You know, it's where the economy is going, not necessarily where it death is here today, but where it's going. And that's why I think now it's it's actually appropriate to really be thinking about, Okay, it's time now to enter this new phase where we can start normalizing the policy rate.
Wall Street and the financial media want specificity, they want certitude, they want single point statements.
About exactly where we are.
The reality is just a look at productivity is a capital analysis, a labor analysis, and an all in analysis, call it total factor productivity. The noise in there, to me, with the overlay of technology is highly uncertain. Do you have any handle of the overlay of productivity and technologies effect on the Cleveland and American economy.
Well, I mean we've seen over history, right, that technology can be very additive to productivity growth, right, I mean, that's kind of the engine of an economy that's increasing and having potential growth rise. But in any point in time. It's very hard to measure productivity growth.
Even if we.
Didn't have this big technological innovation of AI, it's very difficult to measure it. So you have to take into account that there's uncertainty around productivity growth. I mean, some estimates saying that we're still in a low productivity regime. Other restamates are saying, well, let's look forward and maybe we're going to be in a higher But for the FED right now, right that's not sort.
Of the focus.
The focus is, you know, are we calibrated well, it's policy calibrating well.
To the court, you've been great on this. She just said they're not focused on productivity. We have to be because business leaders every day are focused on those outcomes and they're invested.
Well, they've sort of been forced to by inflation and a lack of workers, and they've been forced to put investment into productivity and.
We'll see if it starts to pay off.
But Loretta is right, at the moment, you know, you don't, you're not seeing it. But that's not the key for them. But I do want to know how you respond to the criticism that the FED has not communicated well what it's thinking and what it's planning, or if not planning, you know, what are the potential outcomes because we've seen some very wild in the markets as data comes around.
Have you said data dependent too much?
I think there's a misunderstanding what data dependant means, and that means that I think Chairpal today will be explaining where he sees policy going, not necessarily at the next meeting, whether fifteen to twenty five, which in some sense is really not the big issue. I know for financial markets it is, but not in terms of monetary policy. It's really what's the path forward? Are we beginning now to bring policy down? And the pace, of course, and the magnitude eventually of how far our indust rates go down, that's going to depend on how the economy evolves, right, But we're going to enter this new phase, I think, and appropriately so in July. I probably wouldn't have supported actually moving the rate down in July, and of course the committee didn't, but I could have made a case for it. And that's a change, right, That's the economy has changed enough, Inflation has come down quite a bit. It's on a path I think where we can be pretty confident it'll get back to two percent, and now we really have to balance both sides of the mandate. So it's basically keep the momentum going on inflation at the same time making sure that labor markets remain healthy.
What do you think it would take for the committee to decide you needed to do more than the standard twenty five basis point cut?
So I think it would have to be that, you know, somehow they thought they were a little behind and they needed to catch up, and frankly, I don't see that in the data. I think they're actually in a very good place now. If it turns out that, you know, the forecasts are saying, wow, you know, we may be seeing the moderation in labor markets being more than moderation and we actually see a weakening, they may have to adjust that and then do more. But I think there's sort of a record if you think about when we started to raise rates, right, we started at a twenty five and then a fifty. Then we did our seventy five, and that's sort of the preferred path because that means you're, no, you're not doing too much too ahead of time, And the other thing I think I would be worried about is if you do a fifty to start with the market send you know, building even more. And I think that's a calibration that you have to think about when you're doing this. So I think being steady right, thinking about what the right pace is gear to how the economy is working and evolving, it's the right way to go.
You said that you expect j.
Powell to come out and give a sense of where we're going. And I think that's actually the frustration for a lot of people in markets. We don't know where we're going. We don't have a sense of what the neutral rate is. Right now, the market has about two hundred basis points of rate cuts priced in by the end of next year.
Is that appropriate?
What is neutral?
Well, remember what the markets are doing is and appropriately so looking at different scenarios, right and they're waiting and then when they when you get those kind of things out of the financial markets about how many rate cuts, it's balancing different scenarios. When the fence talking about you know where they're seeing is they're talking about, here's what we think if the economy evolves as we expect, wouldn't be appropriate policy path. But they also have to think through alternative scenarios too, So it's kind of a different answer or different question answer to a question, and that's I think the frustration is that the FED is trying to answer a different question is here's where we see policy going. But of course they don't want to commit themselves to something because the economy could evolve differently, and that's been hard to communicate.
You founded an inflation lab at the Cleveland FED.
What do you think inflation dynamics are now?
Is this a completely different kind of situation post pandemic than models coming out of other recessions have worked with.
Well, I think one thing that we saw during the pandemic and the aftermath, who sent the supply side right had a lot to do with inflation dynamics. But the key thing to remember is that those supply shocks would not have necessarily resulted in higher inflation if we hadn't had a very strong demand side of the economy. So it's this balance between supply and demand. Typically right in the past, right, it was all about demand. Supply you could sort of say it was sort of stable, and it was all about how demand was moving around. In this event, right, it was both supply and demand, and that made it more challenging. And so in that sense, I think there's a renewed understanding that dynamics on inflation. It's both sides, that's supply and demand, and understanding both I think is going to be a focus going forward.
Well as if it goes into its review process for its Monetary policy framework, does what happened change the way you think the committee should look at policy? In other words, maybe you want to be a little bit more preemptive than you were.
So I know a lot of people characterized the FED in the framework that came out in twenty twenty as walking away from being preemptive, but if you actually look at the language in there, still says preemptive. I agree with you that it sounded like we were just being data dependent in the moment. But we've always were focused on where is the economy going? So it's data coming in, assess that data relative to your outlook. If it's materially different than you expect, you might have to change your outlook, and therefore you might have to change policy, your policy expected policy paths. So I think we've always been forward looking. I expect the FED to remain forward looking. They may change the language in the statement so that that's a little bit more transparent, if you will, so that people actually understand that the policy has to look forward.
I would never ask you this question if you're on the watch, But now that you're gainfully retired and in the real world, I'm going to ask you this question. Cleveland has reasonable real estate, but Shaker Heights as a boom real estate economy. And part of that asset success of Shaker Heights and the Shaker Heights of America is the gains thats are getting from this financial system. How does the FED distribute the benefit more across America rather than this illusion than only the have nots that own the havelves that own Nvidia are making way?
Yeah, I mean the FED always focuses on the macro economy, right, It doesn't have tools that can really do much about red distributing or fairness or making sure that everyone gains. But what we can do in the FED, and what the new committee will be doing at the FED, is making sure that we maintain healthy labor markets, which again helps distribute and brings inflation and you know, the inflation rate down and getting back to price stability is also very key to having a strong economy so that everyone can prosper from the economy. The FED really can't do the other part of what you're talking about, and that's what the federal government policies are about, and the fiscal policy is about.
We thought that you were going to retire and build homes to offset some of the supply issues. Lurida, there is this question Mike was talking about how the Queen of Inflation studies and how the Cleveland Fed really does have an incredible metric for that. Do you have a sense of how much more inflationary this post pandemic economy is and that really speaks.
To what is the new neutral?
Well, there are certain factors that really affect inflation, right, but the basics are similar to what we saw before.
Right.
Inflation expectations are still an important driver of inflation. Making sure they remain stable is helping to keep inflation moving down, which is important. Supply side conditions matter, and the labor market tightness matters. We're going to hear a paper at Jackson Home that's really addressing that how much tightness in the labor market affects what you want to see when demand gets out of lap with supply, so again it's the same basic factors, but of course the supply side during the pandemic changed quite a bit, and those factors are going to become I think, more signal and going forward than perhaps they were in the past.
Are you having more fun now that you're not on the committee?
I'm having fun.
Well, hopefully you can go hiking or enjoy the beautiful Wyoming Lord Semester, formerly of the Cleveland Federal Reserve. Just going back to the end of June, when you step down and she is here for the first time in it ten years, Joining us now is someone who has been in that room, who has seen the decision making in the speech crafting former Saint Louis FED President Jim Bullard Joining us now. Jim, I would love your take on this speech. What did you think of it?
I thought this was a good speech. I thought it was not quite a victory lap, but certainly emphasizing that this policy since twenty twenty two has been extremely effective in inflation down substantially putting us on a path to two percent inflation without substantial weakening in the labor market. That labor market was super hot. It has cooled, but it's only cool to a sort of normal labor market, and so that's why everyone's talking about the soft landing. So I think to the extent there are critics out there, which is great, they have to contend with the fact that this policy worked very, very well over the last two years.
Appropriate Jim Bowler to your acclaimed speech years ago on regimes of a FED staggering from regime to regime or planning from regime to regime. Does this speech signal a new post pandemic regime?
You know this is going to be studied for years. In this episode about disinflation without recession will be studied for many years, and exactly how it works is a good question. But Chair Powell said in the speech, I think basically lined out the argument. If you can keep inflation expectations on target, and even when the world seems to be exploding with inflation, then you can get the disinflation to occur relatively rapidly and relatively pain mostly. So I think that's a new mode for many people and thinking about how monetary policy works.
I've been asking his question, Jim Bollard of many and with great respect to your public service, out of Saint Louis. Where is the unemployment rate that begins to hurt for Jim Bullard. I think a lot of America wants to know what's a statistic and unemployment rate where it says some pain? Is it five percent? Is it four point x percent? Where's that number for Jim Bullard?
Go?
You know, estimates of the natural rate for most people are in the mid four percent range somewhere. And so I think it's true that unemployment has come up, but it has come up from this, you know, a three handle that it was apt for several years. I think what you should think about is if the three handles the thing that's unusual for the US economy, four handle would be a very normal market turn. And now we're at that level.
Now.
If it goes up from here, it goes up substantially from here, you know that's going to be a substantial weakening. That's why I think Cherpel didn't want to get any anything further to happen in the labor market.
I think he said, further cooling is unwelcome.
Yeah, Jim, I said Jim Bullard here easily a decade ago with Alan Meltzer of Carnegie Mellon, and he lectured me on the silliness of a fifty basis point move. If we discuss a fifty basis point, are we defeating all the history of measured and all the value of a gradual approach.
Yeah, I just think right now, they just probably don't need to go fifty basis points. I think that would you know, trigger expectations about a really rapid pace of rate decline.
They probably don't need to do that.
They would like to ask them toe the have the inflation come, ask them tote down to two percent. Also, you know, basically with this speech and certainly with the July meeting as well, they've been heavily signaling that they're going to make this move in September and subsequent moves. So that's already been pricing in the market. So they'll just be confirming at a September meeting of what's pretty much already happened as far as market price.
Jim Bullerd, the former Saint Louis fed President, thank you so much for.
Being with us.
But the real issue is this is a German Paul who at the back end of the speech said, now is the time for humility. Yeah, I think that's an allusion to the election and the incredibly intense economic policies we're getting both from Trump and Harris.
You're just trying to roll up.
Is here he is. Let's go to him right now.
Former Kansas City Fed Thomas Ahoning. I'm very curious to see why you actually think maybe it is too soon to sort of sound the all clear and the victory signal that we seem to hear from Federal Reserve Chair Jerome Powell.
Well, I understand where he's coming from, first of all. And you know, first of all, we have an economy that is strong but slowing, which is what you want. You have a labor market that has been strong but slowing as you would expect and want, and you've had a relatively tight interest rate environment. If you think about it, interest rates, real interest rates are between two and a quarter and two and three quarter percent. If the equilibrium raise around two, you're modestly tight. So you would expect a continuation, and that's what he said. We expect to see a continuation and the decline of inflation. So with that in mind, we are getting close to where we can make a cut. So that's the statement. But the fact of the matter is, and here's the catch, inflation is between two and a half and three percent. I know they like to use the PCEE, but there is a CPI two and this CPI is three percent, and that's what people index to and that's what people look at. So inflation is still if you say three percent, it's fifty percent above target. So why are you in such a rush? So that's that's the counter argument to that. But I think based on what he said was, you know, we were very close. The next move is down, and that's what they've been saying for nine months, and that gives the markets kind of a let's say we're gonna speculate. Let's speculate long because rates are going to go down.
The heritage of this discussion out of your Iowa State economics and all you did in building Kansas City, is a distrust of those people over in the east coast and maybe the left coast about the debt and the deficit.
Tom Hanig, right.
Now, on what you got, you got every every Trump supporter, every Hair supporter is looking at the debt and the deficit and saying, you've got to be kidding me. How afraid of you are the fiscal realities of America folded into our monetary policy.
Oh, it's very much folded in.
For example, regardless of what they do, the deficit is only going to grow. We know the interest on the debt is exploding. We have a huge UH deficit of two trillion. It's going to continue to be well above the train for some time. So here's the question, who's gonna who's gonna learn the money. There's gonna be the foreign interest and they're pulling away from the dollars somewhat, it's going to be domestic. How much do you want to take away from the private sector to fund the debt right and then maybe redo it in some kind of fiscal stimulus it's less efficient. Or are you going to turn to the Federal Reserve? And I call it. I call it knocking on the central Bank's door, because when you're the only source, if you're going to keep integration from exploding, the Fed's going to happen.
Well reported, you've got kruger Ins and your your addresser in your bedroom. Gold at twenty five hundred. I mean we go back to Wayne Angel. We can go back further than that. The primal Midwest economist has got to be screaming about the combination of the debt and the deficit in gold at twenty five hundred.
Well, I hope it's more than the Midwest because it affects the whole nation, and it is. It is a very significant problem. You know, the dollar used to be a stable coin, right.
Tied to the gold because first somebody take a note ut stable coin.
Really look at it.
It was backed by the goal and therefore you had you had discipline around.
It's all fiat, right, which is fine. If your policy is.
Can we extend an hour?
He's just getting fired up. Look, well, think about it. That's all I'm asking you to do.
Think about what is the discipline to the value of our currency. It's the FMC with more and more pressure coming from the size of the death that we have to fund.
Someone has to fund that not to go.
Too far afield. When we're talking about the gold standard. This goes back to the question of inflation and just how pegged inflation is in this economy that does look different than it did pre pandemic. Do you have any concerns about the fact that we don't understand neutral and we talk about normalizing policy without a sense of where we're going.
Well, I think people know where we're going, and you know, the estimates are neutral, are like every other estimate. It's not certain, but many researchers now are saying neutrals around two percent. So if neutrals two percent and the rate the Fed Funds rate is real rate is two to quarter two to three quarters percent, you have a type policy and the other part of it isn't And I will say Chairman Power emphasizes is inflationary expectations. So if they can stay firm in terms of we're not gonna ease so much that we reignite inflation. We don't know what that is, but we know we are somewhere around real rate of two percent, we'll get our rate down to two percent as inflation comes down. And if they move in September, the main thing will be how they message it, because if they don't message your right, the markets will immediately start saying, well, what's the next quarter or a half or some point, and then you will lose that anchor.
I like what you said because it hints to where I was going to go next. Is this a fetter reserve that wants to see a market rally, because ultimately that's more supportive of no further deterioration in the label market.
I think this is a FED that not necessarily want to see a market rally, but it does not want to see inflation night, nor does it want to see unemployment struct a rise. So they're in that tight spot and that's why they're being very careful as they go forward from here.
But they have a lot on their shoulders.
There's a state in the vicinity of tom Honing. It's called Missouri. McChesney Martin came out of Missouri, and he and Truman of Missouri had a pitched battle in the early nineteen fifties. Are we going to reduct fed independence battle into twenty twenty five? Well, it's yes, as possible because of the pressure to print money to buy the debt of the US government. And that's when the FED, I think it's hard decisions are ahead of them, because I think the FED is going to have to say behind the doors, I don't care how they do it, Congress, get your house in order. We cannot carry these kinds of debt forward and retain ourselves as the strongest, most reliable currency in the world.
We're at a time.
Can you get beefun toasts back on the menu at the Pioneer Grip? With all your power, can you get the menu back to what it was?
I don't I'm not hosting this anymore, so my power is kind of limited, so I can't probably.
Give you my opinion.
Give you a toast to Jackson Hole.
I'm a fan former Kansas City FED President Thomas Honeg joining us here in.
Jackson Hall.
From Jackson Hole.
For our radio and television audiences worldwide. This is a Bloomberg special interview following up on the J. Powell Fed Chairman's speech. Here in Jackson Hole, we have Philadelphia FED President Patrick Harker joining me, Lisa Bradwitz and Tom Keene, and we'd like to thank you very much, Pat for coming out, uh, interrupting your your seminar rumor?
Has it you're going to cut rates?
Was it you?
You've been some what reluctant? Are you on board?
No?
I said the last couple of days that it's time to start a process. And I think it's a process. It's not about a particular number. The process needs to be dictated by the data we see but we need to start moving rates down, no question about it.
Well, if you start moving rates down. The one thing that didn't come through in the speech is by how much?
Yeah, And again I think we need to let the data dictate this. I think what matters more than a particular number. Now, I've been out and about in my district all summer talking to contacts, and one thing I heard is twenty five point fifty. That doesn't matter so much as commit to a process. Be methodical about the process in particular, because what I've heard, particularly from the bankers, is they need time to absorb the changes. So don't just stop and start. Don't just do a large decrease and then stop and then starting it. Just start a process and keep it moving.
This to me, really underscores what LORDA Master was saying formerly of the Cleveland Fed Reserve, where it makes sense for the Fetch Reserve to go by twenty five basis points to begin with and then potentially cut more significantly later on, because then you're not signaling to markets that you're going to go much further.
Isn't what you agree?
And we'll see how things. You know, there are a lot of risks are out there in the economy and the global economy. So we start with twenty five and we just let it run and keep moving that and we're already seeing it, right, We're seeing the long end of the curve start to come down. That's been good. The mortgage business is back. You talk to bankers, they're starting to write mortgages again. That's all good news for the economy.
I've got to ask the engineer the question. Susan Collins was channeling Patrick Kreker here the other day. She says, we need to lose a pessimism. We need to be more optimistic about where we are right now. You, more than anyone I know, listens to business. What are you hearing from business about investment next year?
About their confidence forward?
They're cautiously optimistic, I would say, right now, I think they are optimistic. But depends on the industry and depends on where they are in their own business cycle, right. But yeah, generally we're seeing take housing for example, Housing is a good example. We know that a lot of developers are sitting on their hands waiting for rates to come down for this process to start. I think that's a good thing because we need them to build affordable houses, loan moderate income houses, and I think they will do that as we start this process.
When the Chairman's book today, he suggested that the balance of risks has changed. Inflation is coming down and it's probably not going to shoot up again because of the rising unemployment rate. But the rising unemployment rate in turn is a bigger risk. At this point, how much of a risk do you see of downturn from unemployment?
So I don't see a large outside risk. The employment unemployment can go up some right, and it probably will go off a little bit. It will definitely, in our view, not peak above say five percent. I mean it will be below that for sure. Well not for sure. We never nothing for sure. But you got to look at the totality of the data too. It's not just about that number, right, It's about what we're hearing from our contacts, the claims data, the job to job transition data. There's a host of data. You have to look at it.
Well, this is a confidence question. Recessions are always a confidence question. You're talking about confidence CEOs that the business is going to be okay. But what do you hear from the average person who could pull back if.
They see the unemployment rate going up.
It really is a tale of two consumers. To simplify things. Those who have the money are spending the money. They're not that concern. Low moderate income households are really still feeling the pain. They're feeling the pain of housing prices, food prices, you name it. So they are very concerned. So it really depends. It's not one size fits all. There's not the average consumer. That person doesn't exist in our economy.
So everyone's talking about this process, right, You talked about that too.
This is the beginning of a process.
One thing that Neil dot noticed was missing was the word gradual from Jpalas, which we can get to that in a second.
Do you have a sense of where we're heading?
Yeah, so I like the word methodical. That's what I'm hearing from my contacts. Please just make it so that we know where you're going in a very clear way, and then you start that process and don't just stop and start.
As I said earlier, So where are you going.
Well, we're going to go back to whatever that new.
Neutral rate is.
We have an idea of what that could be.
Yeah, I mean we don't know exactly what it is. We'll know it when we get there. Let's be honest, you can't know it out priori, but you know it's probably around something around three percent, is sure, you know, or somewhere around that, But we don't know that for sure.
One of the new things that social media is wonderful people. There's a guy named Triple Net Investor that's out there revealing empty office buildings for next to nothing.
We got good news.
Philadelphia is not on the latest list of this city, that city and the other city. From where you stand and from all your contexts, and Philadelphia's let on this. Where are we on the washout and clean up of commercial real estate?
Again?
Let's commercial real estate isn't one size fits all thing. So downtown office is what we're talking about. The dentist in the suburban office mall is doing just fine. Right, it's that downtown office space. We are starting to see that clean out some again, it's going to take some time, whether it's new businesses moving into that space at much lower rents or conversion. We're seeing a lot of conversion activity as well.
Do you have a confidence that the banking industry is resilient to that conversion that's so far?
Yes, I do, but it's something we clearly need to keep our eye on.
Let's sticky with real estate. Let's talk about the residential side. You were populistic at the start of the interview here talking about mortgages coming back. There's been a lot of criticism of a FED maybe breaking the mortgage market because interest rates rose above what the majority of people had for their mortgage rate.
Do you have an.
Idea of what level housing it takes for housing to come back and is that figured into your calculations of where neutral should be.
Yeah, so we had to do what we did to get inflation under control. So I don't know apologies that we took rates up quickly. I think about my generation, the Baby Boomers, the largest generation to go into retirement. We're sitting on these low mortgages. We want to move, We don't want that big house anymore. That lock in effect, it will start to ease as rates come down, and we're already starting to see a little bit of that again. I talked to the bankers. They're writing mortgages again, not just refise, but they're writing new mortgages again. That combined with the new supply that'll come on the market I'm pretty optimistic we can get this.
This is a critical statement from mister Harker, the idea of like, when the rate comes down, where does the fevers step in?
Again, are you.
Looking in Jackson? It would take a lot, a lot. It would take a lot for that to happen.
Another question that comes up now that you're essentially starting the path to rate cuts is what do you do about the balance sheet? Because in theory they work in opposition to each other, and it had been sort of the fence policy that we wouldn't do them simultaneously.
But it looks like you're going to be doing that.
Yeah, that's okay.
I think again we I've always been in the camp of putting the balance sheet on autopilot, essentially starting the process, letting it run until we get and get there. We definitely don't know exactly where that's going to end. The data will dictate when we end that process. I'm okay with doing that because it's in the background, it's running. We need to get back to ample it reserves. We don't know what that number is, but we'll know what won't.
You get an estimate about when that might be?
I do, but I'm not gonna. It's so uncertain. We had an estimate last time we did this, right, we're off, So I'm cautious about that.
If he told you, you'd have to kill you.
I think that there's this question right now about heading into your end. And Adam Posen was really highlighting this earlier. There's this anxiety about what the fiscal backdrop will do to derail some of the calm, the methodical aspects of FED policy. I don't know that you can or want to comment on basically what that policy could be. But how much does that keep FED officials up at night? How much is that part of the discussion what you have to do to respond to any potential expansion of the deficit that could be inflationary next year.
So I stay out of fiscal policy. Honestly, you have to respond, We have to respond to it exactly. And so I can't speak for the FED either, but for myself, what keeps me up are many risks. That's one of them, right. There's also if we see what we're seeing around the world, content licks get worse. I mean that would be tragic to humanitarian tragedy alone, but the tragedy also to the economy, the hurt to the economy.
So there are a lot of risks that keep me up at night.
That's just one of them.
Well, tariffs, were you more or the deficit depends.
It depends the devil's in the detail, Like what's specific about the tires, what specifically we're investing in in terms of deficit. You know, I'm a simple guy. I think if we're investing in something that's improving the productivity of the American economy, that's a good thing. If we're spending money that doesn't do that, that worries me more. So, Again, it's not just one one thing. It really depends on what we're doing.
So you mentioned productivity. We had the big revision to the non farm payrolls right this week, but that should raise productivity. You view that as good news offsetting the bad news of Lord John.
That's an interesting that's an interesting way of thinking about it. We were expecting this adjustment and we looked at in Philly FED. We've been looking at this the payroll adjustments, and we knew this was coming. It's a little larger than we expected, but we knew it was coming, so that wasn't a surprise. And it's still a good number overall, if you average out over twelve months, we're still doing just fine in the American economy. But there's risk there. That's why we need to start to take action now.
Well, we'll see you on September eighteenth.
Patrick Harker, President of the Philadelphia Fed, thank you very much for joining us on Bloomberg Radio and television.
This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.
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