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Fed's Mester: Compelling Case To Move Rates Gradually (Audio) · Bloomberg Intelligence

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Speaker 1: I want to welcome now to our special Bloomberg Radio
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Speaker 1: broadcast are Bloomberg Television audience. I'm live today the Federal
0:07
Speaker 1: Reserve Bank of Cleveland with the Cleveland Fed Bank President
0:11
Speaker 1: Loretta Mester to thank you for inviting us here. Thanks
0:14
Speaker 1: for coming. It's exciting for us. Well, it's exciting to
0:16
Speaker 1: be here with you because you know what you just
0:18
Speaker 1: sent it a couple of weeks ago to Federal Reserve meeting,
0:21
Speaker 1: first time you've done this since you joined the f
0:23
Speaker 1: O m c UH. You are looking at an economy
0:26
Speaker 1: that's performing well, and you say the outlook is that
0:29
Speaker 1: it will continue to perform well. But what's the urgency
0:31
Speaker 1: why descent? Is the economy overheating? Well, it's not overheating.
0:35
Speaker 1: And I don't think we're behind the curve yet, but
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Speaker 1: I thought there was a very compelling case for taking
0:40
Speaker 1: another gradual step up on the path. As you know
0:43
Speaker 1: from the Summary of economic projections, the modal path and
0:47
Speaker 1: the or the median path across participants is a gradual
0:51
Speaker 1: path op. We've made a lot of progress, I think,
0:53
Speaker 1: on both parts of our dual mandate goals. In terms
0:56
Speaker 1: of labor markets, you know we've We've seen a hundred
0:58
Speaker 1: and eighty thousand jobs added per month this year on average,
1:03
Speaker 1: which is a pretty good pace, especially after last year's
1:06
Speaker 1: pace and previous year. So we're doing well on the
1:08
Speaker 1: labor front. Inflation still still below our two percent goal,
1:12
Speaker 1: but again, you know, it's moved up over the past year,
1:15
Speaker 1: and monetary policy has to be forward looking. So you know,
1:18
Speaker 1: my my view, there was a compelling case for moving
1:20
Speaker 1: the rate up gradually, um taking another step on that
1:23
Speaker 1: gradual path. And you know there's some you know, people
1:27
Speaker 1: who think like, oh, you want to curtail the expansion.
1:29
Speaker 1: Not at all. Right. The reason I think it was
1:31
Speaker 1: appropriate to move the rate up by twenty five basis
1:35
Speaker 1: points is that we want we want the sustainable expansion,
1:38
Speaker 1: and I think moving rates up is consistent with that.
1:41
Speaker 1: Last week, the numbers on consumers spending were weak enough
1:44
Speaker 1: that the Atlanta Fed cut its GDP tracker down to
1:48
Speaker 1: two point four percent. It had been up as sighs
1:51
Speaker 1: three point eight percent. You know, the first half the
1:54
Speaker 1: GDP barely grew over one percent. Does that make you
1:59
Speaker 1: just think it isn't Maybe the weight could be a
2:02
Speaker 1: little bit longer. There there's a risk of hitting the
2:05
Speaker 1: economy with the rate hike when it's really not all
2:07
Speaker 1: that strong yet. Well, you're right, the first half of
2:09
Speaker 1: the year growth was around one percent UM. I still
2:12
Speaker 1: think we're going to see a rebound in the second half. Yeah,
2:15
Speaker 1: around two two to three percent in the second half,
2:18
Speaker 1: which about two percent for the year. And my view
2:21
Speaker 1: is that we're going to be growing about two little
2:23
Speaker 1: bit over trend um over the next two years UM.
2:27
Speaker 1: That'll be strong enough to put some downward pressure on
2:29
Speaker 1: the unemployment rate. I expected to go down from where
2:31
Speaker 1: the current level. And I believe that, you know, the
2:34
Speaker 1: the day is in place for inflation to move gradually
2:38
Speaker 1: back to two UM. And my view inflation expectations are
2:41
Speaker 1: reasonably you know, well anchored. We've seen inflation move up
2:45
Speaker 1: over the past year, and I think the economic conditions
2:48
Speaker 1: are such that we're going to be, you know, going
2:50
Speaker 1: gradually back to our two percent coals. So again we
2:52
Speaker 1: have to be a little pre emptive and sort of
2:54
Speaker 1: making sure that we're moving the interest right up UM
2:58
Speaker 1: so that we can keep the the expansion sustained. So
3:02
Speaker 1: but still, when I think of the urgency to hike,
3:04
Speaker 1: now many FED officials or some I could try to
3:09
Speaker 1: think of how the f hom C would say a
3:10
Speaker 1: few some several, but a lot of economists and many
3:14
Speaker 1: people of race the issue, but inflation is undershot for
3:16
Speaker 1: so long. Again, what's the urgency is? Would it not
3:19
Speaker 1: only be okay, but would be a good idea to
3:23
Speaker 1: let inflation get up to two percent and let it
3:25
Speaker 1: overshoot the forecast? And you too say not till were
3:28
Speaker 1: going to see a two percent inflation rate. Look, I mean,
3:31
Speaker 1: I think we've learned over history that the FED should
3:34
Speaker 1: be looking ahead and not just waiting. I want to
3:37
Speaker 1: be consistent with our communications and our summary econ on
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Speaker 1: projections that basically they say a gradual path is appropriate.
3:44
Speaker 1: I think if we wait until you know, some people
3:47
Speaker 1: say wait until you see the inflation get back to
3:50
Speaker 1: your goal. Um, then there's a higher potential that we're
3:53
Speaker 1: gonna have to raise interest rates on a steeper path.
3:56
Speaker 1: And in the past, when people when when FED and
3:59
Speaker 1: other policy nations have on that in other central banks,
4:01
Speaker 1: it really doesn't turn out to be a good outcome.
4:03
Speaker 1: So again, my preference would be moved rights up gradually.
4:07
Speaker 1: You know, the gradual path. If you look at what's
4:09
Speaker 1: in the SEPs and of course that's the assessment today
4:11
Speaker 1: about what what we think is appropriate. It doesn't mean
4:14
Speaker 1: moving rates up every meeting, right, it's it really is
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Speaker 1: a gradual path, and you know, policy will remain accommodative
4:21
Speaker 1: even if we take another step on the gradual path. Okay,
4:24
Speaker 1: So the FED has been telling us repeatedly that all
4:26
Speaker 1: meetings are live, there's potential for a policy policy change.
4:31
Speaker 1: Um you argued for hiking rates in September, The FED
4:36
Speaker 1: chair said, recently the cases strengthened for a rate hike
4:39
Speaker 1: if the data stay strong. It seems like the economies
4:42
Speaker 1: on even a better footing for November rate hike. If
4:46
Speaker 1: the outlook doesn't change, if the reports come in strong,
4:48
Speaker 1: are you going to argue for a rate hike in November?
4:50
Speaker 1: So I think all meetings are live, and I would
4:52
Speaker 1: include November in that all meetings are live. Um As
4:55
Speaker 1: I said in September, I thought the case was compelling
4:58
Speaker 1: to take another another step on the gradual path. If
5:01
Speaker 1: the data come in um as we anticipate, you know,
5:04
Speaker 1: consistent with my forecast over the meeting run, then I
5:08
Speaker 1: would expect, you know, to that the case would remain compelling.
5:11
Speaker 1: But of course We're going to look at all the
5:13
Speaker 1: data that comes in between now and November, between November
5:16
Speaker 1: and December, as we do all the time as we
5:18
Speaker 1: step through meetings. We'd like to look at all the
5:20
Speaker 1: incoming information. But you're right, if the data comes in
5:24
Speaker 1: as consistent with what we've been seeing, then yes, I
5:28
Speaker 1: would think that it would still remain of compelling, and
5:30
Speaker 1: you would you would vote for a rate hike. Well,
5:32
Speaker 1: I we'll see when we get to the meeting, but again,
5:34
Speaker 1: the case would be compelling. Uh, it is a few
5:37
Speaker 1: days before an election, and the FED says it's not political.
5:41
Speaker 1: I'm a long time FED watcher. I've seen moves right
5:43
Speaker 1: before elections. I believe it. But it would certainly raise
5:46
Speaker 1: a lot of attention. The markets would notice, are the
5:49
Speaker 1: rules for a rate hike in November, especially this year
5:52
Speaker 1: any different? Does the hurdle for the rate hike get
5:55
Speaker 1: a little bit higher? November said? You said it yourself.
5:58
Speaker 1: We are in a political institution. We have been in
6:01
Speaker 1: a political institution all along. We're designed to be have
6:05
Speaker 1: an independent monetary policy. I can tell you I've been
6:08
Speaker 1: going to FOMC meetings since I became research director at
6:12
Speaker 1: the Philly Fed, so over the past sixteen years. I've
6:15
Speaker 1: been in the FED thirty years. Yes, we are in
6:17
Speaker 1: a political institution. We don't Politics do not come into
6:21
Speaker 1: our decisions. We look at the economy, we do our
6:23
Speaker 1: best to evaluate it relative to our dual mandate goals,
6:26
Speaker 1: and we set policy based on the economic outlook. So
6:30
Speaker 1: you'll push and you think other FOMC members will vote
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Speaker 1: for a rate hike if called for even six days
6:35
Speaker 1: before an election. I think we're a political Politics doesn't
6:37
Speaker 1: come into it. President Bill Dudley said today the FED
6:41
Speaker 1: should be cautious raising rates, especially at the time when
6:44
Speaker 1: the key rate is so low, so close to zero.
6:48
Speaker 1: If there's recession, the Fed doesn't have much room to
6:50
Speaker 1: find it. And he built Uley's not the only person
6:52
Speaker 1: making that argument. How do you respond with it, because
6:54
Speaker 1: its pretty clear you don't share that view. Right again,
6:56
Speaker 1: I'm basing it one monetary policy, well standardized you know,
7:01
Speaker 1: ways of doing policy. I view the economy and I
7:04
Speaker 1: look at our goals. We've made progress on both the
7:06
Speaker 1: employment part of our mandate and on the inflation part
7:09
Speaker 1: of our mandate, and to me, bringing the rate up
7:12
Speaker 1: a little bit is appropriate. Yes, of course, we always
7:15
Speaker 1: have to think about the risk um going forward. But
7:18
Speaker 1: again I think it's a compelling case taking another little
7:21
Speaker 1: step on our gradual path, which the participants of the
7:24
Speaker 1: on the FOMC continue to see as the appropriate path.
7:29
Speaker 1: Another person I want to site as a fellow FED
7:30
Speaker 1: bank president, another monetary theory expert on the FED, Jim
7:35
Speaker 1: Bullard of St. Louis, because he said on Friday the
7:38
Speaker 1: December is his base case for a rate hike this
7:41
Speaker 1: year because a lot of members want to raise the
7:45
Speaker 1: key rate by the end of the year. Let's see,
7:46
Speaker 1: doesn't happen in November. Should markets be all but convinced
7:51
Speaker 1: that it will happen in December if it's even Jim
7:53
Speaker 1: Bullard's base case? Now, yeah, So I think that I
7:56
Speaker 1: don't like to look at it in terms of calendar gear.
7:58
Speaker 1: I looked to look at it in terms of of
8:00
Speaker 1: sort of the appropriate path. So you're right, doesn't doesn't
8:04
Speaker 1: happen in December November? I mean, and that and sent sons,
8:07
Speaker 1: that's less important than is the economic outlook consistent with
8:11
Speaker 1: a gradual increase in the in the level of the
8:14
Speaker 1: interest rate. And each meeting is a liar. You know
8:17
Speaker 1: you mentioned the the steps the Summary of Economic Prevention
8:20
Speaker 1: Projections that includes the dot plots. Of course, each member
8:24
Speaker 1: gives their idea of based on their view of the
8:26
Speaker 1: economy where the interest rates are going two hiks two
8:30
Speaker 1: hikes in. Is is that a realistic path or does
8:35
Speaker 1: the FOMC risk under delivering Again, I mean that's not
8:38
Speaker 1: quite the same as promising four rate hikes at the
8:40
Speaker 1: beginning of and ending maybe with one, but still okay,
8:44
Speaker 1: So firstly, it's not a promise, that's true. I used
8:47
Speaker 1: the wrong word. I shouldn't have used that. Basically, we
8:49
Speaker 1: get to get you know, we sit down and each
8:51
Speaker 1: participant decides what they think of the appropriate path of
8:54
Speaker 1: policy has given what they see in the economy happening
8:57
Speaker 1: and what their forecast is over the meeting run um,
9:00
Speaker 1: and you know, we're we're all committed to hitting our
9:03
Speaker 1: goals right and moving the economy in that direction. And
9:06
Speaker 1: then we write down what we think the appropriate policy
9:09
Speaker 1: path will be. If the economy involves differently than we expect,
9:12
Speaker 1: then that path is going to be moving around and
9:15
Speaker 1: so and if different shocks at the economy, then you'd
9:17
Speaker 1: expect that path to to move around. So again it's
9:20
Speaker 1: not a commitment to the path, but we want to
9:22
Speaker 1: be as transparent as we can with the public about
9:25
Speaker 1: where we are seeing the economy going and what policy
9:28
Speaker 1: is associated with that. Semester we're just getting going, and
9:31
Speaker 1: I'm so glad you've given me an hour here on
9:33
Speaker 1: Bloomberg Radio to continue this conversation. I want to thank
9:35
Speaker 1: our Bloomberg Television listeners for joining us. Will be continuing
9:39
Speaker 1: this conversation with Loretta Mester, president of the Cleveland FED.
9:43
Speaker 1: I'm Kathleen Hayes. This is Taking Stock with Pim Box
9:50
Speaker 1: and Kathleen Hayes on Bloomberg Radio Very special show today.
9:55
Speaker 1: We're broadcasting live today from the FED to Reserve Bank
9:58
Speaker 1: of Cleveland. The Reddemester, president of Cleveland FED, is my
10:02
Speaker 1: very special guest. Want to thank you again, Lort. It's
10:04
Speaker 1: still great to be here in Cleveland at the bank. Yeah.
10:06
Speaker 1: I'm glad that you were able to come to a
10:07
Speaker 1: regional reserve bank to sort of see how we work
10:10
Speaker 1: in the regional bank. Everyone focuses on the board of governors,
10:13
Speaker 1: but this regional structure of the FED, I think is
10:16
Speaker 1: very important. Since you brought that up, explain that because
10:20
Speaker 1: from time to time in a political you're even not
10:22
Speaker 1: in a particular it comes you're up, let's change the fit,
10:24
Speaker 1: and somebody wants you a regional banks or someone wants
10:27
Speaker 1: this explain to our listeners and your constituents, right, why
10:32
Speaker 1: regional banks pay an important role and keep the Federal
10:34
Speaker 1: Reserve doing a good job. Right. So the Federal Reserved
10:36
Speaker 1: with design as an institution that sort of balances private
10:41
Speaker 1: sector and public sector, right, it has. You know, there
10:44
Speaker 1: was a concern about it being too concentrated on Wall
10:46
Speaker 1: Street concerns. The FED, by the regional structure, really brings
10:50
Speaker 1: main street concerns and views to the f MC meeting.
10:54
Speaker 1: So each of the Reserve bank presidents, you know, monitor
10:57
Speaker 1: their district. You had both Taught and David on before
11:01
Speaker 1: umber and our Business Advisory Council, So they bring a
11:06
Speaker 1: lot of regional information to us UM at the Cleveland FED,
11:10
Speaker 1: and that regional information. I can't emphasize how much that's
11:13
Speaker 1: important for us to get a handle on what's happening
11:15
Speaker 1: in our regional economies and that actually we bring that
11:18
Speaker 1: to d C. So I always make it a point
11:20
Speaker 1: in FMC meanings to talk about what's happening in my region.
11:23
Speaker 1: And of course the other presidents bring what's happening in
11:26
Speaker 1: their region, we talk about it, and then we're making
11:28
Speaker 1: monetary policy at the national levels. But that information is
11:32
Speaker 1: very important, and the regional structure of the FED is
11:35
Speaker 1: a way of bringing that information so that it can
11:38
Speaker 1: affect national monetary apology. You have any sense, and you've
11:40
Speaker 1: been with the FED for a long time, and you
11:42
Speaker 1: like in monetary policy academically, your expertise you've been following,
11:45
Speaker 1: do you have any sense that that the intent to
11:47
Speaker 1: try to restructure the FIT or change the FED is
11:49
Speaker 1: any more intense now than it has been. I think
11:52
Speaker 1: that it's reasonable that to given we've been through very
11:55
Speaker 1: hard economic times, that it's time. You know that they're
11:58
Speaker 1: going to be a lot of people who want to
11:59
Speaker 1: relook at things. But I want to point out to
12:01
Speaker 1: people that you know, the FED structure has lasted for
12:05
Speaker 1: over a hundred years, and we've had two attempts at
12:08
Speaker 1: central banking before the Federal Reserve system, and neither one
12:12
Speaker 1: lasted more than twenty years. So there is something very
12:15
Speaker 1: good about this balance of the regional with d C
12:20
Speaker 1: and you know, with the New York FED coming together
12:23
Speaker 1: and making policy on behalf of the nation, and so
12:25
Speaker 1: one of the good things we could say it again
12:26
Speaker 1: one of things about regional FED bank presidents. They have
12:29
Speaker 1: boards of directors and advisory council, so they're the regional economy.
12:32
Speaker 1: So how do you respond then to people who feel
12:36
Speaker 1: that the Fed is maybe not responsive enough to the
12:38
Speaker 1: demands of labor. And within that context, I want to
12:41
Speaker 1: mention that the Labor Market Conditions Index, which Janet Yellen
12:45
Speaker 1: has praised, is such a good view of the labor
12:47
Speaker 1: market has as some of a different view of the economy.
12:49
Speaker 1: I would say than the low unemployment rate UH. It's
12:53
Speaker 1: been below its post recession average of plus four every
12:55
Speaker 1: month since January year did date average has been negative
13:00
Speaker 1: out of UH seven eight seven seven out of eight
13:03
Speaker 1: months this year. In the past, this has been a
13:05
Speaker 1: precursor a signal of recession. Is that something the right
13:08
Speaker 1: ms you and others who want to high rates now
13:11
Speaker 1: need to pay closer attention to. We look at many,
13:14
Speaker 1: many different statistics on the labor market. In fact, one
13:16
Speaker 1: of the authors of that that index is actually here
13:20
Speaker 1: at the Cleveland Fed UM, Bruce falc And so we
13:22
Speaker 1: look at that, we look at a lot of other
13:24
Speaker 1: indicators of the labor markets UM, and I think most
13:27
Speaker 1: ecconists would agree that the labor markets are doing quite well.
13:30
Speaker 1: In fact, it's one of the strengths of the economy.
13:32
Speaker 1: That said, not everyone in the labor market is doing well,
13:36
Speaker 1: and there are long term issues with labor workforce development
13:41
Speaker 1: issues UM. I recently was in Hazard, Kentucky, part of
13:44
Speaker 1: my district in Appalachia, and you know, there are people
13:48
Speaker 1: hurting there because of the coal um industry. And you know,
13:51
Speaker 1: I saw a program that's actually making you know, taking
13:54
Speaker 1: you know, coal miners and they were in a course
13:57
Speaker 1: to learn how to be electrical alignment and and firebrock
13:59
Speaker 1: to line it. It's one small program, but I think,
14:02
Speaker 1: you know, one of the roles of the FED and
14:04
Speaker 1: one of the value adds we can do is study
14:06
Speaker 1: how to scale those programs up. We have a community
14:09
Speaker 1: development function here at the Cleveland FED that does first
14:13
Speaker 1: rate work UM and looking at some of these issues
14:15
Speaker 1: in terms of low and moderate income neighborhoods and what
14:20
Speaker 1: kinds of programs can help transition right from certain industries
14:24
Speaker 1: that are undiversified into more into the jobs that are
14:27
Speaker 1: going to be in demand in the future. So again,
14:29
Speaker 1: I think the FED can can help that conversation and
14:32
Speaker 1: by providing our objective research on which programs work, which
14:37
Speaker 1: programs don't work, which kinds of policies can the nation
14:41
Speaker 1: UM rely on to actually help these transitional economies. That's
14:46
Speaker 1: different than saying we should use monetary policy as a
14:48
Speaker 1: tool to affect those longer run issues. Zeroing in on
14:51
Speaker 1: the living recognitions index and the weakness we've seen that
14:55
Speaker 1: you don't take that as a sign that maybe this
14:57
Speaker 1: economy really doesn't need or is really not strong enough
14:59
Speaker 1: to stand another industrate hyke, I don't. I think if
15:02
Speaker 1: you look at across a number of statistics, the unemployment
15:04
Speaker 1: rate is down, The other indicators of labor market health
15:08
Speaker 1: have improved. UM, hiring rates are going up. You know,
15:12
Speaker 1: if you look at the unemployment rates across race and
15:14
Speaker 1: general gender, they've improved. They're not perfect, obviously, but again,
15:19
Speaker 1: some of those differences reflect longer run issues that monetary
15:23
Speaker 1: policy really isn't meant to address. So again, I think
15:26
Speaker 1: if you look at the the job creation rates UM,
15:31
Speaker 1: the number of jobs being created at a hundred and
15:33
Speaker 1: eighty thousand per month on average this year, that's well
15:36
Speaker 1: above the range um that most economists say would be
15:41
Speaker 1: the steady state or the sustainable rate, and so I
15:43
Speaker 1: think that's you know, to me, those are good numbers.
15:46
Speaker 1: More with Lotermester, she's president of the Federals or of
15:49
Speaker 1: Bank of Cleveland. Coming up here on taking Stock. This
15:53
Speaker 1: is Bloomberg. You're listening to taking Stock with Kathleen Hayes
15:58
Speaker 1: and Pim Fox on Bloomberg Radio, our very special show. Today,
16:03
Speaker 1: we're live at the Fed of Reserve Bank of Cleveland
16:05
Speaker 1: with Cleveland Fed President Loretta Mester. Loretta, I want to
16:09
Speaker 1: follow up on some of the things we've been discussing. Actually,
16:12
Speaker 1: I'm getting notes from listeners and others who are who
16:15
Speaker 1: are hanging on your every word. And one question, how
16:19
Speaker 1: deep right now is a split on the Federal Open
16:22
Speaker 1: Market Committee, the FEDS policy making body. Three dissenters the
16:27
Speaker 1: most people. I don't know if people realize in fact,
16:30
Speaker 1: you don't people like you don't dissent lightly, it's a
16:33
Speaker 1: big deal. Three people descended how deep is a split? Well,
16:37
Speaker 1: if you look at the vote count, yeah, you'll say
16:40
Speaker 1: three to centers. But I don't think we're that far apart.
16:42
Speaker 1: I think we all as as Cherry Ellen Senator press conference.
16:46
Speaker 1: You know, the case has strengthened. We said that in
16:48
Speaker 1: our statement after the meeting. It's just really a matter
16:51
Speaker 1: of where you see the risk and where you see
16:53
Speaker 1: the economy. I think one of the things that struck
16:56
Speaker 1: me over time is the resiliency the U S economy
16:59
Speaker 1: is shown into a number of bumps in the road
17:02
Speaker 1: on this road to of expansion. So if you just
17:05
Speaker 1: think over the past year. We started the year, we
17:07
Speaker 1: had that volatility UM in January and February and the
17:09
Speaker 1: financial markets we got over that. We had the readjustment
17:13
Speaker 1: to sort of fears about the growth rate in China
17:16
Speaker 1: being revised down. UM, economy made it through. UM. We
17:21
Speaker 1: had the Brexit vote UM again, lots of concern about that,
17:25
Speaker 1: and the economy made it through. So to my mind,
17:28
Speaker 1: you know, we've continued to make this progress UM and
17:31
Speaker 1: we focus on the monetary policy goals. To my mind,
17:35
Speaker 1: that means that it's a compelling case to take another step.
17:38
Speaker 1: So the FETE has been cautious up till now about
17:42
Speaker 1: how it's moved RACE. I think that strategy has really
17:44
Speaker 1: served us well. But in an economy where we're continuing
17:48
Speaker 1: to make progress on our goals, and we expect to
17:50
Speaker 1: make further progress on our goals. I think being prudence
17:53
Speaker 1: sometimes means moving the rate up, and that's kind of
17:56
Speaker 1: where I was, and other people had different views. Well,
17:58
Speaker 1: we're going to get a little better a view of
18:00
Speaker 1: this when we get the FOMC minutes, but that's not
18:02
Speaker 1: for uh, Well on the week and a half or so,
18:06
Speaker 1: the dynamic at the meeting where there were If we
18:09
Speaker 1: get those f and FMC minutes, are we going to
18:11
Speaker 1: see that there were a number of people, not just
18:13
Speaker 1: as centers, who were more in favor of moving in September?
18:19
Speaker 1: How did that? Can you give us a sense of
18:21
Speaker 1: of you just said that, No, maybe the split is
18:24
Speaker 1: in as deep as we might think. Is that because
18:26
Speaker 1: there's more people who were leading in that direction they
18:28
Speaker 1: just didn't dissent. The meetings always have every participant, whether
18:31
Speaker 1: a vote or not. You bring your view about the
18:35
Speaker 1: both the economy and policy to the table, so there's
18:38
Speaker 1: a rich discussion. I always come into the meetings very um,
18:42
Speaker 1: very much looking forward to the other view points I'm
18:44
Speaker 1: going to hear around the table. Of course, I come
18:47
Speaker 1: in with my idea of where I think things have
18:49
Speaker 1: been and where they're going. You know my forecast and
18:52
Speaker 1: then what I think of the appropriate policy is. But
18:54
Speaker 1: it's a very good discussion. We exchange views. I commend
18:58
Speaker 1: Janet Yalen, the chairman, for allowing that kind of give
19:01
Speaker 1: and take and for encouraging it. So my my fundamental
19:05
Speaker 1: is that when you know you bring a diversity of views,
19:07
Speaker 1: you actually get and have that discussion, you actually get
19:09
Speaker 1: better policy as an outcome. So how worried are you
19:13
Speaker 1: are you You're not so much in the financial bubbles camp,
19:16
Speaker 1: but are you a bit worried that investors are reaching
19:19
Speaker 1: for yield and they've gone into commercial real estate? Is
19:23
Speaker 1: Eric rosen Grand from the Boston emphasized junk bonds et cetera,
19:26
Speaker 1: and if people start exiting all at once, that that
19:29
Speaker 1: could deed stabilize the markets. And that is something that
19:32
Speaker 1: you're putting on the plate when you make that list
19:36
Speaker 1: of reasons why the Fed should move now and raise
19:38
Speaker 1: that rate. Okay, we certainly always have to look at
19:40
Speaker 1: all the risks that our policies in gender um. My
19:44
Speaker 1: case was based on the progress we've made on our
19:47
Speaker 1: dual mandated goals. UM, but you know it would we
19:50
Speaker 1: have to take into account that we've had interest rates
19:52
Speaker 1: at very very low levels um for a very long time,
19:56
Speaker 1: and so of course you're going to be looking for
19:59
Speaker 1: whether financial when balances are building up. I don't see them,
20:02
Speaker 1: um right now is building up you know, and and
20:05
Speaker 1: the reason to race rates, But it's certainly something that
20:08
Speaker 1: we're going to have to continue to monitor. We did
20:10
Speaker 1: see some froth in the commerce in the commercial real
20:13
Speaker 1: estate market, which is what Eric rosing Grin has pointed to.
20:16
Speaker 1: That seems to have settled down a bit now, but
20:18
Speaker 1: nonetheless we want to continue to monitor that this is
20:22
Speaker 1: a bit in the future. But again, inquiring minds want
20:25
Speaker 1: to know, um, when would be the appropriate time to
20:29
Speaker 1: start unwinding the balance sheet? Is there a level of
20:33
Speaker 1: fud funds rate you can point to, because after all,
20:36
Speaker 1: you're you're looking for a rate hike this year, so
20:39
Speaker 1: are a lot of other people to write rate hikes
20:41
Speaker 1: next year? How is the Fed calibrating this? As the
20:44
Speaker 1: majority seems to be more on board for this gradual moves, still,
20:47
Speaker 1: at some point you gotta look at the balance sheet,
20:50
Speaker 1: right So as the fetists said that, you know, we
20:52
Speaker 1: want to communicate our policy based on the funds rate path,
20:56
Speaker 1: and that's what we've been doing, um and then later
20:59
Speaker 1: on we can herman whether we want to stop reinvesting
21:01
Speaker 1: of the portfolio. So my view of of of the
21:05
Speaker 1: mechanism is that the portfolio you know, is an accommodated
21:09
Speaker 1: is a tool of accommodation. And so as we get
21:11
Speaker 1: you know, the economy continues to expand and we're bringing
21:14
Speaker 1: the funds rate up, then we could consider sort of
21:16
Speaker 1: stopping the reinvestments, whether a one percent level of the
21:20
Speaker 1: funds rate. I think different people would have different views
21:22
Speaker 1: about that, but the same issues about why the funds
21:25
Speaker 1: rate should come back up eventually will also mean that
21:28
Speaker 1: that that we can stop reinvesting in the in the
21:30
Speaker 1: portfolio can gradually, um, you know, get smaller in about
21:34
Speaker 1: fifteen seconds. That this means because it's another form of
21:37
Speaker 1: tightening when you stop reinvesting the proceeds. So you have
21:40
Speaker 1: to be doing it at a time and the economy
21:41
Speaker 1: is pretty strong, well you'd want to do it. Take
21:44
Speaker 1: into account that that's added downward pressure on long yields.
21:47
Speaker 1: So of course, right we'd we'd look at all our
21:50
Speaker 1: tools at that point, but again the main tool policy
21:53
Speaker 1: tool at this point is interest rates for term interest rates.
21:55
Speaker 1: All right, we're Amester, We're gonna keep going. She's president
21:59
Speaker 1: of the Federal Reserve Bank Cleveland, joining me today for
22:01
Speaker 1: an exclusive interview. I'm Kathleen Hayes on taking Stock, and
22:04
Speaker 1: this is Bloomberg. You're listening to taking Stock with Kathleen
22:11
Speaker 1: Hayes and Pim Fox on Bloomberg Radio. Very special edition
22:17
Speaker 1: of taking Stock today on Bloomberg Radio. I'm Kathleen Hayes
22:21
Speaker 1: along with Lorettamester. She's President of the Cleveland Fed. Loretta
22:25
Speaker 1: getting got a great response here on our conversation, so
22:29
Speaker 1: I want to thank you again for taking the time today.
22:31
Speaker 1: It's a pretty special to sit down for an hour
22:32
Speaker 1: the Fed Bank president. Thanks for coming. Well, I want
22:35
Speaker 1: to ask you about we got the IYSET Manufacturing Index. Okay,
22:39
Speaker 1: anything above fifty is signaling growth, anything below contraction in manufacturing.
22:43
Speaker 1: It climbed a fifty one point five in September. Uh,
22:46
Speaker 1: it was negative the month before. Lackluster. People aren't very
22:51
Speaker 1: excited about what they're seeing. So that's one part of
22:53
Speaker 1: the equation that I said. Manufacturing closely watched. I know
22:56
Speaker 1: folks the Fed watch it and it's not just UH,
22:59
Speaker 1: the I s M Manufacturing index, the I s M
23:02
Speaker 1: Services index is at a seventy nine month low. Again,
23:07
Speaker 1: with these signs of an economy that's still struggling in
23:11
Speaker 1: a lot of ways. It's not strong. Is a rate
23:14
Speaker 1: hike now maybe just not the most prudent thing to do.
23:18
Speaker 1: So you're right. Growth has been struggling a bit, right.
23:21
Speaker 1: We had you know, one percent growth in the first
23:23
Speaker 1: half of the year. Our NIO casts suggests that we're
23:27
Speaker 1: going to see a pickup and growth in the second
23:28
Speaker 1: half of the year. UM. The consumer has been the
23:32
Speaker 1: strength side of the economy. It's been doing very well.
23:34
Speaker 1: Consumer spending is held up, consumer confidence is held out up, UM,
23:39
Speaker 1: household balance sheets of strength, and over time, UH, employment
23:43
Speaker 1: is part of that driver. Right. We've seen the income
23:46
Speaker 1: is rising UM and at other parts and at lower
23:49
Speaker 1: parts of the income distribution as well moving up, So
23:51
Speaker 1: that those are all very very positive things. Business investment,
23:55
Speaker 1: as you point out, and manufacturing has been hit UM
23:58
Speaker 1: has been weak, and so a certain extent we understand
24:01
Speaker 1: part of that, right. You know that the oil price
24:04
Speaker 1: shock UM really hurt the energy part of the economy
24:08
Speaker 1: and investment in the brig counts are down and and
24:11
Speaker 1: that was really a bigger shock UM that effected the
24:14
Speaker 1: Cleveland Fed district as well, because we have oil and
24:18
Speaker 1: um gas exploration going on in our region as well.
24:21
Speaker 1: But the other part is that it's broader than just
24:24
Speaker 1: energy and there you know, you've seen that low interest
24:27
Speaker 1: rates some firms instead of investing or buying back their stock. UM,
24:31
Speaker 1: the weakness has been a little bit more. They're just
24:34
Speaker 1: there does appear to be a sense of caution on
24:36
Speaker 1: the part of a lot of businesses, and so that's
24:37
Speaker 1: somewhat of a puzzle. UM. I do think that as
24:40
Speaker 1: the economy continues to expand, we'll see some increase in
24:43
Speaker 1: business investment. But you know, if that continues to be
24:47
Speaker 1: as low as it's been, in productivity growth as low
24:49
Speaker 1: as it's been, it could be that trend growth as
24:51
Speaker 1: lower than the troopers and I pay it at manufacturing
24:55
Speaker 1: very important in your region across the Midwest. Dollar rate hike,
25:03
Speaker 1: stronger dollar not good for manufacturing. How concerns are you
25:06
Speaker 1: about that? Right? So we certainly have, UM, some firms
25:09
Speaker 1: in our district who reported that the dollar really affecting them.
25:12
Speaker 1: They're the ones who have you know, or dependent on
25:15
Speaker 1: international sales, but the manufacturer in the district that are
25:18
Speaker 1: domestically focused, they've seen improvement over time. So again it's
25:22
Speaker 1: you know, you have to take into account the heterogeneity
25:24
Speaker 1: of the economy. So yes, manufacturing is week. We have
25:28
Speaker 1: signs that at least in our district economy, and I
25:31
Speaker 1: would say more generally in the nation that the ones
25:33
Speaker 1: that have been less tied to international which we're exports
25:36
Speaker 1: have been hurt, have seen some improved activity over time.
25:40
Speaker 1: What about markets and of course the exchange rate, but
25:43
Speaker 1: then there are stocks as well to consider if the
25:46
Speaker 1: FED starts back on the rate hiking path, while other
25:50
Speaker 1: central banks from the European Central Bank to the Bank
25:52
Speaker 1: of Japan are trying to find ways to stimulate their
25:56
Speaker 1: economies more, they've had negative rates for crying outlet. So
25:59
Speaker 1: we operate it in a global economy, of course, you know,
26:02
Speaker 1: we're we're interlinked in many ways. Trade is one channel,
26:05
Speaker 1: financial services is another. But again, right, we set our
26:08
Speaker 1: domestic policy here in the US to try to hit
26:11
Speaker 1: our goals of two percent inflation, price stability, and full employment.
26:16
Speaker 1: And again just looking at how the progress we've made
26:20
Speaker 1: and what we expect to continue to make on those goals.
26:22
Speaker 1: Taking a little step up on the path of graduating
26:24
Speaker 1: in interest rates seems appropriate. We're still going to be accommodative, right,
26:29
Speaker 1: So this is not an idea that we're gonna tighten quickly.
26:32
Speaker 1: And in fact, one of the reasons I think there's
26:34
Speaker 1: a compelling case to take that next step on the
26:36
Speaker 1: gradual path is so that we don't find our self
26:39
Speaker 1: in a situation where markets tighten enough labor, you know,
26:43
Speaker 1: labor markets tightened so much that prices become more price pressures,
26:47
Speaker 1: and then we'll have to move rights up more steeply
26:49
Speaker 1: in the future. So again, this is really negotiating a
26:52
Speaker 1: gradual return back um to our goals. And of course
26:57
Speaker 1: it's it's not just the dollar right now. Earlier in
27:00
Speaker 1: the year, when the FED was all primed for for
27:02
Speaker 1: interest rate increases, one of the things that happened, of course,
27:06
Speaker 1: first it was the volatility in in Yuan China that hit.
27:10
Speaker 1: Then of course the bregsit vote in Midsummer. Well, now
27:12
Speaker 1: we've got big dark clouds on hanging over some big
27:14
Speaker 1: European banks, and it's not just Deutsche Bank in Germany.
27:17
Speaker 1: People look at Italian banks as well. If the FED
27:20
Speaker 1: starts hiking rates in the middle of that, don't they
27:23
Speaker 1: or do you risk exacerbating this term oil. I don't
27:26
Speaker 1: think that the FED moving the funds right up by
27:28
Speaker 1: twenty five basis point is going to affect the conditions
27:31
Speaker 1: and Italian banks and German banks. UM. One thing about
27:35
Speaker 1: the US is that our banking system is much better
27:38
Speaker 1: capitalized than it was during the crisis, so we're relatively
27:42
Speaker 1: um good. But we can't ignore the fact that there
27:45
Speaker 1: are problems in some other countries in terms of their
27:48
Speaker 1: banking system, and that is a risk. But again we
27:51
Speaker 1: take prudent, you know, account of that. We're certainly monitoring
27:54
Speaker 1: the situation UM and that's part of this monitoring in
27:58
Speaker 1: between f MC meetings that we did precisely to make
28:01
Speaker 1: sure that we understand the mechanisms and how it could
28:04
Speaker 1: affect US markets. Little finer point on this, UH, we
28:08
Speaker 1: have seen lately that some of the European and Japanese
28:12
Speaker 1: banks are having a little bit harder time getting dollar
28:15
Speaker 1: funding because the various challenges they're facing. Could a rate
28:19
Speaker 1: hike exacerbate that problem? Again, the level of interest rates
28:23
Speaker 1: we're talking about, UM, I don't see that that's going
28:26
Speaker 1: to be a major problem for us or for them either.
28:30
Speaker 1: Another kind of question, oil, Okay, we've got a deal
28:33
Speaker 1: that maybe we've got we've got a deal to talk
28:34
Speaker 1: about a deal in Opeq. If they're successful this time, UH,
28:39
Speaker 1: led by the saudiast to get a cut in production,
28:42
Speaker 1: presumably oil prices will move higher. Does this represent a
28:47
Speaker 1: significant factor for inflation? Uh? Does it increase your concern
28:53
Speaker 1: about about inflation and the FED not moving fast enough?
28:57
Speaker 1: But first of all, guess what do you what do
28:58
Speaker 1: you think of the deal? How are you say? Okay? So,
29:00
Speaker 1: one of the things that should remember is the reason
29:02
Speaker 1: that inflation has been low is because of the sharp
29:06
Speaker 1: decline in oil prices since mid to the beginning of
29:09
Speaker 1: this year. As those the effect of that lower oil
29:12
Speaker 1: prices work through, we've seen inflation move gradually back up,
29:16
Speaker 1: and the oil prices have been relatively stable. Now we've
29:19
Speaker 1: seen more stability and inflation moving back up towards our
29:22
Speaker 1: target over gradually over time. Obviously, one of we're going
29:25
Speaker 1: to be monitoring what's going to happen to the oil price,
29:28
Speaker 1: but at the moment, there's no reason to think that
29:30
Speaker 1: things are going to be so different that we are
29:33
Speaker 1: out medium run outlook will change necessarily and so, but
29:36
Speaker 1: it is certainly one of the factors that we're going
29:38
Speaker 1: to take into account when we're assessing conditions going forward.
29:41
Speaker 1: If oil prices moved significantly higher, again, is it more
29:45
Speaker 1: of a yippie we got inflation moving up or is it,
29:47
Speaker 1: oh my gosh, now people face higher oil prices and
29:49
Speaker 1: it's a it's a tough thing for consumers and not
29:51
Speaker 1: so great for the economy. Well, that's the balancing act
29:54
Speaker 1: that we do. Right. It's going to have those both
29:56
Speaker 1: of those effects, and the question is how much will
29:58
Speaker 1: it have an impact on inflation, how much on the economy,
30:01
Speaker 1: And the timing also matters, right, So oil prices can
30:04
Speaker 1: affect inflation um relatively soon in terms of the headline numbers, right,
30:09
Speaker 1: And it will also have an impact, you know, more
30:13
Speaker 1: drawn out on the real side of the economy. But
30:15
Speaker 1: that's the kind of balance than we do as we
30:18
Speaker 1: weigh our dual mandate goals. Diversity. People talk a lot
30:22
Speaker 1: about that at the FED, and Janet Yell and our
30:24
Speaker 1: FED chairs made it pretty clear that the FED is
30:25
Speaker 1: really pushing in that direction. You're a woman, You're a
30:28
Speaker 1: one who has Risen at the top of the academic
30:31
Speaker 1: economic sphere of the FED. What what do you what
30:35
Speaker 1: would you have to say about women economics, women at
30:37
Speaker 1: the Federal Reserve, women in this sphere of the economy
30:40
Speaker 1: and endeavor. I think everyone should become an economist. I'm
30:45
Speaker 1: just pro economists, So no matter what you know, part
30:48
Speaker 1: of the part of the spectrum you're in, I think
30:50
Speaker 1: becoming an economist is a great thing, and I would
30:52
Speaker 1: encourage everybody to do that. Now, seriously, the FED does
30:55
Speaker 1: take diversity very um seriously. I think we've made some progress,
31:00
Speaker 1: but there's certainly more progress we can do over time.
31:03
Speaker 1: I think that's true of the economics profession as a whole,
31:06
Speaker 1: and I think that's one of the challenges we face
31:08
Speaker 1: in terms of our own diversity within the Federal Reserve system.
31:11
Speaker 1: But you know, we're a institution that really values diversity
31:16
Speaker 1: of views, and diversity of views is informed by your experience,
31:21
Speaker 1: and so having a diverse workforce, having diversity on our
31:25
Speaker 1: boards of directors, having diversity and our leadership is very
31:28
Speaker 1: important because ultimately it results in better policy. At ten seconds,
31:32
Speaker 1: would you encourage young women to look at economics it's
31:35
Speaker 1: all more open to women now that it used to
31:36
Speaker 1: be when we were doing it, and Beget definitely encouraged.
31:39
Speaker 1: And I think it's a fascinating field, um, and I
31:42
Speaker 1: think we need as many good minds, you know, working
31:44
Speaker 1: on these topics as we can get. Laurettamester a great
31:47
Speaker 1: mind working on this topic. Thank you so very much
31:49
Speaker 1: for joining me. Thank you for having and coming to Cleveland.
31:52
Speaker 1: The Reddamester, President, Federal Reserve Bank of Cleveland, joining us
31:56
Speaker 1: today for an in depth conversation about monarch write policy
32:00
Speaker 1: and the economy.