Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / US Monetary Policy, Inflation, and Labor Markets with Adriana Kugler (Federal Reserve Governor)

Transcript

US Monetary Policy, Inflation, and Labor Markets with Adriana Kugler (Federal Reserve Governor) · The Capitalism and Freedom in the Twenty-First Century Podcast

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  [MUSIC]
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  >> Jon Hartley: And for those who don't know me, I'm Jon Hartley,
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  I'm the founding chair of the Economic Club of Miami here.
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  There's a few of my co founders who are here as well, and
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  we have our executive director, Francisco Gonzalez,
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  who's put in a tremendous amount of effort today for today's event.
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  So really grateful for all their work on this.
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  And by way of background, an economist,
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  I host a podcast at the Hoover Institution, the Capitalism and
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  Freedom in the 21st Century podcast, and do a lot of economic stuff.
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  And very looking forward to today's conversation and very much
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  honored to have distinguished members from the Federal Reserve here today.
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  It's my distinct privilege to introduce to you Governor Adriana Kugler.
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  Dr. Kugler took office as a member of the Federal Reserve Board of governors in
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  2023 to fill an unexpired term in 2026.
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  Prior to her appointment on the board, Dr.
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  Kugler served as the US Executive Director at the World Bank Group.
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  She's also on leave from Georgetown University where she's a professor of
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  public policy and economics and was the Vice Provost for Faculty.
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  Previously, she served as Chief economist at the US department of labor from
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  2011 to 2013.
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  Dr. Kugler is also a research associate at the NBR and the Center for
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  the Study of Poverty and Inequality at Stanford University.
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  Dr. Kugler's other professional activities also include being the chair
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  of the Business Economics Statistics Section of the of the American Statistical
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  association.
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  Who's also a member of the Board on Science,
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  Technology, and Economic Policy at the National Academy of Science.
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  And served on Technical Advisory Committee at the Bureau of Labor Statistics.
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  Dr Kugler also received a BA in Economics and
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  Political Science from McGill University.
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  I grew up in Toronto, so it's wonderful to have a fellow Canadian connection
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  there and also a PhD in economics from the University of California, Berkeley.
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  I'm a Stanford Economics PhD.
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  There's sort of a famous rivalry between the school, two schools, but
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  we won't hold that against her.
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  But without any further ado, I wanna welcome
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  to Governor Kueger to the stage to present some remarks that she's prepared.
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  And then we're going to do a fireside chat afterward.
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  Thank you so much.
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  Please give a round of applause.
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  >> [APPLAUSE] >> Jon Hartley: This is a live recording
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  of an episode of the Capitalism and Freedom in the 21st Century podcast,
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  which I, Jon Hartley, am the host of at the Hoover Institution.
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  It's the official podcast at the Hoover Institution Economic Policy Working Group.
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  Really, really excited to have this conversation with you,
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  Governor Kugler and ask you some questions, starting with monetary policy.
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  So the Fed funds target ranges between 4.25 and
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  4.5% after some cuts.
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  What do you consider to be the appropriate stance of monetary policy rates?
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  >> Adriana Kluger: So there's some magic number.
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  There is no specific number that we're looking for.
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  We look at the totality of the data and we also definitely look at trends.
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  That for me is really important.
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  We don't overreact to any particular number or any specific number.
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  We look at the totality of the data and the trends and how the economy is moving.
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  And the other thing that we look is at forecasts and
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  any risk that may be coming our way.
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  So given that, as I mentioned,
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  2024 ended at a very solid place and
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  2025 is also starting at a very good place,
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  the economy in 2024 expanded at a rate
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  of 2.5% compared to 3.2% in 2023.
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  So a little slower, but
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  it's still the highest growth rate among any advanced economies.
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  So economic activity remains very resilient.
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  Now let's turn to the labor market.
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  As I said, we got data this morning and we receive good news.
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  The labor market is healthy, it's stable.
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  For some time the labor market had been cooling gradually.
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  Unemployment increased from 3.4% in April 2023
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  to about 4.2% sometime in the fall of last year.
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  But what we have seen is that the unemployment rate has hovered around 4%,
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  4.2%.
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  It remains stable.
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  Also something that we see is that there's still hiring going on even
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  though the hiring rate has gone back to pre pandemic levels and
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  layoffs remain subdued.
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  So that that gives us hope that there is a balanced labor market,
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  as I mentioned in the remarks, that is neither weakening nor overheated.
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  The labor market is stable, which gives us a little bit of time to make decisions.
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  By the same token, I have to say in the past few months we
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  have seen the inflation rate moving sideways.
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  It has firmed a little bit.
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  So we were paying attention to that.
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  If we look at the overall inflation, whether it's headline or
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  whether it's score, it has moved sideways.
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  Specific components have made progress.
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  So I want to acknowledge the progress that we have made.
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  For example, in terms of the housing inflation component component,
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  in terms of services inflation, which had been persistent for some time,
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  but at the same time non market services inflation has increased due
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  to portfolio management categories and things of this sort.
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  And then we are making less progress in terms of goods inflation,
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  which has usually kept a lid on inflation as a whole.
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  So that's holding us a little bit at the same level without allowing
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  us to make progress because we're not yet at the 2% level.
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  That means it makes sense to hold our federal funds rate where it is now.
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  And the final issue is, as I mentioned,
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  we have uncertainty coming ahead in terms of new policies that may be put
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  into place in terms of some policies that have already been put into place, but
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  that we're not sure how they will shape up once they're implemented.
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  So I think the cautious and
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  the prudent step is to hold the federal funds rate where it is for some time,
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  given that combination of factors, given that the economy is solid,
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  given the fact that we haven't achieved our 2% target.
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  and given the fact that we may have uncertainties and
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  other factors that may be pushing up the inflation or
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  maybe reducing output and growth into the future.
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  >> Jon Hartley: So my next question was gonna be on inflation.
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  And so there's been some.
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  The Fed's engaged in a few cuts and it's now halted,
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  sort of with the latest inflationary going a little bit sideways.
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  As you say, year over year inflation's now 3%, core inflation's a bit higher, 3.2%.
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  And what do you think inflation needs to be before thinking
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  about any further accommodation or rate cuts?
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  >> Adriana Kluger: So, again, I'm not one that has a magic number in mind, right?
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  I will keep looking at the trends.
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  I will keep looking at where the economy is going and at the risks ahead.
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  Now, you're right.
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  We have made tremendous progress since the height of inflation in 2022,
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  in the middle of 2022, when headline inflation was 7.2%.
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  It is now Now 2.6%.
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  If you look at core inflation,
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  it has halved from 5.6% in 22 to 2.8%.
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  But in recent months we move sideways.
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  It's really firm.
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  So we want to make sure that we continue to make progress.
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  This talks to the trends issue, right?
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  That we continue to make progress and continue to slow down
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  inflation to feel comfortable with also changing rates farther.
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  That's not where we are right now.
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  I am concerned about goods inflation increasing a bed
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  from minus 0.6% last year to now minus 0.1.
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  So we're not getting as much help from goods inflation.
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  Again, this non market component of services inflation is not helping us
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  either.
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  But the better of good news is housing inflation,
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  which had been very persistent, it was at around 5% at the beginning of 24,
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  came down in the fourth quarter to 4.7%.
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  The services component ex housing component of inflation has come
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  down to 3.2% at the end of last year after being at around 4%.
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  So there is some progress in some components, I would say, but I am paying
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  attention to why these other components are kind of moving backwards now.
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  >> Jon Hartley: And it's a great point.
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  Inflation was at this basically peak of many decades and
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  we've come a long way in the past few years.
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  I wanna talk a little bit about the balance sheet.
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  The Fed's balance sheet today is closer to about $7 trillion from its peak of $9
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  trillion just a few years ago in the post pandemic period.
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  How do you think about the Fed's balance sheet and
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  where should it be if you think that there should be some terminal level?
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  >> Adriana Kluger: So as you will remember, during the last two recessions,
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  the 2008, 2020 recessions, we, and I wasn't there at the time,
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  but I have to say the Fed deployed balance sheet tools to
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  help make progress on revitalizing the economy at the time.
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  And I think that served economy well.
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  In March 2022, the Fed then decided to
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  start reducing the size of the balance sheet.
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  And that has been happening ever since.
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  And I would say that what the Fed, what we aim for
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  is to reduce the balance sheet to a point that serves us in
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  terms of our effective functioning and monetary policy.
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  Given what is now an ample regime system that we have now,
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  we're paying close attention to any indicators of the conditions in money
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  markets because what we want to see is that we're somewhat above this ample level
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  to feel comfortable with stopping this reduction in the balance sheet size.
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  And we don't have any specific date.
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  We're watching very closely, but we,
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  we don't have a date in mind as to when that may happen.
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  We're just continuing to watch very closely.
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  >> Jon Hartley: So as a nerdy economist, I love asking questions about R Star.
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  R star it's this level of the interest rate that's neither inflationary nor
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  disinflationary and there's all these different estimates for
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  it out there in the literature.
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  We have model driven estimates from Labbock Williams which is R Star
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  kind of falling further since the pandemic.
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  And also surveys out now from the New York Fed which ask questions of market
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  participants and their forecasts for where the, where the, where they would think
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  the short term rate will be in the long run, effectively asking about R star.
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  That median estimate or forecast from the New York Fed survey of
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  professional forecasters has actually been rising quite a bit since the pandemic.
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  And other measures show R Star rising as well.
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  The median forecast being around 3% from that survey.
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  Lawback Williams is I think closer to below 2% now.
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  Do you have a particular estimate you like to use for R Star?
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  >> Adriana Kluger: So I use a wide range of models to inform my opinions about our
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  star, but I also look at economic conditions generally.
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  I also look at the financial conditions index to see the level of
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  restrictiveness of our policy rates as they start for those.
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  And I know there are a few students here who wonder what these R Star
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  is,is the neutral rate of the interest rate is basically the interest
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  rate that will keep us at 2% without the labor market either weakening or
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  overheating and without any shocks.
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  So it's a theoretical concept because we're gonna continue to have shocks,
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  believe me.
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  So it's kind of a long term concept where we would like to be,
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  but it's a theoretical concept.
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  So that's why we have these models.
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  And I rely on a variety of models.
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  I definitely look at the Lobach Williams estimates,
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  which is a semi structural model as well as many other semi structural models.
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  There are the reduced form models.
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  There is a number of them, Negro et al.
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  And Liebherg and Matthews.
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  There are quite a few of them.
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  So they have a range of estimates.
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  But besides looking at these estimates,
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  something that I pay a lot of attention to is the determinants of R Star.
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  Why that neutral or long term interest rate may go up or down.
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  So the reason why I do that is because I wanna be paying attention to whether
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  these determinants or factors that affect R Star are permanent or temporary.
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  And so that will make a big difference.
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  And so one of the things that I and many others pay attention to,
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  including Constance here, who's nodding and
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  going, of course, is government debt, right?
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  So government debt has been going up.
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  And this government debt means that we need to issue and
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  supply more US treasuries.
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  And that increases RStar.
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  So I think that's here to stay for some time.
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  That's pushing up R Star, for sure.
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  The other thing is what I talked about in my speech, productivity.
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  So productivity also pushes up RStar.
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  So as, as you have seen, I'm a productivity optimist.
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  But there are others that are not as much.
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  And time will tell, as I said, right?
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  We'll have to see if that remains that will push up our start.
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  There are many other factors that could push our start down, in fact.
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  So one of them is the aging of the population, which is
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  happening across the world, not only here in the US but all across the world.
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  When the population ages, people save more and they invest in safe assets.
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  So there is greater demand for things such as US Securities.
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  That pushes down our star.
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  Other things that may push down our star is international demand for US Treasuries.
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  And that has been going up for some time.
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  As you know, there are many countries around the world,
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  including Latin America, which deregulated financial markets.
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  Financial flows have increased.
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  That would push up Star.
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  That would push down our star.
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  Also because there is greater demand for US treasury.
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  So there's a combination of factors.
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  If you ask me, I would say our star has gone up some,
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  but not as some others predict.
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  I think there is some momentum, but I would say there are other factors that
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  are keeping it down still at a level not as far from from what it used to be.
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  So I'm paying attention to that because As we move on towards
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  normalizing our federal funds rate,
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  we need to pay attention to when we stop, we need to be close to that rSTAR.
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  So we're not quite there yet, but we all pay attention to that.
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  And my colleague, President Bostic, who's here from Atlanta,
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  pays close attention to that as well.
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  We are all definitely keeping a close eye on RSAR and we all have our estimates.
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  >> Jon Hartley: I think you're in good company with rSTAR thinking that rSTAR may
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  be on the rise.
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  I love the fact that the New York Fed, along with the bank of Canada,
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  bank of England, European Central bank, they now put out these surveys
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  asking professionals about their estimates of RSR.
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  So not only do you get to and obviously they look at these models as well, but
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  you also get some information in terms of what people are thinking about RSR.
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  I have a whole paper on this.
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  I'm very invested in survey estimates of the natural rate of interest for
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  full disclosure.
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  But I do think it's kind of a methodological step forward because
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  sometimes these models can be very structural and
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  very complicated to understand.
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  And at least being a sort of empirical reason person, I appreciate sometimes just
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  asking people what they think rather than having to go into a very deep model.
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  I want to talk a little.
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  >> Adriana Kluger: That's really true,
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  I have to say I do like looking at the surveys as well.
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  And there's survey based models, right?
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  Which use the survey data to inform where rSTAR is too.
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  So thank you for mentioning that.
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  >> Jon Hartley: Exactly and they can still coexist with model based estimates.
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  And I think those model based estimates maybe inform those survey estimates.
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  Yeah, I think it's a really understated, underappreciated development.
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  I think that's continuing to come out of central banks.
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  The New York Fed actually has been doing this for 10 years,
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  whereas the bank of Canada, European Central bank and ECB and
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  also the Reserve bank of Australia have been doing it for just a couple years now.
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  But they're following your lead, you being the Fed.
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  I want to talk a little bit about the labor market.
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  You star a little bit.
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  You are a very decorated labor economist.
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  How do you think about slack in the economy?
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  You star full employment where do you think we are today versus
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  say full employment or latest unemployment reads at 4%.
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  >> Adriana Kluger: Yeah the typical way to measure slack is by looking
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  at the unemployment gap or the output gap.
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  So the gap between actual unemployment and what we call the Nairo,
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  the natural rate of unemployment or the output gap,
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  which is the gap between the total output in economy and potential output.
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  And those are usually they're estimates created by the CBO,
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  by the Congressional Budget Office, but
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  we certainly come up with our estimates of those gaps.
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  Now, I have to say, during the pandemic and post pandemic period, and
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  especially during the post pandemic period and
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  this inflationary period that we have been living through.
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  We definitely realized that there were some other measures of slack
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  which were better.
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  So one that I pay a whole lot of attention to is the vacancies to unemployment ratio.
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  So number of vacancies created by employers and
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  businesses over the total number of people looking for jobs.
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  It gives you a better sense of that gap between the total jobs available and
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  the total number of people looking for jobs.
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  That VU ratio has moved tremendously over the past few years.
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  It was 1.2 prior to the pandemic.
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  It reached 2 in May of 2022, and now it's back.
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  The numbers just came out this morning to 1.1 again.
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  So it's almost 1 to 1.
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  So that tells you something about how the economy is in much better balance, right?
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  In terms of labor supply being balanced with labor demand
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  other things I pay attention to are flows.
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  So the hiring rate, the layoff rate that I mentioned before.
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  >> Jon Hartley: The jolts data.
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  >> Adriana Kluger: Yes, exactly, the jolts data from the Labor Department.
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  So I used to be chief economist at the Labor Department.
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  So this was where I spent most of my time on days 247 looking
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  at the labor data, and that includes the jolts data.
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  So the hiring rate is now below what it was pre pandemic.
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  The layoff rate surprisingly has been subdued.
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  It had been going up for a while now it's leveled off again, but
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  it's remained subdued given the time we're living through, right?
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  So there has been a reduction in demand for workers, but that has come through
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  reduced hirings and not necessarily through people being laid off.
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  And that's good news.
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  That's a good situation to be in because people are not desperate losing their
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  jobs, right?
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  It's not the 22 million that I mentioned before back during the pandemic.
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  So that's good news.
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  One other measure, which, again, this shows you how nerdy I am.
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  So I love that you are also like that.
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  Is this measure of quits?
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  The quit rate is one of those things that I paid so much attention when I was chief
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  economist because it tells you about opportunities in the labor market,
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  even for those who are already employed.
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  So you all remember the time of the Great Resignation.
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  So during the Great Resignation, people were leaving looking for
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  jobs elsewhere because there was an abundance of demand for labor.
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  So that gives you an idea of how tight the labor market was at the time.
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  And there is even the wage premium for quitters, for workers, right?
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  How much more their wages are when they leave a job and jump to another job.
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  That tells you how tight the labor market is.
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  That has all gone back to pre pandemic levels.
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  So that tells you once again that the labor market is at a good place.
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  It's healthy, it's resilient, but it's well balanced at this point.
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  It's neither weakening we saw the unemployment rate tick down this morning.
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  But it's not overheated the way it was certainly a few years ago,
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  which was causing a lot of trouble as well for businesses in terms of having
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  shortages of workers, pushing up wages to a level that was not sustainable.
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  So I would say the labor market is sitting at a good place.
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  It's stable, it's healthy, and it's resilient.
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  >> Jon Hartley: No, absolutely and it's fascinating too,
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  just how much has changed in the past six months.
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  There's so much worry about the unemployment rate moving up.
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  It triggered some of these various measures like the SAHM rule and
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  some of these other measures.
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  But, yeah, it seems like we're in a much better place now.
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  And I think to your point, it can't be overstated how big a shift is going
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  from having two job vacancies for every unemployed worker to simply one.
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  Yeah. I mean, that was just a massive shift.
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  And I think vacancies, the beverage curve is something that people, I think,
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  are starting to pay a little more attention to.
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  So I think that's terrific.
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  I want to ask you just a little bit about the Fed's framework review.
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  I'm curious, what do you think about the upcoming Fed framework review and
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  what do you think it should address in your mind?
• 23:47
  >> Adriana Kluger: Yes, so we literally just started talking about these with
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  Rafael and my other colleagues in our last FOMC meeting.
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  And I have to say.
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  That one thing that I support and
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  approve unequivocally is keeping our 2% target for
• 24:08
  inflation in terms of so many other parts of the framework.
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  I'm entering this process with a very open mind and
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  we're going to have a whole lot of discussion, analysis papers and
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  reviews that we will be doing in the next many months.
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  So that's what we're doing now.
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  I do have to say, and this has been told by others and
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  it's well known that the last review was heavily influenced by
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  the period between the last two recessions, between 2008 and 2020.
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  So much of that review of the framework at the time focus
• 24:51
  on the zero lower bound, right?
• 24:54
  On that ability to maneuver potentially if we were hit by a new recession,
• 25:00
  given that we were very close to the zero lower bound, or
• 25:05
  it was influenced by an inflation which was running persistently below 2%.
• 25:12
  And how to get that up, given that we had a flat Phillips curve, right?
• 25:17
  We thought there was a flat Phillips curve.
• 25:19
  So a lot of those things is what we were seeing in the last framework.
• 25:25
  In my mind, the next framework needs to fold in what we
• 25:30
  have learned from this last period.
• 25:33
  We learned that we couldn't take stable prices for granted.
• 25:38
  Certainly, we had to deal with these very tight labor markets and wage inflation
• 25:44
  as well is price inflation that hit levels that we hadn't seen in many decades.
• 25:49
  So I think we need to fold in the lessons from the pandemic,
• 25:53
  but also the lessons from the post pandemic period together.
• 25:57
  Again, we shouldn't forget about that period between the last two recessions,
• 26:03
  2008, 2020, with persistently low inflation, we should consider as
• 26:09
  many possible situations that could affect us moving forward to learn from them.
• 26:15
  And then the other thing as I mentioned that we have learned is that I think we
• 26:20
  can count on many different measures that we didn't use to count on to understand
• 26:26
  the level of tightness and slack in the labor market or in the goods market.
• 26:31
  So many other things that could be incorporated as well moving forward.
• 26:36
  So again, entering with an open mind,
• 26:39
  happy to learn from my wise colleagues around the table and
• 26:44
  certainly very committed to keeping our 2% target.
• 26:49
  >> Jon Hartley: Well, I think that's several excellent points.
• 26:53
  Certainly, I think the last framework review flexible average inflation target
• 26:58
  was very influenced by the past 10 years of very low inflation, zero lower bound.
• 27:03
  And certainly, I think it totally makes sense that the next framework
• 27:06
  review incorporates the events of the past few years.
• 27:09
  And I think over all this time I couldn't agree with you more that just
• 27:13
  inflation targeting is sort of the central thing,
• 27:17
  I think, to celebrate and to certainly keep in the framework.
• 27:22
  It's been around since the 90s, formally,
• 27:26
  was put in with Ben Bernanke.
• 27:30
  And I think just in terms of anchoring long run inflation expectations has been
• 27:34
  hugely, hugely successful.
• 27:36
  Last question.
• 27:39
  The first Hispanic governor of the Federal Reserve Board.
• 27:42
  What does Miami mean to you?
• 27:44
  And I know you have some family here.
• 27:46
  >> Adriana Kluger: Yeah, in fact, I have some family sitting here with me.
• 27:50
  And so for me, certainly Miami first and
• 27:56
  foremost means family.
• 27:59
  As I said, I've been coming to Miami since the 1980s.
• 28:03
  My late grandmother used to be here, so I was always visiting.
• 28:08
  We have four generations of family members, right?
• 28:12
  My great uncle, my great grandmother.
• 28:14
  Now we've moved to three generations.
• 28:17
  The last two generations have all been born here in the US and so
• 28:21
  for me, it means family and it means opportunities.
• 28:27
  I feel so very honored to be the first Hispanic person,
• 28:32
  man or woman, to serve in the Federal Reserve Board.
• 28:37
  I take ncure.
• 28:43
  I take this role with so much humility and
• 28:46
  with the responsibility of feeling that I can represent everybody,
• 28:51
  all Americans across the country with the work that I do at the board.
• 28:57
  So how did I ended up here at the board?
• 28:59
  Right? I came because I'm an expert in labor
• 29:03
  markets.
• 29:04
  I'm an expert in price and productivity dynamics.
• 29:07
  And that's how I ended up coming to the board, contributing that expertise.
• 29:13
  But I also bring that perspective of somebody who's a Latina,
• 29:17
  who's a woman, who's a daughter of immigrants.
• 29:21
  And that perspective comes across when.
• 29:24
  When I make my decisions and I choose to focus on certain issues that are.
• 29:30
  No, are very important for many Americans across the country.
• 29:34
  So one thing that I spend a lot of time on is not only talking to my family here
• 29:39
  in Florida and across the country, but also talking to all Americans and
• 29:44
  meeting with communities across the country.
• 29:48
  Because I think aside from the data and you saw, I'm a data geek and
• 29:52
  I love this stuff.
• 29:55
  I also love talking to people and finding out about their economic realities and
• 30:00
  understanding how they're seeing the economy and them telling me in real time.
• 30:06
  And that's the difference between looking at the lag data that we get and
• 30:10
  kind of understanding the realities today and
• 30:13
  how they're seeing things coming up tomorrow, right?
• 30:17
  So I would say that that's critical for
• 30:20
  me, that I represent well all Americans across the country.
• 30:25
  And because I'm an expert on labor markets and business dynamics,
• 30:30
  being in Miami, you saw it in my speech, is just a real lab and an opportunity
• 30:36
  to explore these issues in an environment that is very dynamic and very vibrant.
• 30:42
  So I'm so excited to be back in Miami, as I said, not only to see my family,
• 30:47
  we're having a huge picnic with about 100 family members, four generations.
• 30:53
  And I'm very excited to get together and hear from them and
• 30:57
  hear how they're seeing the economy.
• 31:00
  Definitely, but also to understand how people see our future.
• 31:07
  >> Jon Hartley: I couldn't agree with you more.
• 31:09
  There's millions of people underlying all these data points, and
• 31:13
  I think that that can't be forgotten and.
• 31:16
  And should be remembered.
• 31:17
  Well, I want to really thank you for all your wonderful government service and
• 31:21
  thank you for this wonderful conversation.
• 31:23
  Thank you so much, Governor Kubler.
• 31:24
  >> Adriana Kluger: Thank you, Jon.
• 31:25
  [MUSIC]