์ ์: ChristopherWaller ยท ์ธ๊ตญ์ธ
์์ฝ ๋ณด๊ธฐ
Waller๋ ์ค๋ฌผ๊ฒฝ์ ๊ฐ ๊ฒฌ์กฐํ๊ณ (์๋ฐ๊ธฐ ์ค์งGDP 1.8%, 2026 ์ฑ์ฅ 2%๋ ์ ๋ง) ๊ณ ์ฉ๋ ์์ ์ ์ด๋ผ๊ณ ํ๊ฐ. ๊ทผ์ 3๊ฐ์ PCE๋ 4.76%(2์)โ3.05%(7์)๋ก ๋ํ ์ค์ด๋ 2% ๋ชฉํ์ ๋ฏธ๋ฌ. ๊ด์ธ ํจ๊ณผ๋ ๋๋ถ๋ถ ์์ง, ์๋์ง ์ถฉ๊ฒฉ์ ์ฌ๋ฃ ์ ์ด๋ ์์๋ค๊ณ ๋ด. 8์ CPI/PPI๊ฐ ๋ํ๋ฅผ ํ์ธํ๋ฉด ๊ธ๋ฆฌ ๋๊ฒฐ ์ ์ง, ๊ทผ์ ์ธํ๋ ๊ฐ ์ฌ๊ฐ์ํ๋ฉด 9์ 15~16์ผ FOMC ์ธ์ ๊ฐ๋ฅ์ฑ ์ธ๊ธ. ๊ณต์ ๊ธฐ์ค ๊ธฐ๋์ธํ๋ ์์น ๋ฆฌ์คํฌ ๊ฒฝ๊ณ.
๋ค๋ฌ์ ๊ธ
Hello everyone. I'm Howard Schneider. I write about the Federal Reserve and economics for Reuters based out of Washington. Thanks for joining this conversation with Federal Reserve Governor Chris Waller. Uh Chris joined the Fed in 2020 after being appointed to the board of governors by President Trump and has been one of been one of the Fed's uh prominent voices on monetary policy and the economic uh issues and debates that uh that drive those decisions.
He was research director at the St. Louis Fed for about 11 years before that and an economics professor at University of Notre Dame. Right. Before that, he was uh among a handful of people also interviewed by President Trump as a possible Fed chair. He and I will have a conversation and hope to cover a lot of ground.
But before that, Chris has some prepared remarks to kick off the discussion. Chris, over to you. All right. Well, thank you, Howard. To set the stage before we talk, let me give you a sense of my thinking as of today about the economic outlook and the implications for monetary policy. The short version is that while inflation remains meaningfully above the Federal Open Market Committee's 2% goal, recent data suggest we are finally seeing some signs of disinflation.
Now, if this continues in the data over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting. But there continues to be considerable uncertainty about how military conflicts, trade policy, and artificial intelligence will affect prices and economic activity.
If the incoming data for August show this movement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15th and 16th. Now, after a description of my outlook for the economy and monetary policy, I will offer some thoughts on how I communicate those views to the public.
So, let me start with the real side of the economy. Despite the uncertainties I mentioned, most of which weigh on economic growth or economic activity, growth in real gross domestic product or GDP is continuing at a solid pace. Real GDP grew at a one 1.8% 8% annual rate in the first half of this year.
Consumer spending growth was solid in the second quarter after a slow start to the year. While business investment has been strong throughout, overall real private domestic final purchases, the measure of spending that best reflects the underlying strength of consumer demand rose a strong 3% in the first half of 2026.
Now, we have only limited data for the third quarter of this year, including July retail sales, which were weak, but this decrease reflected the fact that Amazon's Prime Day promotion was held in June, dragging down seasonally adjusted sales in July. Outside of non-store sales, retail spending grew.
Given the rise in wealth from the increase in equity prices this year, I believe this should sustain consumption growth going forward. On the business side, data center plans point to continue rapid growth in business investment associated with the ongoing buildout of AI and related technological upgrades.
High-tech investment continues to rise at a rapid pace and software investment, which some feared could be depressed by AI's code coding ability, has grown near its long-term historical average. Now, some would argue that this investment in a narrow sector that tends to be capital intensive rather than labor intensive is misleadingly propping up GDP and should be in some sense discounted.
I don't agree. AI investment is a legitimate part of GDP today and I expect this technology to continue to be an important part of the economy after the buildout peaks and AI becomes as integrated into our lives as the internet has been. More broadly, one signal of continuing business spending growth was another increase in July in sentiment among purchasing managers for non-manufacturing firms to a level that I would also describe as solid.
New orders for these firms, which represent the majority of businesses in the economy, continued to grow in July, and the index of supply problems continued to improve. Today we will get the August non-manufacturing survey. So we will see if this trend continues. Combining the various bits of the pieces of the economy, I expect real GDP to grow a bit more than 2% this year.
A respectable outcome considering all of the uncertainties I have mentioned. Now turning to the labor market, it is also in satisfactory shape. While there were indications in the second half of 2025 of easing labor demand relative to supply, those signs have evaporated. Job creation, though a bit volatile, has increased this year by an average of 60,000 a month through July.
That is close to and probably a bit above estimates of what it takes to keep pace with the slow growth in the labor force, mostly because of much lower net immigration. Payroll gra g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g gains have broadened to most sectors of the economy in recent months and the unemployment rate has fallen a bit to 4.1% in July, a historically low rate and slightly below the median of FOMC participants long run equilibrium rate.
Layoffs and initial claims for unemployment sh in unemployment insurance are likewise lows. I expect more of the same tomorrow when we get the August employment report. With economic activity and the labor market in good shape, they are not a large factor in my determination of the appropriate setting of monetary policy.
But they are an important backdrop for the part of the outlook that is my focus right now, inflation and my judgment about how much the stance current stance of policy is working to return inflation to 2%. More about that in a moment. Now, inflation is elevated significantly above the FOMC's 2% goal and has exceeded that target for 5 and a half years.
In July, prices based on the personal consumption expenditures index or PCE inflation rose 0.2%. And core prices, excluding food and energy, increased 0.2%. While I was happy to see this monthly number for core inflation because it continued the pattern of lower monthly readings that we saw earlier in the year, what caught my eye in the last PCE report is that non-market services prices accounted for approximately half of the increase in core PC prices.
Now, as you are probably aware, I don't like throwing out specific categories going into the estimate of PC PCE inflation, but non-market services prices have always been an issue for me since they are imputed and are not actual price changes. So, ignoring this one factor, my take is that the underlying inflation is even doing better than last month's corn numbers suggest.
Now, PC year prices are up 3.7% in the past 12 months and corn PC inflation is 3.3%. While it is important to acknowledge these 12-month increases for the real world effect they have on businesses and consumers, they are not the best guide for where inflation is today. I say this because not with not notwithstanding uncertainty over the geopolitical factors that have raised prices, I don't see elevated energy prices and tariffs now as a significant source of ongoing inflation pressure.
The evidence is that the price effects of tariffs have largely passed through inflation and my earlier worry that higher energy prices would bleed into many goods and services prices so far hasn't come to pass. In the wake of these price shocks, to get a fix on the current trend for inflation, it is helpful to focus on more recent price increases, such as how inflation measured over the past three months has evolved over the year.
To deal with the ongoing volatility in energy prices, I will focus on core inflation, excluding food and energy, which is a usually a good guide for inflation going forward. Now, three-month core inflation is 3.05% through July, a level that is still not consistent with the FOMC's 2% goal. Never nevertheless, it is important to note the trend.
Three-month inflation has fallen steadily from 4.76% in February to the 3.05 today. That's a large change in the three-month inflation rate. That is a considerable improvement. And the speed of this downward trajectory is encouraging. One factor that I expect will lower reported inflation a bit is a pending change in the way the commerce department estimates the fees paid to stock market traders and related professional.
That change in this non-market price estimate which I expect to be made shortly could lower 12-month PC inflation by a few ten of a percentage point. Given my issues with non-market services pricing, I view this as a welcome measurement correction. Now, I do see some upside risk to inflation. Energy prices have moved up again and remain significantly higher than they were at the beginning of 2026, and the economy faces both pressure on technological goods prices related to the AI buildout and the possibility of more tariff increases.
But in contrast to the period of high inflation after the pandemic, wage growth once one accounts for productivity growth is broadly consistent with an expectation that inflation is continuing to come down to 2%. I am also attentive to the fact that public views about future inflation could rise after the long period of inflation above the FOMC's goal.
Fortunately, the Fed has a very good record of making good on its commitments, and we haven't seen a significant increase in long-term inflation expectations, but it must be acknowledged as a risk, one that the FOMC should be prepared to act on if longerterm expectations begin to rise and progress on inflation reverses.
So, this leads me to my outlook for monetary policy, which I previewed at the beginning of these remarks. As of today, the labor market is stable with employment near its maximum sustainable level and inflation is making slow but continued progress on reaching 2%. We will get another employment report tomorrow and another inflation reading before the next FOMC meeting.
I don't expect that the employment data will deviate much from what we have been seeing. So, my decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation. If there is continued progress towards our 2% goal, then I'm willing to hold willing to support holding the policy rate at its current level.
But if inflation comes in hot, I would consider a rate hike. I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy. If there is evidence that pro progress towards 2% inflation reversed in August, a small adjustment in our stands would help ensure that it resumes.
So by way of wrapping up, I want to speak about central bank communication which I consider an essential part of the monetary policy process. I distinguish between three types of communication that matter for monetary policy and how I personally try to communicate my views to the public. First, I try to communicate why I have taken my current policy position.
If I vote to hold rates steady, I explain how current economic conditions affected my policy decision. Now, I was comfortable supporting the FOMC's decision in late July to hold rates steady because the data at that time led me to view the real side of the economy as solid and we finally saw some hints that disinflation may be starting.
So I was willing to be patient and see if the disinflation would continue. The second way in which I communicate is to explain how future economic data will shape my future poly decisions. In short, I try to describe my reaction function. When thinking about future data, I communicate that if, get that word, if the data comes in in a particular way, then I will advocate for policy to be set in a particular way.
The key point here is that this is not a commitment to a policy action. It is a conditional policy statement. A different economic outcome would lead me to advocate for a different policy action. In my remarks today, I have outlined what it would take for me to support a continued pause, as well as what would cause me to support tighter policy.
By communicating my reaction function, consumers, businesses, and investors can better understand how I will vote on policy given the range of outcomes and then factor that into their planning for the future. Now, is that reaction function perfect? No. But my years as a professional economist and policy maker have given me substantial knowledge on how policy should respond to shocks.
In this sense, I view myself as a home plate umpire in baseball. The pitcher is trying to strike out the batter. The batter is trying to hit the ball or walk to get on base. Both want to play the ball, but they cannot do that until they know the umpire strike zone. The strike zone is the umpire's reaction function.
If the ball goes here, it's a strike. If the ball goes here, it's a ball. Now, the players don't expect the umpire to have a perfect strike zone. They just need a rough idea of its parameters and some guarantee that it won't change much on every pitch. Perfection is not needed for them to play well.
So, when it comes to my reaction function, I do not let perfection become the enemy of the good. The third and final type of communication is forward guidance which specifies a path for the f policy rate in the future that is essentially independent of incoming data. This type of communication is most warranted when the policy rate is at the effective lower bound and additional communication is needed to guide market expectations.
For example, in September of 2021, it was clear to me that we needed to raise the policy rate to deal with accelerating inflation. But as this would only happen after asset purchases had stopped, I supported forward guidance and strongly signal the end of those purchases, setting the stage for rate increases in 2022.
by communicating to markets that rate hikes were coming and coming soon. Market interest rates began to climb. By March of 2022, the two-year Treasury note had increased 200 basis points and we hadn't moved the policy rate off the effective lower bound. So, in this example, forward guidance helped tighten economic conditions long before we actually raised the policy rate.
But it is important to remember that those actions were taken when the policy rate was near zero. I agree with Chairman Wars that forward guidance isn't appropriate now or in many other situations, but when it is truly needed, I believe it should be used. And with that, I think I've rambled on enough.
So Howard, let's get to your questions, which I'm sure will be better informed than most of my answers. Uh, thanks a lot, Chris. We're going to relocate over here to the chair. So after you uh thanks again for that detailed and uh provocative as usual. Um let me start with uh uh this has put a lot of weight on CPI and I'm sure that the couchy bets on CPI now are just going uh up and down and all over the place.
Uh so let's explicate that a little bit if we could. uh the PC target the target for 2% inflation is set using personal consumption expenditures. Uh that runs different than CPI. So you got to translate CPI to PCE. Uh give us a little more detail on what you'd be looking for uh September 11th on this next CPI release to say yeah it's going to be bad or yeah it's continuing to get better.
Yeah. So we once you get the CPI and the producer price index like a day later you have a pretty accurate idea of what the PCE number is going to be. So that's why we kind of we can focus on those two numbers because they pretty much tell us what's going to happen. Now I've argued for well over a year now that tariffs were going to roll off their one-time price level effect and that we would see by this summer a rapid drop off in inflation.
The energy price shock from earlier year has created some uncertainty about that. But if you go back to like January 2025, PC core inflation was like 2.3%. But we weren't too far off. So if we get this roll off that I've been arguing and it's almost a full percentage point then we should start seeing some pretty low lower numbers.
Uh so I think that is what we should start seeing happening. As I said so far energy has not bled into other goods and prices. So I do think we my expectation is we will get a reasonable CPI PPI numbers uh in the next month. Right now, the people are going to accuse me of being data point dependent.
I think you were already started doing that. But what what I try to point out is if you're only going to look at trend, you're always going to miss a turning point. Turning points are not captured by the trend. That's the whole idea. So once you get to what you think is a turning point, you have to put more weight on the near-term data observations if you want to catch that turning point.
Oh, the speech I gave in July, that was what I was trying to argue that I thought we might be at a turning point on inflation. Either it could go up, but I thought it was going to start potentially turning down. Two numbers have come in, they look like that. I'm willing to sit and wait and be patient and see if a third one comes in.
But if it reverses, then, you know, it's time to pull the trigger and and hike rates. So, uh, CPI wise, will it matter core versus headline? Well, definitely definitely core because you know core headline tends to be a bit noisy for thinking about where future inflation is going. Doesn't mean we should ignore energy or food.
I never say that. But in terms of thinking where inflation is going, we try to take that on just the volatility of energy prices this year. That's a perfect example of why you should kind of look through headline and focus more on core. Okay. So, not to be too data point dependent, but what like give us a benchmark for for monthly three month CPI specifically in what level do you think would tilt you one way or the other?
Yeah. I I mean I'm just going to say if it comes in hot and I'll let you define what hot is. Okay. Uh then you it's like okay two is not enough. I mean this has happened to us in the past. We got some soft summer readings and then it kind of took off again. I got burned on that in 2024 for example. Um, so I don't really want to put a numerical estimate, but if we get things that start looking like they're bringing down this three n three-month number, it's the three-month number is 3.03.
Now, if you get that thing down to like 2.8, this is this is fine. Then you should start moving. Just keep holding where you're at. So let's talk about the PCE uh methodology change a second and also um the index kind of that chair wars gave us a Jackson hole last week that he was focused on what share of the PCE basket was increasing by more than 3%.
Right? So um a is that index a good index and b what's the risk of uh moving uh in September being guided by this CPI number when the thing you're actually targeting PCE may have a revision two weeks after that that pulls it down. Yeah, that's what I mean. We're all anticipating that the region is going to drop this down.
So if that plus what's actually happening the data, you might see a significant drop in NPC uh core. So if it's 210, it's 33, it'll drop to like 31. Then if you get some decent data, this thing goes under three on a annual basis and down on three month even lower. Right? So that's what I'm I'm willing to take the chance to see, you know, I'm going to paraphrase John Lennon here.
give disinflation a chance, okay? And let's we can wait one meeting. I just don't see why we have to do it. The mistake you run is if in fact we're at a turning point and in disinflation starting to happen like we've long thought it was going to or I certainly long thought it would, you're raising rates into a disinflation,
you're late at the I mean you're just or you're too far ahead of of you're you're depending too much on the past. So that's why I'm saying look what's the cost of waiting one meeting. Hiking 25 basis points one meeting right now is not going to bring the CPI down to 2%. Sure. So let's just we I think this is risk management.
You want to take a chance to see if infl disinflation continues but I'm not taking a big chance on it. Sure. So uh uh July when you were speaking to this it felt like your default was kind of leaning towards hiking near-term. It feels like your default's kind of shifting towards Yeah. Because that's what I mean.
Back in July, we had seen six months or so of just rising core PCE. Instead of coming down, it was rising. So there's where the trend was saying, uh, it's looking bad, so be prepared to go. But we got a soft report and that was when it was like, can we wait one meeting to see if it continues? And I felt yes, it was.
And that was validated. We got another reasonable software. Even like I said, if you take out non-market services, that thing was like 0.12, right? Okay, maybe let's see if we get another one, right? And and just to be clear for the audience, these non-market services, for example, portfolio fees to brokers and things which are a function of stock market prices.
They're not supply and demand in the economy. And it's quantities, too. It's just like saying, you know, if you buy more stocks, you're going to pay more, right? Their fees go their total fees go up. So you're mixing up price and quantity when you're looking at this. So that's why I you know I applaud uh you know the efforts to sort of correct for this thing.
In the past this wasn't a big deal but for some reason over the last year it's been I mean this this professional uh financial fees is like almost all of that increase in non-market services. So scratch your head if you're going to let one thing drive half the PCE and it's not even actual measure price.
Right. Maybe you want to just say let's kind of push that aside. And I I hate doing that, but this is one of those times I think it's worth at least keeping an eye on. Let me get to a couple other aspects of what you just said relevant to the inflation discussion. So uh growth of 2% plus uh is good for this economy.
It's above uh long-term trend, right? So I guess the question is I is this a non-inflationary type of growth or is this stretching the output gap to the point where you feel sort of you know underlying pressure in the economy is towards higher inflation because we're stretching our productive capacity.
Yeah. I mean if you are increasing your productive capacity potential output goes up. So and that is not inflation right I mean we've always this is not something new that the Fed has discovered. The Fed is and research staff have done this forever. So when you take output growth, you look at potential and then you say where are you relative to potential.
So if potential goes up and it's closer to actual, then the output gap or we say the excess demand is is not that bad. Not that bad. So you could see disinflation even with reasonably good growth. So you feel that the potential is rising at this point? I think it is. We've seen it for the last few years.
We've seen growth go up, productivity has gone up for lots of reasons besides AI. This started before AI. Mhm. AI is probably gonna down the road at some point do it. I think it's an amazing technology. I watch my wife vibe code all day long. It's just amazing what she can do with this. What's her best program so far?
What's that? What's her best program? I can't tell you. I don't want to I don't want to commercially advertise what my wife's doing. So, I'll get I'll probably get arrested. So, um but I just watch what she does with it and it's just really fascinating to me what she can do with the coding and stuff.
So, I do think it is. is I mean I heard a joke recently that a paraphrase of Robert Solsign. We see AI everywhere except in the bottom line affirms profits. Okay. Right. You know so at some point we think that'll show up but it hasn't shown up yet. So another aspect you mentioned that you don't think uh the current setting of monetary monetary policy a little bit restrictive but not all that much.
Uh uh you and the chair seem to be in alignment on this. This is what he said at Jackson Hole. Current policy doesn't seem to be restricting anything. So that's a lot of weight on an opinion that would seem to indicate well maybe you need to hike. Yeah. I mean I have I've I've said this before. There's a difference between financial conditions on Wall Street and financial conditions on Main Street.
Mortgage rates are not low, right? Auto loans are not rates are not low. How Main Street of America is staring at, you know, credit spreads and all this other bond corporate bond rates. They're looking at that. What does that do for me? I don't get it. So, I've made this argument in the past, you know, that what looks like loose financial conditions is really a reflection of stock market prices.
I look at macro data. That's what I care about. And if I see housing's in the tank, people new cars have gotten almost to be a luxury good instead of a normal thing that a middle class family could do, that's not loose financial conditions, you know, and most of the stocks are not owned by the lower half or lower three4s of the population.
They're all held heavily by the upper 25% of the income distribution. So given that kind of differential outcome across distribution across households, you're open to the possibility that the current level of policy might get us back to 2%. Yeah, good. I think so. At least let's take a chance and see.
I'm like I said, I'm not going to say let's wait till next year, but let's just wait and see if we get some improvement on this. Um, let me move if I could to I think that's pretty clear. Okay, good. I hope so. Anyway, um, bond markets, uh, rising yields and let me start like I know you all don't do fiscal policy, but just as a kind of like less informed to more informed, taxpayer to taxpayer, uh, what do you think about the US debt right now?
Because, and I want to give some context. Everybody in your shoes always says, you know, $40 trillion, 6% debt to GDP, uh, three trillion dollars a year being paid to interest right now. This is not sustainable. Unsustainable is a very strong word, but it's also kind of an empty one because it begs the question over what timeline, right?
So, are we at the cliff or not? And if not, where is it? you know, when when it comes to fiscal policy, I mean, you're running roughly 6% nominal deficits, half of which is interest. I don't know the exact numbers, so don't Yeah. But that means roughly you're running a 3% structural deficit. You can't do that persistently.
You just can't. So that's where it's not so much the interest share. You knock off the interest share. It's the structural part after interest. It's like you're just spending more than you're taking in fundamentally netting out interest payments. most the most of the math that you ever do that you can't do that for long term.
Now, does it mean you're going to walk off a cliff? Maybe not. What you might see is just like we're seeing yields just start going up that people are willing to saying, "Look, you need to pay me more to hold this debt. I'm not going to stop financing it. It's just you're going to pay me more." And that's what I've argued is probably going to start happening.
So yields are probably going up with the fiscal stuff, the AI competition for for funds. Remember when AI started the buildout, they were using their own internal funds. They weren't taking anything from anybody. Now they're out in the corporate bond markets competing with US Treasury. So that I believe is a factor pushing up uh yields.
And then the last thing nobody sort of focuses on, there's been some interesting research. US treasuries as a reserve currency and the safe liquid asset in the world earned a premium in terms of a higher price lower yield. There's been some interesting work by Hannah Lustig at the Stanford business school and some colleagues that that premium has disappeared,
right? It's negative now. It's that's why Yeah. So there that's another reason this shield and I gave a speech in Iceland a couple years ago on the neutral rate and that was my biggest worry about rising uh neutral rates was just this point where there's no more premium for safe liquid government us
and that has been leading me to raise my neutral rate estimate which means higher policy rates for any given rate of inflation. Maybe you're not as restrictive as you thought you were and things like that. Right. Right. Right. So um uh how You bring up math, so let's talk math a second. Uh, mathematically, how heavy a lift is it for the US to grow its way out of the debt?
Well, it's not that hard if you can get the structural deficits down closer to zero. I mean, this was best since tax idea, right? Like I said, all I ever say is a 3% structural deficit is not sustainable. How you fix it, I got no advice for you. Okay? It's not my job. That's Congress's job to figure out how to fix that.
I'm just wondering about sort of how the line the lines cross if you look just at growth. Yeah, I mean first of all it's nominal growth. Remember the debt to GDP ratio is debt to nominal GDP. And I you know the bad news of that argument is you do it through inflation, right? Which the US government did after the Second World War.
They inflated a massive amount of the debt away. That's not a good outcome. That doesn't make people better off. You want the real amount of GDP growths to come in. But, you know, that's what I'm saying. If if your deficit's growing at 6% and you have growth at even 3%, inflation at two, it that ratio is growing.
Still adds to it. It's still adding to it. It's just arithmetic. It's just arithmetic. There's nothing political. It's just math. I mean, it's just right. So, globally, let's talk about yields globally because there seems to be kind of um and and you alluded to a little bit of it, but let's tease it out a little bit.
You know, there there's kind of a a good news story, right? uh which seems to be the one that the Treasury Secretary and the chair are leaning towards that this is all a result of the fact that there are suddenly just a a a great number of investable ideas. There's true competition for capital going to productive uses and that means there's going to be competition for the for the money that's out there and the yield will will rise as a result.
Uh the bad news scenario is that demographic headwinds uh uh sort of fracturing of the global order and higher inflation as a result of that uh and then the fiscal deficits that are not just uh the US it's kind of everywhere in the developed world right now are all adding up. Uh and that's going to be a a difficult readjustment that has to come.
Now, so far it doesn't seem to be about a in Fed will lose control of inflation. Inflation has stayed stable, but where where do you land on this kind of Yeah, this is great because people are putting money to use versus life's just too expensive and we're digging a hole. Yeah. So, I mean truth, you know, in in any kind of not to geek out here, but any kind of standard economic growth model, the real interest rates driven by two key factor, three key factors.
One is population or labor force growth. Well, that's zero. That's going to bring down yields, right? Not push them up, right? If you do have good growth, then you would see higher yields because firms can afford to pay higher real rates. The products are their investments more uh profitable and they can afford to pay higher rates.
And that's the good growth measure for why real rates go up. The third factor is what I just said. There's a convenience yield on that debt and that's going away. Well, that's gonna raise rates. That's not a good story. That's a that's kind of a bad story if you lose your convenience shield. So, it is part of it, but you know, I'm not I'm not convinced that that's the whole story.
There's lots of other factors going on. Uh but and then there's just, you know, term premium risk. There's re if you look at the increase, it's all a real risk, term premium, right? So that means investors are saying I am a little uncertain about where the world is going. I'm a little uncertain about the reserve currency status of the dollar.
Maybe I need to hold have a premium paid to me. That's again that's not a good good luck. But the growth thing is certainly a part of it. Right. So part good news, part bad news. And the thing that's kind of controllable would be, you know, I guess the bad news side of it a little bit, right? To fix some of the structural problems.
Yeah. You fix some of that, you can go a long way. Right. So, let me ask you about um uh some of the recent um actions in the Treasury market. I think that the Treasury Secretary and the chair got an earful in Asheville at the G20 about sort of what's going on and the recent Treasury interventions uh yen and then also in the in the buybacks.
Were you surprised by any of this? You know, what the Treasury does is the Treasury's business. you know, um I've never believed as an economist, not a policy maker, that these kind of shortrun innovations do much. Um but you know, if you want to do them, that's that's Bess's that's his prerogative whether he wants to do it or not.
Sure. Any implications for the Fed. Well, if you think that these interventions did have a very shortlived life on long-term yields, then no, not nothing whatsoever. Right. If they want to adjust it and somehow it stands, then maybe there's some correction in the dead oceans that they fixed, that's fine, too.
I don't have any issue with that. So, let's get into um I mean, the chair mentioned this at Jackson Hole that he preferred getting unfiltered uh views of the market. And if you've got a treasury that's more active in that, arguably that's a that's a distortion uh in the market, right? So, this relates to uh and he mentioned this as well.
It gets to the communications question. kind of hall of mirrors problem, right? Are are you looking at a pure market signal and an undistorted price or are you in a situation while the the Fed's talking to markets, the markets are talking to the Fed and you're not really getting an undistorted view of the world.
So, uh, is that an issue right now? Are you in this sort of hall and mirror circular world? Well, I'll use I'll use an example to maybe set the stage, which is as many people know, I I'm a I lift weights. Yeah. And my wife is my lifting coach. Right. That's the app. Yeah. And the first thing she told me when I started lifting is don't look in the mirror.
And I was like, why not? She said because if you start looking in the mirror, you're more worried about what you look like than what you're doing. So don't look in the mirror. Focus on your technique and do the lift and don't worry about what it looks like. I'll tell you what it looks like. So it's kind of the same way with the hall of mirrors problem for communications.
Just don't look in the mirror. And if you notice in the speech, I didn't say hardly anything about financial conditions, right? I look at macro data. The macro data is not part of the hall of mirrors. So if you focus on your job and focus on the variables that you really do, you can look at the financial market as kind of an indicator of something's going.
But in the end of the day, it's our mandate is full, you know, price stability and full employment, not financial conditions. So that's how I've always avoided it is I just look at the macro data. And so just don't look in the mirror. So the former vice chair Rich Clar I think sort of had the same explanation a few years ago.
He wrote about this and he said it's not a problem because you can triangulate what you're getting from markets with survey data, econometric data, lots of lots of information to see if they're consistent or not. So uh in your speech today you very clearly laid out what you call your reaction function.
Um, uh, the chair at Jackson Hole said, "I'm not doing that." Because it can't be perfect. Uh, you use your baseball metaphor to, uh, to talk about how, well, it it doesn't need to be perfect. It just needs to be, you know, broadly parametric to kind of set the the broad confines, right? So, what's the optimal way to do this?
Yeah. Like I said, some of this is, you know, if you take any kind of standard market uh macro model you use for any forecasting, you've got to have a rule for how the Fed's going to respond or you can't solve the model. You can't make the forecast. So, I think every Wall Street forecasting shop has some
reaction function built in. And there's lots of different reaction functions you could use, but the key thing is you kind of want them to be consistent in terms of how they respond to things. Mhm. If inflation goes up, you're going to raise rates. If GDP growth goes up, look at inflation to see if you need to offset it.
If unemployment rate goes up a lot, you may have to lower rates. That's just economics 101. You're not you're not giving some weird advice. That's what I mean by a reaction. I just use economic theory to tell me what should I do as a central banker if unemployment goes up above long run maximum or if inflation starts going up or if inflation starts coming down.
Now the precise quantity sometimes is where the imperfection comes in. I'm not going to necessarily tell you what the right quantity is, but at least qualitatively I can give you a direction where things are going to go, right? Because I mean it occurred to me you're not just talking to financial markets, you're talking to the public as well setting public expectations.
So if we're all flying blind on that, it's probably less good than if we have some informed. Yeah, you want to have some, like I said, that's the whole thing with the strike zone. It's not perfect. It's not and and it varies from umpire to umpire. Right. Right. Right. But the players just say just tell me what it is.
I don't care if it's just so I know what it is and then I can go on. So is the chair, as you put it, is the chair at this point letting the perfect get in the way of the good. You think? Well, I I think that's kind of what his statement said. You know, it's like I'm not going to give one because we it's so complex and that we can't really do it.
Okay. I mean, that's fine, but I I just have a very different view of it. Right. So talk about communications u uh more broadly because there has been uh and I guess you could look at this from two perspectives you know more than Kevin Worsh more than the chair some people have said too much chatter too gets too confusing one person says one thing one person says another yet you go back to the 80s and 90s and there were really uh significant political battles in the US about Fed transparency and opacity there were uh bills brought there were efforts to open up the use of foyer all And the arc since then has been towards saying more not less
pretty consistently. Um so are we at a point where you think that drive towards uh transparency and more information rather than less has kind of you know reached a point of diminishing returns is it a problem? Again I've been look the academic literature in the 80s and 90s is where this all started.
Yeah. It's like why do you want to surprise people? What good does that do? I used for years when I taught my intermediate macro class, I use this example. If you were in the state transportation department and you were going to close down three lanes of a highway for construction, right? You can do two things on your communication.
You cannot say a word and let people just come piling into this construction zone and end up in a mess. Or you can start giving them signs way in advance saying, "Look, there's construction ahead. Look, alternative routes." Which of those two worlds do you want to live in? I think we all would prefer to get the information prior to make better decisions.
So that's my view about communicating and giving some I don't want to call it forward guidance but giving some idea of what's ahead so that you can make whatever important decisions you make. So, I mean, if we expect that from the state transportation department, I would think it's not too bad to expect that from a central bank,
right? I mean, do you think in this era when sort of suspicion is the default mood, it's a good idea to dial back behind the wall and say, "Listen, it's we're better off. Trust us if you just let us, you know, stay behind the curve." Well, that used to be the old model back and just we, you know, never explain, never apologize,
right? Ah, good luck going back to that world. It just doesn't work. and it's not a good model for thinking about economic welfare. So that's why I try to communicate as best I can so that people can try to make the best decisions they can. Surprising people has never been my objective in terms of thinking about things.
Now it doesn't mean you get surprised. Sometimes it's just unavoidable, but it's not my objective to try to say, "Look, whenever I do something, it's going to be a surprise." Um, let me close out. We're we're running out of time here near the end, but on the task forces, the the Fed uh chairman Worsh has announced five task forces, communications, balance sheet, AI and productivity, uh the inflation framework, and I'm forgetting the fifth one.
Yeah. Yeah. So, which of these sort of a lot of these issues have been talked about a lot? Data was the fifth one. A lot of these are pretty new. You know, AI and productivity that's kind of coming in the wheelhouse, coming in view for the first time. uh in a in a in an attractable way. Um which of these you think is h is likely to have the most lowhanging fruit in terms of an actionable recommendation from the various committees that the FOMC could take up and have people six months or a year from now saying, "Yeah, that's a better way to do things."
Yeah. I mean, the communication ones, I mean, we've been talking about communications in my 17 years at the Fed, and as you just point out, it goes all the way back to the 90s. I mean you make marginal improvements with it but we just had a whole framework review where we talked about communications and you know people just have very strong views about how to communicate and what's the right just take scenario analysis which chair Bernanki was pushing last year right
the push back from people was kind I kind of valued it but the push back was kind of pretty strong um so that one is just I'm not sure a whole lot is going to come out out of that that's new in that um the balance sheet one is going to be where I my own personal thing is that's where you're going to have the most differences of opinion on how to proceed uh if you want to shrink reserve demand but stay in ample reserves I'm fine with that but if you want to say we should go to scarce reserves I'm going to be against that like no tomorrow on the private data one great we use private data all the time uh what I worry about is if you start making decisions on private data the public doesn't have
then the public's going to pay certainly the market's going to pay way too much attention to your words thinking there's something in there that you know that I don't you also run the risk of they don't trust you if I can't verify what you're saying from the data then I'm going to have a trust problem that's that's not good
on the AA1 who knows I mean this is so this is still down the road and we're not making monetary policy for two years out necessarily now right epical yeah and the inflation one could be the one that's actually, to be honest, the most interesting. I mean, I don't know. I know the people on that committee, they have very different views.
So, I'm kind of curious what what they come out with, but if they have some new inflation model that's going to help me forecast better, give it to me. I am open arms to try to do it better. Right. Good. Well, with that, we will conclude. Thank you so much, uh, Chris, for being here and and thank you for, uh, watching and listening out there.
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