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; What is sort of technically your last 24 hours as a Fed governor? Your term is up tomorrow, but you're staying on. Thanks for having me back. It's good to see you again. Look, as you say, my term expires over the weekend, uh, but per the Federal Reserve Act, I'll be staying in my seat until someone is confirmed, uh, to replace me, presumably Chairman Designate, uh, Kevin Warsh.
Uh, this is common practice and has happened many times by other governors who who have waited for someone else to be confirmed into their seat. Now, the question is how long is that going to take? Have you had any indication from the White House or from anybody on Capitol Hill? We know that Senator Tillis is threatening to block a nomination, but that could easily be handled.
That could go away anytime. Uh, do you have any idea how long you're going to be uh, still at the Fed? I have no idea. I mean, I wish I knew. Uh, you know, it my confirmation process took what, 6 weeks or so, a little bit more a little bit more than that. Uh, so, you know, I I I have no idea how long it will take, uh, for Chairman Designate Warsh, but you know, I'm confident that the, you know, that the process will will will work and uh, the Senate will come together.
All right, so you get to March 18th. That's the the next FOMC meeting. You still going to dissent for lower rates? And uh, I ask because this time you only dissented for 25 basis points instead of 50. Yeah, so I dissented for 25 instead of 50 for a couple reasons. Um, one of them is that we did cut, uh, since I joined the FOMC in September.
We cut three times, you know, we reduced the federal funds rate by 75 basis points. That means we're less far from neutral than we were when I arrived in September. Now, I still think rates are too restrictive, as I've made very clear. I still think we need to cut interest rates substantially further from here.
However, given that we've moved we've made some progress reducing rates, we can now sort of, I think, in my view, proceed at a at a slower pace of about of a quarter point per meeting. It's no longer as imperative to move in to move in 50 clips as it was. The other thing that happened is the labor market data did come in a little bit better.
And they didn't come in to an extent that they alleviated at all my concerns about the labor market. You know, far from it. Indeed, the labor market has been on this gradual cooling trend for over 2 years now. And it take it should take much more than just one data print to make you change your mind about the trend of the labor market.
But nevertheless, we did get a little bit of better data and that helped alleviate, you know, some some concerns for you, but not all of them. You know, I still have some concerns there. Well, we got a 4.4% unemployment rate last month and next Friday we're expecting to get the same thing. So that's 2 months at least of evidence that the labor market is somewhat stabilized, which is what the Fed was saying in its statement this last time.
And yet J. Powell said given the numbers that you've got to work with, it looks like PCE inflation on the core is going to go to 3% or more. The optics don't look good for cutting rates when inflation is going up and the labor market is stabilized. So I disagree with a couple things you said. First of all, the unemployment rate, even though it's the single most important indicator, is far from the total of information that we know about the labor market.
There's plenty of evidence in the There's plenty of evidence in the labor market data that indicates that we can accommodate additional demand for labor. There have been signs like it taking longer for some folks to find jobs, pockets of weakness among, you know, younger folks and folks and folks without college degrees.
That all indicates that there, you know, increased part-time work for economic reasons. All this indicates that there's additional slack in the labor market beyond what's indicated in the unemployment rate alone. If you look at the employment to population ratio for younger folks, it's been trending downwards for a long period of time and it has shown and it has shown less stabilization than the overall unemployment rate is.
And this is the type of thing that is concerning for me. So I disagree with the assessment that there's labor market that there's enough labor market stabilization that we can drop our concerns about the labor market. I still have some concerns. Now, I'm not as concerned as some as as some others, but those concerns still do exist for me.
And on inflation, I think, you know, I've been making this argument that almost all of the inflation over edge over our target is due to quirks of how we measure inflation. It's due to two things. It's due to the portfolio management services which pick up just the stock market prices. So, AI pushes stock prices higher.
That mechanically feeds through into portfolio management services which contributed 36 basis points to core year-on-year. A normal year is six basis points, right? So, there's over a quarter of a point of core inflation excess that's basically just the stock market moving higher. And all of the professional investors in the audience know there's been decades of feed deflation in that industry, not inflation.
So, there's a there's an error in how this thing is measured and interpreted. The other thing is housing. The way the housing inflation is measured, it's picking up the housing market rents of 2022 and 2023, not 2026 or 2027. We shouldn't be making policy based on what happened in 2022. We should be making policy based on what's happening in the next 12 months.
So, once you correct for these two errors, the the backward looking nature of shelter and the the the messed up portfolio management fees, you look at market-based core ex-housing instead of looking at regular core, inflation's running 2.2%. That's within noise of our target. We don't have an inflation excess uh of of any inflation that's relevant for supply-demand imbalances of the type monetary policy would respond to.
We should not be making monetary policy we should not be asking people to give up their jobs because of quirks of how inflation is measured. That just to me is not a good idea for policy. It's a bit of it's a grotesque interpretation of stable prices. Uh I am curious uh Steve just about how we start to measure things going forward.
And I just want to go back to the labor market for a second cuz there's been a lot of discussion about the stability or maybe the potential instability there. I spoke this morning with the CEO of American Express and he actually talked a lot about small businesses, the kind of middle market businesses, if you will, that at least in his view weren't as healthy as some of the larger businesses.
And I'm curious if there's been any meaningful discussion at the Fed about that kind of middle market of our economy. You know, excuse [clears throat] me, there is there is there is conversations about that. You know, people talk a lot about K-shaped you know, sort of K-shaped economies and things like that.
And I think usually they're talking about households when they talk about that, but there certainly is an element of that on the firm side as well. You know, from my perspective, some of that stuff is helpful for understanding where the economy is going, but I don't believe in targeting a specific sector of the economy.
I believe that you know, the the statutes that Congress gave us instruct us to target the the overall macroeconomy as a whole and I'm focused on aggregate employment and I'm focused in on aggregate inflation. And so I do see, you know, there is there definitely are pockets of weakness here and there, but I'm focused on on the overall levels.
But there was some discussion a few years back with J. Powell when he did start to look at certain segments. The idea that when you look at the economy in aggregate, aggregate, sometimes it obscures uh you know, certain things whether it's to the upside or the downside. Is there not any value in maybe trying I guess bisect or dissect things into different sections?
Oh no, there absolutely is because it can help you it can help you predict where the overall is going to go, right? And I did that a moment ago with the with the labor market. When you as I was saying, if you look at if you look at younger folks, if you look at folks that have college degrees, if you look at folks that are marginally attached to labor market, I think that they're often they're leading indicators of where the overall labor market is going to go.
And they portray additional slack beyond what just the unemployment rate itself would give you. And I think you know, to the extent you're seeing weakness in some smaller business some small business segments like like the the Amex CEO that you mentioned before, that is the type of thing that I would be interested in in in knowing more about of in terms of what it what it portends for the overall economy.
Stephen Myron, I want to talk about Kevin Warsh. Of course, that's the big news of this morning. President Trump posting on Truth Social that he will nominate Kevin Warsh as the next Fed or as the next chair of the Federal Reserve. This has been the horse race that has been captivating Wall Street. I want to bring you this note from Neil Dutta over at Renaissance Macro.
He writes that if you get a few cuts now to appease the president, you may well get tougher hikes later. Moreover, because Warsh has been a policy hawk his entire life, his new found dovishness looks very suspect. Now, that's maybe a little bit more blunt than I would have phrased it, but there's a lot of people on Wall Street on the sell side who share that view and I'm curious how confident you are that, you know, as a Fed chair, Warsh will be the dove that it seems that President Trump wants.
Look, I think Neel is fantastic. I'm I'm a huge I'm a huge Neel fan. Um but I think that Chairman Designate Warsh has a long and illustrious career and history as a very insightful thinker on monetary policy. I think he's a fantastic pick for the from the president. I think he's got enormous credibility.
I think he's got enormous gravitas. I think he's got enormous enormous respect from financial markets, from economists, from everyone. I think he's going to he's going to do just a knockout job. What specific policies he supports or he's going to support going forward, uh you know, I can't answer to that.
I'm not him. You got to ask him those questions. Mhm. Well, I would love to. So, fingers crossed there. But as a Fed governor, I mean, as you know well, the job of the Fed chair is not just their opinions on where policy should go, but it's building consensus, you know, in the room itself. And so, with the current makeup of the FOMC, I mean, you think about some of the views on interest rates, on the balance sheet, do you think that Warsh will be able to basically build that consensus with that makeup?
I do. I I do. And the reason is that he's been there before. He knows how the place operates. He knows a lot of the a lot of the key figures involved. And he's got the respect and the credibility that you need to do that. And I think that people want people want him to succeed. I think people want the Fed to sort of have a a good role in the economy, a good role in the in the country.
And I think that they'll want him to succeed. And I think that he will be able to marshal the arguments and the evidence that he needs to persuade people of his of his policy views. Let's talk about your experience. You came to the Fed, from the White House, and I'm sure you know, people said he was just put there to do what Donald Trump told him to do.
Uh, did Donald Trump tell you to do anything in particular, and do you think he told Kevin Warsh that? And even if he didn't, how do you How did you and how would Kevin fight the perception that he's the president's man inside the Fed? Look, the president has never ever asked me to do anything on monetary policy.
He has never asked me to do any specific action on monetary policy. He's told me his views on monetary policy, but he tells the whole world his views on monetary policy. You know them as well as I do, right? That's not a secret. He's never asked me to do anything, and I wasn't in the room with any of, you know, Chairman Designate Warsh's conversations with the president or anybody else involved in this selection process.
So, I don't know what those conversations were like, but if they were anything like the conversations I had with the president about monetary policy, then he wouldn't have asked him to take any specific actions. Well, how do you How do you get the public to realize that? Uh, you do that by taking policy actions that are consistent with the data.
And I think that, you know, I've laid out a case where the inflation measures that are consistent with supply and demand imbalances in the economy, the inflation measures that are relevant for monetary policy, are indicating that there's no material overheating, that there's no material inflation issues in this country right now.
Um, so by taking policy steps that are consistent with the economic data, that are justified by the state of the economy, I think you're delivering the right policy. At the end of the day, the financial markets and the economy respond to whether the policy is the appropriate policy or not, right? They don't respond to why the why the policy is there.
Right? The interest rate doesn't really care why, you know, the the long end of the yield curve ultimately doesn't really care why the why the short rate is what where the short rate is. It cares whether the short rate is appropriately set and what the consequences of the short rate are for the economy.
The motives of the people who went into sort of setting the short rate, yeah, those aren't really important. Is it Is it the right policy for the economy or not is what matters. And I think that that's what I've That's what I've labored to labored to work for is to sort of is to do a lot of a lot of analysis of the inflation scenario, a lot of analysis of the labor market, a lot of analysis of the economy, and put that all out there.
And I put all of my analysis out there all the time. I try and be as transparent as I possibly can with my calculations. Everybody knows exactly why I hold the views I hold. I see. I'm curious once you move on back to your original role over at the National Economic Council. How is fiscal policy, meaning fiscal policy dictated from the White House and obviously through Congress itself, is that going to be in sync, do you think, with what at least what you know now with regards to the Fed's thinking and Kevin Warsh's thinking?
Is that going to be in sync? Well, first let me say that I honestly have no idea what I'm going to be doing, you know, after after Chairman Dudley and Warsh is confirmed. I have no idea. You're not going back to the White House? Oh, I have no idea. I have no idea. You know, it's it's possible. want to go back?
Well, you know, I think I'm going to be doing a lot of thinking over over coming weeks about about, you know, about what'll happen and what things will look like, but I don't know. You know, we'll we'll see we'll see we'll see how things shake out. But, you know, with respect to fiscal policy, you know, as a member of the Fed board, it's it's just it's not really appropriate for me to comment on it one way or another.
And you'd have to talk to folks, you know, in the White House and in Treasury. And I'm I'm sure they've got plenty of views on appropriate fiscal policy that they'd be very happy to give you. Do you want to come work here? You'd make a great co-host. Well, they No, I mean no offense to Mike. He's great, too, but, you know.
I mean, there are some pretty great snacks upstairs, so, you know, it's it's it's it's not unappealing. Yeah, we have a lot of good snacks on the desk right now, actually. But, we should talk about the balance sheet because one of the differentiating factors of Kevin Warsh is also his views on the balance sheet.
We know that he's skeptical about expanding it to the extent that the Central Bank has, very skeptical about QE as well. And the point has been made to me today on Bloomberg Television, you know, if the Fed is going to step away from a stance where it's using the balance sheet to influence the shape of the curve that you could see long-end rates go higher.
That obviously wouldn't be good news for mortgage rates, which I know that President Trump is very focused on. And I wonder, you know, whether those views hold any water with you. Uh about about whether to do something with the balance sheet? Yeah, whether or not, you know, stepping away from expanding the balance sheet will translate into higher long-end rates.
So, you know, my my perspective is that it is a good idea to shrink the balance sheet. Um I've said this numerous times. Um but I also think that in order to shrink the balance sheet, uh we need to do some regulatory reform because there are regulatory uh requirements that create demand for reserves in the banks.
We we we require the banks to hold reserves because of the various requirements under the Basel system, right? So, once we do some regulatory reform, then I think we can get back to shrinking the balance sheet. Uh it is something that I I would like I would like to do. Um whether that has an effect on long rates, I think depends on a lot of stuff.
It depends on how you're shrinking the balance sheet, whether you're doing a roll-off, or whether you're or whether you're selling securities. I think doing roll-off is passive and is is less likely to have a substantial effect on long rates. But I think at the end of the day, you know, what really matters is the overall stance of policy as as combined short rates and balance sheet policy.
And if you're at the zero lower bound, then the short rate can't do anything, and then it's the balance sheet policy that's really setting the tone for for the bond market, right? But if the you're not at the zero lower bound, then in theory, you can be moving the short rate around to offset whatever you're doing on the balance sheet.
And so, what you're doing when you set policy is you're targeting a particular level of financial conditions that let you hit your monetary policy targets, stable prices and maximum employment. And if for some reason financial conditions were to deviate from what allowed you to hit stable prices and maximum employment, you can change the short rate to offset that and thereby get back to stable prices and maximum employment.
So, if you want to shrink the balance sheet because you have a principle that uh that you want the Fed to have a you know, a minimal footprint in the economy, for example, right? Then, if that were to cause an increase in long rates, you can offset that tightening of financial conditions by reducing the short rate.
So, as long as you're not the zero lower bounds, you have multiple tools uh to to to affect this this situation. One last question. Uh we know now who the next chair of the Fed is likely to be, but we don't know what's going to happen to the current chair of the Fed. Would it be uncomfortable for the committee?
Would it be difficult to have J. Powell stay and be in the room when Kevin Warsh is trying to lead people perhaps in a different direction? Uh look, you know, I think that I think that Chairman Powell uh you know, deserves a thank you from all Americans. I think his work during the during the pandemic recession uh you know, was part of a a critical effort that really helped save the country from a second Great Depression.
And and everyone uh everyone owes him a thank you for that. Um however, I really can't tell you what he's going to decide to do. Uh you know, and uh you got to get it you know, you got to get it from the source. Uh you know, I don't I don't know.
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