Fed Gov. Waller Talks Dissent, US Fiscal Policy

Summary

Bloomberg Talks: Fed Gov. Waller Talks Dissent, US Fiscal Policy – Episode Summary

Date: October 16, 2025
Host: Council on Foreign Relations Moderator, on Bloomberg Talks
Guest: Christopher Waller, Member of the Board of Governors, Federal Reserve

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Brief Overview

This episode features an in-depth conversation with Federal Reserve Governor Christopher Waller, focusing on central bank communication, dissent within the Fed, labor market complexities, the evolving nature of monetary policy, the real meaning of the neutral rate, fiscal policy pressures, and the long-term implications of technology and inequality on the American economy. The conversation, held at the Council on Foreign Relations, traverses Waller’s personal views and experiences, delves into the structural design and practical challenges of the Fed, and reflects on the nuance required in today’s rapidly changing economic environment.

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Key Discussion Points and Insights

1. The Fed’s Communication and Dissent

• Diversity of Viewpoints:
  • Waller rejects the idea that unanimity at the Fed indicates groupthink, emphasizing that public speeches and discussions reflect differing opinions.

    "All the public speaking, the speeches, are the way for us to show a diversity of opinions and thought about the direction of policy. ... It's actually signaling where people stand when you come to the meeting." – Christopher Waller [00:44]

• Value of Dissent:
  • Dissent is a part of healthy policy debate, not a sign of division or lack of confidence in leadership.

    "I personally think there's nothing wrong with dissents. ... That's the whole point is to say, look, I'm on this committee to have my own independent view and make these points." – Christopher Waller [02:14]

  • He references his own dissent at the July meeting as evidence of constructive disagreement.

2. Understanding Today's Labor Market Data

• Masking of Declining Demand:
  • Waller posits that declining labor supply (primarily due to reduced immigration) is "masking the weakness of labor demand," suggesting the underlying unemployment situation is more fragile than it appears.

    "All that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand." – Christopher Waller [03:51]

• Implications for Rate Setting:
  • If not for falling labor supply, rate cuts would likely be more aggressively on the table.

3. Rate Cuts, Neutral Rate (R), and Economic Division*

• What is Neutral?
  • Waller explains the neutral rate as the tipping point between stimulating and contracting the economy, currently seen as around 3%. The Fed's current policy rate is understood as still restrictive.
• Technological and Regional Divides:
  • With reference to "two Americas," Waller acknowledges differing impacts of monetary policy on high- versus low-income groups.

    "Upper income groups, everything's fine, wealth is booming ... Low income households, they can't pass [tariffs] through, they'll walk out the door. ... We have ... this dichotomy in the economy." – Christopher Waller [07:19]

4. The Fed’s Balance Sheet and Quantitative Policy

• End of Quantitative Tightening:
  • The Fed is nearing an "ample reserves" framework, suggesting that the era of rapid balance sheet contraction is winding down.

    "We're about at that point, we had an excessively large balance sheet due to quantitative easing. ... We've been on a quantitative tightening policy since May of 22. And we're basically back to where we think we should be just for ample [reserves]." – Christopher Waller [09:16]

• Reserves Manage Stability:
  • Sufficient liquidity is essential so banks aren't "scrambling around looking for nickels and dimes in the couch." [09:16]

5. Wealth Effect and Consumption

• Disproportionate Impact:
  • The "wealth effect" mostly benefits higher-income Americans, with a strong and persistent increase in wealth driving some of recent consumption growth.

    "For every $1 of wealth [increase] ... your consumption should go up by 2 to 3%." – Christopher Waller [10:49]

  • This effect requires wealth increases to be permanent, not just temporary.

6. Transparency and the 'Dots Plot'

• Questioning the SEP:
  • Waller questions the utility of the Fed’s "dot plot" (Summary of Economic Projections) and advocates for focusing on the nearer term rather than detailed long-run forecasts.

    "I personally have doubts about whether we should have the SEP at all. ... Just the best we can do is 6, 12, maybe 18 months out." – Christopher Waller [11:56], [12:47]

7. Political Pressures and Central Bank Independence

• On Administrative 'Bashing':
  • Waller reflects on his earlier academic work about White House pressure on the Fed, noting that criticism of the central bank "has been done forever," not unique to current administrations.

    "I just go to work and I try to do my job the best I can. ... You can always look at something and interpret it as political when it's not." – Christopher Waller [16:26]

8. Structural Changes in Global Trade and Agriculture

• Soybean Farmers and Trade:
  • Waller shares firsthand experience from his time at the St. Louis Fed, observing that once China shifted soybean purchases away from the US, trade did not recover even after tariffs subsided.

    "Just because a supply chain gets disrupted and then you reverse something, it doesn't necessarily mean it comes back. Once it's changed, it's changed." – Christopher Waller [18:29]

9. Fiscal Deficits and the Value of the Dollar

• Long-Term Unsustainability:
  • Waller avoids direct engagement but notes persistent large deficits are not sustainable. The policy rate is influenced over the long run by the interplay of the demand and supply for US Treasuries.

    "When you're running 6% deficits, 3% primary deficits, we know that that's just not sustainable in the long run. ... At some point, if that reverses and the supply starts exceeding demand ... yield's going to go up." – Christopher Waller [20:29]

10. AI, Technological Change, and Labor Markets

• Short vs. Long-Term Impact:
  • Waller notes that while AI may create short-term disruptions ("drop in level" of jobs), historical precedent shows employment eventually recovers—with new, unforeseen jobs emerging.

    "Usually there's ... a gap where ... jobs are slowly going away, new ones are coming on. This time, ... it's happening so fast that [old] jobs go away faster than we can figure out what the new jobs are." – Christopher Waller [22:24]

• Diffusion of Gains:
  • Technological gains have historically spread throughout the economy, not just consolidating at the top.

    "The history of technology is that they do diffuse." – Christopher Waller [24:28]

  • He points to examples from automotive to IT revolutions.

11. Inequality, Employment, and Policy Limits

• Inequality as a Policy Challenge:
  • Despite acknowledging growing inequality, Waller stresses the Fed has limited tools to specifically address wealth or income gaps.

    "I have one instrument. I can't deal with inequality. It's really not in my toolkit. ... I have to look at the aggregate." – Christopher Waller [27:53]

12. Competitiveness, Tariffs, and U.S. Manufacturing

• Reshoring Barriers:
  • Waller doubts that even very high tariffs alone can bring manufacturing back to the US, stating U.S. cost structures may not compete with global alternatives.

    "Even if it's 100% tariff, it's still cheaper to manufacture in Taiwan or Vietnam or Japan or Korea or China than in the U.S." – Chris Thomas [28:59, as relayed by Chris Thomas; see response from Waller same segment]

  • He underscores shifting U.S. labor preferences toward services.

13. Neutral Rate Process and Debate on the 2% Target

• Gradualism in Rate Setting:
  • Moving to neutrality is a process, not a one-time event, especially with inflation still above target.

    "It's really the process ... bring it back towards neutral. ... Doesn't mean you go below." – Christopher Waller [31:00]

• 2% Inflation Target:
  • Waller favors a precise target for accountability but acknowledges that a wider band may ultimately be more practical.

    "I like 2% because it holds me accountable. ... That's the danger with the 2%. It's so precise that if you don't hit it, you start saying you're failing." – Christopher Waller [34:24]

14. The Federal Reserve’s Structure and Regional Voices

• Benefits of Decentralization:
  • Waller praises the regional structure of the Fed as a check against East Coast-centric or political dominance, offering grassroots engagement and a diversity of viewpoints.

    "This is one of the brilliant aspects of the design of the Fed. ... You need some political accountability in D.C. but you want to have a lot of this outside of D.C. ... representing all the country in the decision making process, just not a few handful of elites." – Christopher Waller [36:08]

• Encouraging Dissent:
  • As Chairman, Waller would encourage more open dissent, seeing value in closer votes and richer debate.

    "I would encourage dissents. ... That was the idea of the structure, was you put 19 members so you get this diversity of views from around the country." – Christopher Waller [37:51]

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Notable Quotes (with Timestamps)

• On Diversity of Opinions:
  • "All the public speaking, the speeches, are the way for us to show a diversity of opinions and thought about the direction of policy." – Waller [00:44]
• On Dissent:
  • "I personally think there's nothing wrong with dissents. ... I'm on this committee to have my own independent view and make these points." – Waller [02:14]
• On Labor Market Masking:
  • "All that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand." – Waller [03:51]
• On Neutral Rate:
  • "For me, R Star is a policy rate ... the real R Star that I should be [looking at is] the return on safe liquid government debt." – Waller [07:19]
• On Wealth Effect:
  • "That's what we mean by the wealth effect ... for every dollar in wealth, that's what we mean by the wealth effect." – Waller [10:49]
• On SEP/Dot Plot:
  • "I personally have doubts about whether we should have the SEP at all. ... Best we can do is 6:12, maybe 18 months out." – Waller [11:56], [12:47]
• On Bashing & Central Bank Independence:
  • "This has been done forever. ... I just go to work and I try to do my job the best I can." – Waller [16:26]
• On Supply Chains:
  • "Once it's changed, it's changed. So yeah, soybean farmers are typically getting hammered." – Waller [18:29]
• On Fiscal Deficits:
  • "We know that that's just not sustainable in the long run. ... At some point, if ... supply starts exceeding demand, ... yield's going to go up." – Waller [20:29]
• On AI & Technology:
  • "It's happening so fast that jobs go away faster than we can figure out what the new jobs are. The new jobs will show up. ... It's just the timing may be a little more disruptive." – Waller [22:24]
• On Inequality:
  • "I have one instrument. I can't deal with inequality. It's really not in my toolkit. ... I have to look at the aggregate." – Waller [27:53]
• On Regional Fed Structure:
  • "You need some political accountability in D.C. but you want to have a lot of this outside of D.C. ... representing all the country." – Waller [36:08]
• On Dissent and Debate:
  • "I would encourage dissents. ... That was the idea of the structure, was you put 19 members so you get this diversity of views from around the country." – Waller [37:51]

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Timestamps of Important Segments

• [00:44] – Fed communication and groupthink vs. genuine debate
• [02:14] – Dissent at the Fed: historical context and personal example
• [03:51] – Is today's unemployment rate masking weaker underlying labor demand?
• [05:21] – The complexity of interpreting unemployment and labor supply
• [06:23] – Defining 'neutral' and implications for rate cuts
• [07:19] – The challenge of monetary policy in a divided economy; the meaning of R*
• [09:16] – Update on the Fed's balance sheet, reserves, and quantitative policy
• [10:49] – The 'wealth effect' explained and its modern impact
• [11:56] – Transparency debate: should the FOMC keep the dot plot?
• [14:45] – Political pressure, central bank independence, bashing, and ex ante/ex post policy
• [18:29] – Structural trade shifts: soybeans as a case study
• [20:29] – How fiscal deficits and the value of the dollar affect Fed thinking
• [22:24] – AI: risk, productivity, labor markets, and the unprecedented speed of technological change
• [24:28] – Do technological advancements ultimately spread their gains?
• [27:53] – Employment, inequality, and the limits of monetary policy tools
• [28:59] – Global competitiveness, tariffs, and U.S. manufacturing viability
• [31:00] – What 'moving to neutral' really means for policy
• [33:08] – Debate over the 2% inflation target versus a range
• [36:08] – How the Fed’s structure represents and benefits all of America
• [37:51] – Encouraging open dissent as a core mandate

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Conclusion

Governor Christopher Waller provides a nuanced, frank, and occasionally humorous look inside the workings and thinking of the Federal Reserve as it navigates a complex economic landscape. The conversation captures deep economic insights, the political realities facing central bankers, and the practical constraints of monetary policy. Waller’s focus on diversity of thought, transparency, and readiness to dissent point to a central bank committed to responsible adaptation in extraordinary times.

Transcript

[Christopher Waller]

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[Council on Foreign Relations Moderator]

News There seems to be an excess of communication right now. Everyone is talking at the Fed, within the administration. How do you interpret how? Everybody has to get out there and speak, speak, speak.

[Christopher Waller]

Well, one of the criticisms that's been leveled at the Fed for a long time is we engage in group think. Every policy Decision is a 12 nothing vote, there's no dissents. And that if you're all going to do exactly the same thing and think the same way, we don't need 19 of you, we need one. But what I always try to point out is it's through speeches and public speaking that everybody presents their views and you can go out and listen and they're not the same. So all the public speaking, the speeches, are the way for us to show a diversity of opinions and thought about the direction of policy. This is a good thing, it's not a bad thing. Despite people saying it's a cornucopia of noise, it's actually signaling where people stand when you come to the meeting. And I always try to stress this to people. We have to make a decision every six weeks. We do not get to kick the can down the road. And what that implies is that to get a reasonable, consistent opinion, we have to kind of compromise. You have to come to a decision. And that's why our votes are often 12 nothing, 11 to 1. It's because we all understand we have to come compromise somewhat on our positions to have a clear, consistent policy setting for markets and American people.

[Council on Foreign Relations Moderator]

Larry meyer, Washington University, St. Louis had a small book out of his time with Greenspan, a term at the Fed, and he was heated about the consensus vote, the need for consensus. Should we be more like the bank of England, which seems like a fistfight every six weeks?

[Christopher Waller]

Yeah, I'd like to avoid the fistfight every six weeks, but I, I mean, I personally think there's nothing wrong with dissents. It's a way to communicate differences in policy stances. You know, the whole complete consensus largely comes out of the Greenspan era, where it was like, if you have a 12 nothing vote, there's no doubt about what policy should be. Everybody agreed with the chair at that time, and that kind of tradition continued. But as the bank of England has shown there's no point of having 19 of us if we always do the same thing. So at that point, what's wrong with having a few dissent? I don't actually personally. I dissented at the July meeting. I don't personally think that shows anything about loss of faith in the chair or not the right policy. But that's the whole point is to say, look, I'm on this committee to have my own independent view and make these points. And that's what people are doing.

[Council on Foreign Relations Moderator]

We welcome all of you again, particularly Worldwide with Christopher Waller and to this audience. Ed, can I call on you first for the first question in a bit? I'll let you come up with it, but I think we need to hear from Ed Cox.

[Christopher Waller]

Giving you a little time to think of it.

[Council on Foreign Relations Moderator]

He's got a little time to think about it and, you know, maybe I don't want to get in the way of his good first question. I'm going to ask some questions about the speech. I got to keep the assembled press happy or they won't show up again at Council on Foreign Relations. But I want to come out of this with a little bit more knowledge about who is Christopher Waller. We'll get to that in a minute. Number one question, I get the unemployment rates. 4 point X percent. Is a 4 point X percent unemployment rate now the same as a 4 point X unemployment rate when you were at Washington State?

[Christopher Waller]

No, I think this is where we're in this unusual situation where we have this kind of zero net immigration instead of roughly say 400,000 a year, actually people leaving the country. And this is kind of, I've said this before, it's masking this decline in labor demand. So just think about if it's all immigration and you have a decline in labor supply, then the following things should happen. Employment will go down, wages should be bid up. If you have a labor shortage, vacancies should go up, quits should go up. That's what you should see with a very tight labor market and declining labor supply. When did we see that? 2022, 2020. That's what we saw. And that was a very tight labor market. If things are driven by a decline in labor demand, just kind of thinking about labor supply is constant, you'll see jobs fall, there'll be downward pressure on wages, there'll be downward pressure on vacancies, quits rates will fall. That sounds to me more like what we're seeing in the data. So all that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand. And I've seen some estimates that if you had just kept the labor force participation rate where it was earlier, unemployment would be 4.95%.

[Council on Foreign Relations Moderator]

Okay, well, that's an important touch point. I would suggest 5% is a much bigger number than 4.9%. Do you see an immediacy at the central bank and among the staff that the real unemployment rate is 5ish and not 4.6%?

[Christopher Waller]

Well, that's, that's where you got to take a position on what do you think the labor supply is doing? Is it fine that it's 4.3 because the fact that people leave or drop by labor force, that's just a natural part of the economy and therefore 4.3 is exactly reflecting things. Or do you think like I do, which is like we're seeing falling labor demand and if it wasn't for this decline in labor supply, we would be hurting and there'd be no doubt about cutting rates. Absolutely no discussion about it. So that's where they were in this weird thing. We've never seen falling labor demand with a big fall in labor supply at the same time, at least not in my career that I can remember.

[Council on Foreign Relations Moderator]

And that speaks to the technology. I'll get to that minute. And the AI thing you mentioned, 100 basis points for rate cuts, five rate cuts maybe is modeled in. You have to see what happens out there, quote, despite more than three years of restrictive monetary policy. How many rate cuts do we need to get Christopher Waller away from the dreaded R word restrictive?

[Christopher Waller]

Well, that's what I said. You have to kind of pick a new what you think is the neutral rate, which means you're neither stimulating or contracting the economy. That's the simplest way I describe what the neutral rate is. I have. I just typically look at the sep, the survey of economic projections, and the median is around 3%. So for the committee as a whole, if it's 3%, you know you've still got 125 basis points to go to get to neutral if everything starts coming back closer to target. And that's where I think things are going to go.

[Council on Foreign Relations Moderator]

But the challenge is you allude to in your speech. And I'm going to be aggressive here. I think of John Edwards and two Americas, basically. There's two our stars out there right now. There's an R star for the haves, including everyone on Park Avenue assembled. And there's an rstart for the have nots who are flat on their Back, including farmers in your Dakotas. There's two our starts. How do you manage that forward in a divided America?

[Christopher Waller]

Yeah, so that's actually an interesting way of thinking about. I never have, but typically when people talk about our star, I mean there's. How many interest rates are there? It's not like there's one that this is the unique R Star. So I gave a speech last May 2024 on R Star in Iceland and I always have to look at it this way. For me, R Star is a policy rate. I control reserves in the banking system. What's the closest substitute? Short term liquid government debt. So for me, that's the real R Star that I should be. Not the return on capital, not the return on AI, not the return on corporate debt, the return on safe liquid government debt. That's the R star I look at. And that's driven by global demand for Treasuries versus the global supply of Treasuries. That's how I view R Star. I mean, your point is actually a very good one, that what's restrictive? If you think about RStar as being restrictive, it's more restrictive for some groups than it is for others. That's probably always true. It's not just now. But it seems to be very stark this time that upper income groups, everything's fine, wealth is booming, the stock market's booming, they've got no problem financing stuff. I hear this from retailers. We pass tariffs through to high income customers, they don't bat an eye about it because they can afford it. Low income households, they can't pass it through, they'll walk out the door. So that's the tension again, one of these tensions that we have, kind of this dichotomy in the economy between the upper income groups and the lower income groups.

[Council on Foreign Relations Moderator]

Off the script, off the speech. Three esteemed market economists that I spoke to all send the same thing away from a typical monetary policy speech. They're looking at qt, qe, the state of our monetary policy forward and the Fed's unique balance sheet. Give us an update on where you stand with the Fed's balance sheet and quantitative. The end of quantitative tightening.

[Christopher Waller]

Yeah, I mean, I think we're at the point where we run an ample reserves. I gave a speech in July on our balance sheet. We run an ample reserve to ensure that there's sufficient liquidity in the banking system and the financial markets that people don't have to at the end of the day, go scrambling around looking for nickels and dimes in the couch to Cover their reserve positions. That to me is idiocy. So you have ample reserves. The reserves are there. Nobody has to spend the whole evening looking for money under the cushions. We're about at that point, we had an excessively large balance sheet due to quantitative easing. We ended that. We've been on a quantitative tightening policy since May of 22. And we're basically back to where we think we should be just for ample. All the QE stuff is taken out in terms of how much liquidity it still has affected the composition of our balance sheet, which was part of my speech I gave in July. QA really distorted the maturity structure of our balance sheet. And our next choice, even though we get the level right, our next job is try to get the composition right. And that'll take some time.

[Council on Foreign Relations Moderator]

I share this stage with Jason Furman up at Harvard, boring kids in Act 10 in basic economics. And he had a brilliant tweet the other day. He said we need to fold in the wealth effect into our consumption. You have brilliant consumption numbers in here of the halves, the upper decile. They're trading one block over on Madison Avenue. Explain the wealth effect and how it boosts monthly consumption. You mentioned luxury travel and others. How wealth effecty is America right now.

[Christopher Waller]

Yeah. So I mean, if you go back to kind of some basic economic theory, one kind of rule of thumb is for every $1 of wealth that you get the real interest rate, say 3%, 2%, your consumption should go up by 2 to 3% for every dollar in wealth you get. So like 2 or 3 cents for every dollar of wealth. That's what we mean by the wealth effect. Now those numbers also mean that wealth increases permanent. It's not a one time. If it's just a one off, you're not going to change your entire consumption path. So this is always kind of the challenge with the wealth effect because it's not that big of a number in terms of a dollar increase. It's only like 3 cents of consumption. But that also has to be permanent. It's not like a one off and then comes back down. So wealth picks often, sometimes are smaller than that. But the run we've had for the last few years, that's looking pretty permanent and pretty big. It's not just a $1 increase.

[Council on Foreign Relations Moderator]

I'm going to squeeze in a couple more questions here. This one's for the press. David Gura gave me this question over at Bloomberg News because he's vicious in his questions. Should we get rid of the dots?

[Christopher Waller]

That's a good Question. I mean I personally have doubts about whether we should have the SEP at all. But I've been told that what are you trying to hide then? Why would you take them away? Why would you not be as transparent?

[Council on Foreign Relations Moderator]

What would happen if the dots went away?

[Christopher Waller]

Well, you'd kind of be back to 2011 and then you know, we would say that now you could change the dots. I personally believe you should get rid of the calendar dating, get rid of the long run numbers and just say look, what's the next optimal policy over the next 6 12, 18 months? That's as good as we can do. So then it's a rolling number and you get away from this crazy thing. It's like wow, there's three meetings left in the year. How many more rate cuts this year? Who cares?

[Council on Foreign Relations Moderator]

The media, we wouldn't have a job.

[Christopher Waller]

So if I said okay at the September, he said here's how many over the next six months that's what the focus would be, not the end of the calendar year. So I would do that and then get away from the long run stuff. Just the best we can do is 6:12, maybe 18 months out. Any kind of forecast. We're no, we don't have any genius insights over everybody else on Wall street who does this. So that would be one of the critical things I would do is change the calendar dating and shorten the horizon that we actually do it.

[Council on Foreign Relations Moderator]

One of my hallmarks is who are these guys? Literally like Butch Cassidy and so we're going to find out who Christopher Waller is. I mentioned the you were accounting major and you got bored because the professor was putting so you switched to economics. The Waller of 1991 is a spectacular 13 page paper, I think it is on prodigious game theory. And what he didn't know in 1991 is he would be describing the game theory of 2025. I'm not going to get you in trouble with the Secretary of Treasury right now, but I'm going to review this. You set up in 1991 off of James Baker's word bashing of where administrations bash the central bank and there's coercion involved. The title of the paper bashing and coercion. You sub out strong administrations and weak administrations. No, I'm going to not ask you what this administration is, but I want to take it forward to the present day. If we have bashing and coercion and we have to be ex ante, we're trying to get out front of the debate. The Fed's trying to Glean what's going on, or we go true ex post, literally in a Georgia school where we wait for the data to come in. How does the bashing and coercion affect the monetary challenge of ex ante vs ex post? Do we come more. Do we become more ex post with an administration going after a central bank?

[Christopher Waller]

Well, like I said, I wrote this paper back because at the time there was a lot of discussion about central bank independence and institutional design. And the kind of presumption was once you pick the central banker, that's the policy. And every other external influence just kind of went away. And I was kind of looking around going, that's not what I'm hearing. That's not what I'm seeing. Back in the 80s, right, there was a lot of criticism. And so this idea of Baker's was, look, the administration can push the Fed one way or the other by publicly criticizing the Fed. Now, when I wrote this paper in 1989, 1990, I didn't think I'd be the one receiving it 25 years, 30 years later. So when I reread the intro the other day, I was like, wow, what was I thinking? So, but I mean, that is kind of this situation. And it's not just the current administration. This has been done forever. I mean, George Bush, bash GreenSpan, Burns and LBJ, costing him costing in the election, criticism had come out, this was a norm until basically Bob Rubin came along and then it was like, don't talk about the Fed. And that kind of became the rule through sequence of administrations until President Trump came in and 2018 started criticizing the Fed more publicly than had been done in a long time.

[Council on Foreign Relations Moderator]

Does it change the behavior of a given central bank if we have bashing? You're trying to get out front, the public, the media want you to be out front, omniscient, have a crystal ball. Or do you have to slam back to a massively exposed data dependency because you're getting crushed by whatever the executive branch is, whatever the nation is.

[Christopher Waller]

I mean, at the end of the day, this is what I tell everybody. I just go to work and I try to do my job the best I can. That's all I can do. A lot of this is just out of my control, whether the administration's views drive people to push one way or the other. And, you know, I can't speak for anybody else, but I just try to do the best job I can using the theory that I know the models of the economy that I use and the data that I use. So you know the call I made in June, which was I was saying the labor market is not as good as it looks. And I was accused of being political August 1st, that suddenly didn't look so political. The data came in exactly the way I said it was going to. So what sometimes looks like people say, ah, they were interpreting this as purely a political position. Suddenly the data said, maybe it's not political, maybe it was actually the right call. And so that's how I kind of think of this. You can always look at something and interpret it as political when it's not. That's, that's kind of the problem in what we decide and what we do. Indiana University is shaping the future of health care. Advancing discoveries that become treatments for Alzheimer's, obesity, cancer and other rare, rare and complex diseases. And training the next generation of providers, doctors and nurses trusted to address health challenges with skill, compassion and purpose. From the lab to the clinic, from research teams to patient care, IU talent is driving medical innovation, improving health outcomes and strengthening communities. See how IU solves what's next iu Edu Impact.

[Council on Foreign Relations Moderator]

One more question. I'm going to go to the floor and also out on Zoom Worldwide with the Council on Foreign Relations. I want to get this one question and I have to ask, with your heritage of the Dakotas and the old Northwest, how bad is it for the farmers? Right now, soybeans is a news, but French Hill down in Arkansas is telling me, guess what, they're flat on their back. Report on that, please.

[Christopher Waller]

Well, back in the first Trump administration, there was, you know, tariffs on China and tariffs. China immediately responded by not buying U.S. soybeans. And I was at the St. Louis Fed. Some of the biggest soybean producers were in our district. I heard this. We had barges of soybeans lined up on the Mississippi river that were never going anywhere. And they only have a certain shelf life before they rot. They're gone. So we saw this. China was, I think, don't quote me exactly, but this is in the ballpark. But China was sort of bought like 75% of US soybeans. Soybeans. Even later when some of this came off, soybeans never recovered. China was only buying like 30. Again, don't quote me on the exact number, like 35%. And now it's back down to basically zero. So they've just shifted their entire supply chain to Brazil and South America and they never came back. And so that's the one thing you want to be a little careful of, is just because a supply chain gets Disrupted and then you reverse something, it doesn't necessarily mean it comes back back. Once it's changed, it's changed. So yeah, soybean farmers are typically getting hammered and I'm trying to not buy.

[Council on Foreign Relations Moderator]

I've seen the new Foreign affairs magazine. It is brilliant. Shannon o' Neill with a great article on supply lines, which to me is the discussion in Q1 next year. Edward Cox, please, sir, with our first question. Ed Cox can be for Economic development.

[Christopher Waller]

Of the Conference Board.

[Council on Foreign Relations Moderator]

Governor Waller, your excellent presentation, I appreciate it very much about the data, but there are several mega things out there for which the Fed is not responsible that I'm sure are in the background are part of your consideration and that's the extraordinary deficits, fiscal deficits going forward and the value of the dollar. Could you explain how those might enter into your considerations as to what the, what monetary policy should be?

[Christopher Waller]

You know, we have a kind of a long standing view that we don't, you know, praise or criticize fiscal policy. We take it as a given for doing our own job. But when you're running 6% deficits, 3% primary deficits, we know that that's just not sustainable in the long run. How long is the long run? I don't know the old joke, I'll be dead before we find out. But we just know in economically you can't do it persistently. It's just not going to happen. So that has general concerns. The R Star speech I gave back in Iceland was if you think about R Star and government debt, which is the closest thing to matter for me and reserves, it's a race between the growing demand for US treasury debt and the growing supply. For the last 40 years, demand has outstripped supply. And what does that mean? Prices go up, yields go down. At some point, if that reverses and the supply starts exceeding demand, the only way you're going to get the markets in the world to hold this stuff is you lower the price, which means the yield's going to go up. So for me, having good, stable fiscal policy is the best way to ensure that you don't have that happen. But again, this is not under my control. That's up to the Congress, White House to think about fiscal policy. That's it. That's just my view on it.

[Council on Foreign Relations Moderator]

Question, sir. Mark Rosen, Adventure in Growth Capital Governor.

[Christopher Waller]

Waller, you talked about AI and you.

[Council on Foreign Relations Moderator]

Said that you thought short term it could have some risks for the labor market. Long term was good for productivity.

[Christopher Waller]

But a lot of forecasters are predicting that it will be negative for the.

[Council on Foreign Relations Moderator]

Labor market longer term that it will reduce jobs. How does that impact monetary policy?

[Christopher Waller]

How does it impact your dual mandate.

[Council on Foreign Relations Moderator]

And how do you think about it generally?

[Christopher Waller]

Right, so that's what I was saying. Is this a structural or a cyclical phenomenon with AI? So if you think about labor, labor demand and employment just over time just grows with the economy. What I worry about is AI being a structural, is there's this like this one time permanent drop in the level of demand. The question is, does it continue to grow at the same rate as before, in which case it's just a level effect, employment growth and everything will continue on in the future, or does it drop and then it just stays flat, it not only drops in the level, but it has a lower growth rate of employment? I as a policymaker cannot do anything about that latter case. If it's just the fact that there's this kind of cyclical movement in labor demand, that's what I'm designed to have some influence over. But if it's a sharp structural drop, lowering the fed funds rate 50 basis points isn't going to, isn't going to overcome that. And that's what we're trying to figure out is going to happen now. In the past, whenever we've seen technological change, I gave a speech yesterday down at Amazon. You know, you see jobs going away, you know which ones are going to go away, but you never know which jobs are coming. And usually there's a kind of enough of a gap where there's the jobs are slowly going away, new ones are coming on. This time, what I worry about, it's so fast, it's happening so fast that the jobs go way faster than we can figure out what the new jobs are. The new jobs will show up. I have no doubt about that. It's just the timing may be a little more disruptive than technology we've seen in the past.

[Council on Foreign Relations Moderator]

Thank you for that question. I forgot to ask that. You saved me there with that question. Here's a footnote from this speech this morning. Technology that improves labor productivity leads firm to demand more labor, not less. A huge body of America doesn't agree with that. And to your point on innovation, with a Nobel Prize, a celebration of the last 48 hours of Schumpeter and across profit of innovation, this new innovation, the gains are going to go to a narrow group. Or do you think they will, this is a cliche word, they will diffuse out across America.

[Christopher Waller]

Well, the history of technology is that they do diffuse. I mean, one of the things I Pointed out in the speech yesterday, if you look back to Karl Marx's theory of capitalism, machines, robots, would replace labor to produce all the output. Everybody would lose their jobs, be unemployed. There'd be this mass army of the unemployed. There'd be a social revolution. Capitalism would die, and we'd have a socialist utopia. That doesn't happen. I mean, when capital goes up, machines and technology go up. It makes labor more productive, and firms like productive workers, and that's why they want to hire them, because they don't want to keep their output constant. They want to produce more, and they need both of these things to produce more output. This is what we've seen in the history, certainly of the US in the last 200 years. The capital stock in the US is seven times larger than it was in 1950 in terms of machines, equipment, everything. The unemployment rate is exactly the same. So employment grows with technology. It's not. It doesn't go negative with it.

[Council on Foreign Relations Moderator]

But to the President's point, and arguably his election, a huge body of America feels let down. We had productivity, we had capital deepening of an extraordinary amount. And the jobs went to China. That's his theme with AI. Are we going to replicate that in some unknown way? And the jobs are going to go to. You name the place.

[Christopher Waller]

Well, even with the China shock, total employment in the US has grown. Ever since the China shock, it hasn't gone negative or fallen. Just go look at the employment rate. Go to Fred, my favorite data series. Pull up employment, look what it does. It just goes up. So, yes, there are reallocations. Jobs get lost and they go somewhere, somewhere else or they get eliminated. But that's my point. New jobs, new things came up. People reskill going to new areas. So when the China shock was hitting manufacturing, we had a whole it, software, phone technology revolution, information technology that created thousands and millions of jobs.

[Council on Foreign Relations Moderator]

Is Fred an unfair advantage for the St. Louis Fed? Do they wake up every day different than any other bank?

[Christopher Waller]

Fred is one of the greatest gifts from the Federal Reserve to the planet. There we go.

[Council on Foreign Relations Moderator]

Ma', am, please.

[Christopher Waller]

Hi, Ginger Cutler. I'm a term member at cfr. Governor Waller, just what you just said about how unemployment is the same as it was in 1950, and the China shock didn't really necessarily affect employment. I. I guess I want to hearken back to what you said about where wealth is concentrated in the hands of Americans. Right? And how you said that what the bottom 60% of households own 15% of wealth and 45% of spending. I'm curious how that figures into what you just said about unemployment being the same as it was in 1950 and the China shock ultimately not really having an effect on the labor market. I'm curious how inequality factors into that. Yeah, so I was just trying to get. With employment, you get sectoral shifts, some sector goes down, some other sector goes up. In my speech yesterday, I said, look, when automobiles came up, if you were making saddles or wagons, your jobs were going away. But those same skills got transferred over to producing chassis for cars, making car seats. The same skills, they just had to transfer. So those jobs went away, but other jobs came up that took their place. That's why you can't just look at one sector and say, oh, that's going to kill the entire economy. I don't believe that's going to happen with AI either. In terms of wealth and income inequality, this has been an issue in the US for the last 40, 50 years. There's been a tremendous reasonable increase in wealth inequality, income inequality. For me, as a policymaker, I have one instrument. I can't deal with inequality. It's really not in my toolkit. I can't say, here's an interest rate for this group. As Tom was saying, I can't say, here's an interest rate with that R star, and here's an interest rate with that R star. That's, that's not in my set. I have to look at the aggregate. It's really my only choice. Can I look at these discrepancies and think how I might want to lean one way or the other? Sure, I can. You know, we kind of got criticized for that before with our last framework, that we were kind of leaning a particular way. It's, it's. There's nothing wrong with it. It's just we only have. There's very little we can do about it. And that was my issue with our last framework. I could care about this, but there's very little I can do with it for particular groups.

[Council on Foreign Relations Moderator]

I think we have a question here in the digital world.

[Christopher Waller]

We'll take the next question from Chris Thomas. Good morning, Governor Waller. Thank you for the time today. Ex intel, ex McKinsey. Now I help global companies think about their global footprint and where they put advanced manufacturing facilities. And the constant refrain is that no matter how high the tariff, the US Is just completely uncompetitive. And now it's the most expensive place in the world to do business, especially if you're building something. To what extent does this matter for the growth and success of the US Economy and is there anything that could be done about it? I've heard that Even if it's 100% tariff, it's still cheaper to manufacture in Taiwan or Vietnam or Japan or Korea or China than in the U.S. yeah, I mean, this is, this is way outside my wheelhouse, I have to say. You know, trade policy, you know, particularly worrying about one sector over another, manufacturing versus others, this is just something I, I can't make those decisions. That's what the President got elected to do and he's following through on his promises. Whether you get stuff re on shoring or not, I don't know. We'll see. We did learn something with the pandemic that supply chains stretched across the globe are pretty fragile. And there was a lot of emphasis on getting near shoring. Maybe not on shoring, but near shoring. As a result, over time, you know, if tariffs were big enough, I'm pretty sure you'd bring your factory back. There is a price at which you will bring it back. It's not infinite. So that's what I don't know. We'll see how this all works out. Whether there's a lot of incentives to bring stuff back or not, or whether the people that, you know, you bring these jobs back, whether people want to do them or not. I mean, in the US We've moved into much more of a service sector mentality and the idea of screwing lug nuts on a tire for eight hours a day is not something most Americans typically want to do.

[Council on Foreign Relations Moderator]

Well, I'm not going to ask you about bananas and tariffs. I don't think we're growing bananas, Sir. Over here, please.

[Christopher Waller]

Hi, Andrew Watros with Morgan Stanley. Governor Waller, thank you for your comments. I want to ask you to say a little bit more about what you are intending to convey with the phrase to a more neutral stance of policy. In a sense, if you're restrictive, just cutting once is moving to a more neutral sense of policy or is this describing sort of a process where over several meetings you have an idea of a range in mind that is more neutral and you're describing a process of moving towards that range? Yeah, I'd say it's the latter. It's really the process. So if you're at neutral and you think you're restrictive and your policy rate is set up here, what's going to cause you to bring it down? You think inflation is coming back to target, you think the labor market is either stable or weakening, you want to kind of bring it back towards neutral. It doesn't mean you go below and you want to stimulate the economy. Things would have to really get bad. We're not seeing that in the labor market that we want to go below neutral or I'm not seeing it. I can't speak for anybody else but. And the debate right now is about inflation. Inflation is running 3%. It's way over our target. It's been above target for 5 years, 4 years. Why are you lowering rates? So you have to say what is the outlook for inflation? And that's what I've argued, that any tariff effects are going to be temporary. You look, this is a classic line in central banking. You look through those things, you think about what is going to be inflation 12 months from now, when the next 12 months. So that's what I'm doing. And in that world, I see inflation coming back down to target. I see a softening labor market. So I want to bring things back to target. I don't want to go below target right now because inflation is above target.

[Council on Foreign Relations Moderator]

With Q and A, we go to tenths of a percentage point. You were talking whole numbers up there. You say 2% is where the Fed is right now. What is the latest thinking you said around the raging debate to take a Taylor rule, look at the output gap, look at Nairu and all the rest of the mumbo jumbo and plug in a more normal 2.2 or 2.4 or 2.6% run rate versus the decades long hope for a 2% change.

[Christopher Waller]

The inflation target. Yeah, yeah. I mean, there's always a good argument or debate about should you pick a point or pick a range. A lot of central banks in the world, they run with a range. They don't seem to have big problems with that. You know, like the bank of Canada has a range of 1 to 3%. So, you know, there's often a question, you're just as happy with 3% inflation as 1%. No.

[Council on Foreign Relations Moderator]

Should we be? Should we want to?

[Christopher Waller]

But they're not going to do crazy stuff to get it to 2. That's the key point. You'll get there, you'll take your time, but you're not going to do drastic policies to drive it to exact exactly two. I think two is a good thing. I'll give you my spiel on what's the real value of having a 2% target with a particular price index. It holds you accountable. If I just said inflation in general, somewhere between 1 and 3%. There's a lot of loose things that go on in there that I could Always slippery slide. Say I, I did my job. What are you talking about? That happened with the money growth targeting back in the early 80s. M1 was pretty good, but M2 was lousy. But next month M2 is.

[Council on Foreign Relations Moderator]

Remember how the world stopped? I think it was Thursday at whatever it was 3:30 for M1, M2, money growth.

[Christopher Waller]

So I like 2% because it holds me accountable. Okay, now you want to hold me accountable because it's 2.2 instead of 2. Ah, come on. That's where range kind of helps. I always like to tease my friends and things is in the year 2000, if I had told you the Fed would keep inflation between 1 and 2% for a decade. Everybody in the year 2000, that is a phenomenal monetary policy success. But because it ran 1.7, we didn't hit 2. It was a failure. Think about that. 1.7, not 2 was a failure. But if I'd ask you, before any specific 2% target, you said 1 to 2. That's amazing. That is phenomenal monitoring. So that's the danger with the 2%. It's so precise that if you don't hit it, you start saying you're failing and hitting your target. That's why I actually kind of like arrange myself.

[Council on Foreign Relations Moderator]

I want to talk one final question here for me about the culture and the fabric of America and our economics. There is such a conceit and bias and a distrust back to 1907 or even before, of three zip codes in Manhattan or maybe the corridor from Washington up to Boston. You represent a part of America, some would say the backbone of America, from Bemidji, the Dakotas, Bemidji, all the way out to Washington State and then to St. Louis. How would the Federal Reserve system change under a Chairman Waller, given that cultural geography versus every day the east coast certitude that's the heritage of the modern economic Fed?

[Christopher Waller]

Well, I mean, this is one of the brilliant aspects of the design of the Fed. I've studied the structure of the Fed for 40 years now. The whole idea was to say, look, you need some political accountability in D.C. but you want to have a lot of this outside of D. DC that was the typical grassroots get people away from DC Talk to the American public. I always say we're the one government agency that has contact with all parts of the US through our 12 districts and all the branches in those districts. Everybody can come talk to a president of the bank. They go out, they go out regularly, speak to the public. You can come talk to them, you can Have a conversation with somebody. I mean, the only other institutions that have that kind of contact are the IRS and the Post Office. And we typically don't want to have them knocking on our door. So that's why the big advantage of the Fed in our structure of having people on the outside. There has been debates forever moving more political accountability to the Fed or moving it away. Sometimes people's views shift back and forth depending on what the situation is. But I believe the basic structure that we have has served the country well by representing all the country in the decision making process, just not a few handful of elites in Washington D.C. so that I think is important. I would say, like I said, for me, one of the critical things I change the S and P, I would encourage dissents. I'm not somebody who's afraid of like, oh, if you're dissenting against what I'm pushing, that lowers my confidence or my.

[Council on Foreign Relations Moderator]

It'll be so much better for us. Five, four votes. It'll be, you know, I highly recommend lots of dissents. It'll make the Fed show better.

[Christopher Waller]

Well, I just think that's the whole point of it. That was the idea of the structure, was you put 19 members so you get this diversity of views from around the country, coming in, different points of views. If everybody comes in, no matter what part of the country, no matter what the situation is, and you always say the same thing, we don't need it, you know, just have four, three governors and that's it at the board, you're done with everything.

[Council on Foreign Relations Moderator]

Governor Waller, thank you for joining the Council on four generations.

[Christopher Waller]

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