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Indiana University Narrator
Indiana University is shaping the future of healthcare. Advancing discoveries that become treatments for Alzheimer's, obesity, cancer and rare diseases. And training the providers trusted to deliver them from the lab to the clinic. IU powers medical breakthroughs and the talent behind them. See how IU solves what's next IU Edu Impact.
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Federal Reserve Governor Stephen Myron
Bloomberg Audio Studios Podcasts Radio.
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Matt Miller
News we welcome our Bloomberg TV and radio audience worldwide. I'm Matt Miller alongside Dani Burger. Joining us now is Federal Reserve Governor Stephen Myron here at the desk. We're honored to have you here along with Michael McKee, our international economics and policy correspondent. Mike, take it away.
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Michael McKee
Well, good morning, Steve. Thank you for joining us on this non jobs day. Jobs day. We get no government primary economic data because of the shutdown right now. So let me start by asking if that continue continues as a member of the Open Market Committee, would you feel comfortable voting for a significant cut in interest rates if you don't have data on employment and on inflation?
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Federal Reserve Governor Stephen Myron
Good morning and thanks for having me. Look, I think it's important to recognize first of all that as you're pointing out, access to high quality data is of utmost importance when making monetary policy decisions. However, it's also the case that we don't make monetary policy decisions every day. Right. The FOMC meets to vote once every six weeks or so now. I think that's a bit longer than most shutdowns have historically lasted. So I'm hopeful that we'll get the data by the time we actually have to make the decision.
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Michael McKee
Well, despite what the president says, as you well know, inflation is rising, food prices are up, gasoline prices higher than when he took office. Those are the prices that Americans notice and hate. So isn't it a risk to cut rates significantly in a regime where interest, where inflation is rising?
- [02:00]
Federal Reserve Governor Stephen Myron
So my view is that policy should be forward looking, right? I don't necessarily have a forecast that those items are going to continue rising. In fact, I'd think that a lot of them will actually reverse somewhat. But my, but for my process, what matters most of all is the cost of housing because that is the single largest component of the inflation process. And it's also one of the things that people notice the most. They notice when their rent surges. They notice when the cost of shelter increases. And that's why it gets the largest weight in the inflation indices. And my expectation is that we've just experienced, you know, the biggest population shocks to both the upside and the downside in my lifetime and I think in most people's lifetimes and to me, it would be very surprising if that left no lingering trace on the price of shelter. And so I am expecting a significant disinflation to the services component of the inflation disease driven by shelter, which is affected to an extent by changes in population growth.
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Michael McKee
Well, we were talking before we came on about your view of our start, the neutral rate. We've got inflation running at basically 3%. You've got unemployment at 4.3%, which is historically very low. The Atlanta Fed says we're growing 3.8% or grew 3.8% in the third quarter. There's no economic model that I know of that would get you to a near zero neutral rate with those kind of conditions.
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Federal Reserve Governor Stephen Myron
Yes. So, first of all, I have seen some folks argue that they think that my conception of the neutral rate is zero. That's not the case. I think that's a misreading of the speech. If you read the speech carefully, you'll notice that I do a weighted average of a model implied ex ante and a market implied ex ante rate and gets to about a half. And that's consistent with the dot that I put down on the statement on the summary of economic projections. And so I basically thought, you know, sort of going into things last year, there were all these policies that were pushing our star higher, like the highest population growth we'd seen in decades, the largest fiscal, you know, sustainable fiscal deficits we'd seen, sustained fiscal deficits we'd seen in a really long time. Those are pushing our star higher. So last year I really thought it was at the top of the range of where everyone else on the committee thought it was. And I think it's now come down this year to the bottom end of the range of, of where everyone else thinks it is.
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Michael McKee
But you can't model that.
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Federal Reserve Governor Stephen Myron
What do you mean I can't?
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Michael McKee
The models. If you put in the numbers that we have right now, it wouldn't spit out near or half a percent.
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Federal Reserve Governor Stephen Myron
Oh, real, real rate. Well, no, but what I've done. What I've done is modeled my expectations for inflation based on the changes that I see happening from. From housing. As we talked about a moment ago. I've modeled out changes to the output gap that I expect to see from policies that expand the supply side of the economy, therefore expand potential output faster than they would expand actual output. And some policies that we've seen enacted over the course of this year would push out potential and actual by the same amount or bring in potential and actual by the same amount. Other policies would push out one more than the other. And so for an example of one that would push out one more than the other would be deregulation. Right. I think that the regulatory state has been being peeled back over the course of this year and all indications are that will accelerate, particularly as the pace of, of, of confirmations of appointees has just picked up as well. That in my mind will accelerate the pace of deregulation too. And then when you remove regulations, you expand the potential output of the economy faster than actual output. And so that creates a positive output gap.
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Matt Miller
I actually, you know, I'm not as deep into this as Mike, and certainly neither of us is as deep into it as you, but I have the Taylor rule function on my Bloomberg terminal. I love to play with it and I always ask important economists when they come on what variables they would plug into it. I put in 0.5 for you in the neutral rate here and I put in 4% in the Nehru. I'm still only getting three and a half for the Taylor rule estimate. I know this is a very elementary, you know, function here on the Bloomberg, but what would you change to get, you know, your, your rate down to where you think it should be, which is even, I think, less than the 3% terminal rate that the market is pricing in.
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Federal Reserve Governor Stephen Myron
Yes. So let me, let me be clear. Monetary policy works with lacks, right? And yes, those lags are long and variable, but nevertheless they exist. And so I think it's inappropriate to put in the current backward looking data as opposed to where you expect those data to be in the term, right. Over the course of the next year to two years or so. And so that's why when I work through the calculations that I work through in the speech, which also used actually a couple of different specifications of the Taylor rule, I put in my expectations for where I think inflation is going to be. I put in my expectations for where I think where I think the output gap is going to be. And so when you look at inflation now on a year over year basis, you're including lots of stuff that occurred before the overall policy space shifted. And as I just said a moment ago, we just lived through the largest economy, population growth shocks on both the upside and the downside in very rapid succession to a variable, the structure of the economy, population growth that usually changes only very, very slowly changed incredibly rapidly in both directions. Right. To use backward looking data that just ignores that shock on the upside of the downside, which was of monumental historical significance to the US Economy, I think is deeply misguided I think it's imperative to use forward looking forecasts that incorporates something like that.
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Matt Miller
Well, we can do that with the Taylor rule on the Bloomberg terminal. As I'm sure you know, if you click on the second tab of the function, you can put in your inflation forecast and your unemployment forecast going forward. I won't ask you what all of your variables were, but I will ask about inflation because as a kid who grew up under Ronald Reagan, I've always been skeptical of government policy when it comes to inflation. I've been hearing for so many years that the Fed wants to get it to 2%, but I find it hard to believe and we've averaged 3% essentially on the core since World War II. Do you think most people feel comfortable with that level? With a 3% level?
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Federal Reserve Governor Stephen Myron
Well, you know, I think what you're asking sort of invites a previous question, which is what did Congress assign the Fed to do? And Congress signed the Fed to pursue stable prices. Now historically the Fed has had lots of leeway in how to interpret that and it's chosen to interpret that as 2% growth and measured personal consumption expenditure. Inflation. Right. The way that you calculate inflation is sort of, you know, it's a very complex thing and there's lots of methodological choices that get made when you're sort of deciding how the sausage gets made. And it can really affect how things are measured. Right. And so when you say do, do households have faith that the Fed is pursuing and achieving its inflation mandate? I think that, you know, sort of small changes in measured inflation are difficult for households to detect because they can be, you know, because the way that measured inflation is measured is there's lots of noise in it. And I think that small changes in measured inflation are usually dominated by the noise relative to what households are experiencing. But nevertheless, when you look at inflation expectations, I think that they remain reasonably well anchored, which indicates that households and firms, United States have faith in the Fed's ability and willingness and future of, of, of hitting its inflation, its inflation target.
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Dani Burger
Governor mine, you've been extremely transparent with your view and have been very generous with that. You've always been very transparent with your views. You're probably prolific social media poster of anyone that the Fed's ever had in 2023. I saw you had tweeted something out saying basically the case against adjustment cuts is that financial conditions have eased massively and policy works via financial conditions. Real rates don't exist in a vacuum. Given that view, the fact we have record high stock prices right now is it A sign of unsustainable froth, of even a bubble that will make bringing down inflation that much more difficult.
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Federal Reserve Governor Stephen Myron
Yeah, so that's a great point. Financial conditions are the channel through which monetary policy works and so they matter when you're thinking about where monetary policy should be set. Now, as we were saying a moment ago, my view is that last year neutral was much higher because immigration was much higher, because fiscal deficits were much higher than I expect them to be going forward. If you look at fiscal deficits this year, in February through August, which are the data that we have available and that encompass after the policy space changed, There are about $400 billion at an annualized rate below where they were in the comparable period in the previous fiscal year. Right. So fiscal deficits are coming in also, and that also helps drive down our star. So my view is that policy, even though financial conditions appear to be on some measures loose policy, has actually grown tighter because neutral has migrated down. Now, I do want to be clear that financial conditions can also be driven by a variety of non monetary factors. There have been substantial changes to the supply side of the economy this year, both through the tax code and through the regulatory code, as well as trade renegotiation. Right. All of that can affect financial conditions for non monetary purposes. Sorry, through non monetary channels. And so it can be a little bit of a mistake to look at financial conditions and infer something necessarily about the stance of monetary policy because they can be driven up by other things. And also they're not all loose. I mean, you know, housing, housing finance is arguably still a relatively tight. Sure.
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Dani Burger
But a lot of this view is incredibly forward looking. And that's the point, right, that we're not looking at backward data. But is there any data that we could get, Governor Myron, that would change your mind and it would change your mind to have you believe that we should not be pushing towards more rate cuts right now.
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Federal Reserve Governor Stephen Myron
Oh, absolutely. Look, my view is that services inflation is the most persistent and sticky part of inflation. A lot of my view about services inflation is driven by the housing sector as shelter costs are the largest cost for most families. My view about shelter inflation, as I said, is driven by two things, as I said in the speech. One, the fact that average rents have finally caught up to market rents, meaning the catch a period is done. You know, people don't reset their leases every day. They reset every year, every couple of years. And so that means that a change in market rents takes time to feed through to when it's experienced by households, when you look at the data, it seems to me that that catch a period is done, which means that I expect shelter rents to come down, CPI rents to come down, bringing shelter inflation down. The second thing is the immigration shock that we talked about. My view is that immigration was pushing rents up in previous years and now that shock has not only gone to zero, I think it's actually reversed. I think we have negative net migration when it comes to United States this year. Right. So my view is driven by two things. Shelter, sorry, services are the more persistent and sticky part of inflation. Services are driven in large part by housing. And I expect housing inflation to come down through those channels. If something were to happen that were to tell me that that channel is invalidated, that there's some shock that's going to be pushing rents materially higher, the benign inflation forecast that I have would have to be adjusted as a result. All else equal, Right. If nothing else were to change to offset that. But to me, that's the core of my inflation view and I would want to see something come along and tell me that that channel is wrong and that I'm thinking about it the wrong way.
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Michael McKee
I want to ask you about something in your speech that has confused a lot of people, including me. You argue that tax cuts are going to help lower the deficit by increasing economic activity. And at the same time you argue that tariffs, which are taxes on the American people, are going to lower the deficit. You have one way raising taxes and the other cutting taxes, at the same time lowering the deficit. How does that work?
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Federal Reserve Governor Stephen Myron
Yes. So, you know, it's important when you think about economics to think about the elasticities of supply and demand. And when you cut taxes on American production, whether that's labor or whether it's corporate income, you want to think about the supply of those activity. And is it going to lead to additional labor supply? Is it going to lead to additional investment? Right. And so that's the way that cutting taxes can actually generate economic growth in the United States. When you think about tariffs, again, you think about the demand and supply. And in this case, American consumers and firms are the demand and foreign producers are the supply. Now, the economic evidence is overwhelmingly that the elasticity of the demand in imports is much higher than the elasticity of the supply. Put another way, foreign producers are inelastic, right? You've got a factory in China or somewhere else, and it's stuck in China or wherever it is. It's. It's installed capital, it's inelastic. Whereas American consumers can, American importers can Alter their demand power patterns. They could import from China, but they also could import from Vietnam or they could, or they could make stuff at home. That flexibility gives them the ability to, to avoid the burden of the tariff. Now this is just tax incidence theory in Public Finance Economics 101. And when you look at it this way, the argument that economists always reach the conclusion that economists always reach is that the burden of a tax, a tariff, a subsidy, anything falls on the more inelastic party. Right now the evidence is overwhelmingly that the foreign producers are the more inelastic party because the factory is stuck in place, it can't move, whereas import demand can, can substitute across borders. So it is the case that the negative effects of any tariff fall on the fall on the more inelastic party, which is overwhelmingly the, the exporter and not the importer. And so as a result, the positive effects, effects of tax cuts in the United States get felt by production and they increase economic growth, whereas the negative effects of raising revenue from tariffs get borne by the, get borne by the exporting country.
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Michael McKee
Well, we haven't seen any evidence in import prices that that's happening.
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Federal Reserve Governor Stephen Myron
Well, you know, import prices as your point, dollar denominated import prices, as you're pointing out, have been relatively flat. However, and people, I think you're alluding to an argument that people make, which is that you would think you would see import prices decline if foreigners were reducing their selling prices. Is that that's the argument you're trying to. Yeah. To me that logic doesn't follow for two reasons. One, you know, it's, there's an implicit all else equal clause that's not being stated and all else is not equal because we also had a move down in the dollar this year which ought to increase import prices by a comparable amount. And so the fact that import prices look relatively flat could just be the increase in import prices from the weaker dollar just offsetting the decrease in dollar prices from the incidence of the tariff being borne by the exporter. The other reason why, why it doesn't really make sense to me is because I think that a lot of the, a lot of the importers of record are ultimately US Subsidiaries of foreign companies. And so you've got a Japanese or German exporter selling to the United States, but the exports are bought by, the exports are bought by, by US Subsidiary of them. So Mitsubishi Japan or whoever is selling to Mitsubishi US or whoever. Right. And then if this is the case, then what winds up happening is that the incidence ends up falling on the, falling on the on the importer of record without necessarily pushing a decline down in import prices. And so I'm not exactly sure on the magnitude of this channel yet. It's something that I'm looking into, but it is a possible disruptor of, of, of that argument. But in any case, for sure what we're seeing is not a broad based increase in consumer inflation as a result of tariffs.
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Matt Miller
Governor, I want to ask about a piece that Mark Summerlin wrote in the Wall Street Journal today. He previously of the NEC under the Bush, Bush administration basically says that the Fed suffers from the same kind of bias inherent in media or academia because it's so focused in the Northeast.
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Federal Reserve Governor Stephen Myron
Right.
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Matt Miller
We have four Fed banks between Richmond and Boston and only one west of Kansas. Right. Only two in the South. He says there should be a Fed bank in Miami and Phoenix, which would make sense. He also points out that of the $600,000 donated by Fed staffers in the 2024 election cycle, 92% went to Democratic candidates, candidates. I assume that's because they're in the Northeast and they're underpaid relative to Wall Street. So can you make reforms, especially on those two issues while you're at the Fed?
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Federal Reserve Governor Stephen Myron
Well, look, you know, reforms to the Federal Reserve, to the structure of the Federal Reserve are ultimately an issue for Congress to take up and not one for me to address. But I do see part of my job as bringing fresh and out of consensus ideas to what can be, you know, at times a settled way of thinking. And, and that's what I'm going to continue doing. And so, for example, you know, you sort of, you think about tariffs and whether they're causing inflation or not. I think there is an attitude among a lot of people which is that the correct counterfactual for thinking about tariffs is to compare them to pre trends for what was the trend in those goods before the pandemic? Right. To me that's the wrong counterfactual because there was so much else different about the structure of the economy. When you look at long term trends before the pandemic, they include, you know, you look at 20 year trends before the pandemic, which is what a lot of people do. It includes the entry of China into the WTO and shipping deflation to the entire world. Is that the correct counterfactual for thinking about the impact of tariffs on the economy today? If we're not experiencing the same deflation we experienced in 2004 in goods when, when China had just entered the WTO and then attributing all excess inflation relative to that pre trend to tariffs. I think that's the wrong counterfactual. For me my mind's the right counterfactual is non import goods. And that's why the way that I've looked at it is to compare the prices of import intensive core goods to overall core goods. And I would think that if tariffs are driving inflation, import intensive core goods would inflate at a materially higher rate than overall core goods. And that is just not the case. That is not what you see in the data. That's the study that I did when I was the CEO chairman and I asked the Fed staff to replicate it and they found that when you use this counterfactual you get the same outcome. Right. So the question is what's the choice of the counterfactual? And that drives the decision, that drives the inference. For me. The other counterfactual I think is appropriate to use is to say are core goods the United States inflating at a faster rate, at a noticeably faster rate or markedly different trend than core goods in other countries. And again when I run that experiment I see no discernible substantial difference that would make me think that core goods inflation, United States had broken away from core goods inflation globally. And so for me I think that there's a question of how do you think about these things. And I think everyone was thinking about it one way and I think about it a different way. And I view my job as bringing in new and interesting ideas to try and get people to think about things.
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Matt Miller
Can you do that when the ideological heart of the Fed is in New York, it's at Harvard University, it's in the Democratic Party. How do you move it away?
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Federal Reserve Governor Stephen Myron
Well, I am also of New York and of Harvard University. I get that and, and you know, have, have no trouble saying my view even when it's wildly out of consensus and you know, speaking my mind, as long as I believe what I'm saying, I have no problem sort of speaking in my mind and, and getting my thoughts out there.
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Dani Burger
Well, Governor, mine, it's not only the rest of fomc you have to convince, you have to convince these markets as well. Especially if you are concerned about housing. You were very outspoken last year when the Fed was cutting and long term rates were going higher. If that were to happen, happen again, would you be proponent? Especially as you see, one of the Fed goals should be for moderate long term rates, that the Fed should be using the balance sheet in order to keep long term rates lower.
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Federal Reserve Governor Stephen Myron
So Two things there. One, last year I was an opponent of the Federal Reserve cutting rates because I thought that neutral was higher and that therefore the Fed was not as restrictive as they thought that they were. And therefore I viewed the accommodation being provided as as inappropriate. And I think, as you're pointing out, that long yields moving higher meant that I was actually kind of right. You know, I think that that bears that out this time thus far. And still early days. The meeting was, you know, two weeks ago, three weeks ago. You know, it's still early days, but, you know, thus far we haven't seen that type of increase in long yields that we saw last year.
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Dani Burger
What if it were to happen, though? Well, if I'd be using its balance.
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Federal Reserve Governor Stephen Myron
Sheet, if it were to happen, the first thing I want to do is ask why, right? Why is it happening? And if I came to the conclusion that it was happening because, because it was inappropriate to cut rates because my inflation analysis was wrong, or my analysis of neutral or the apple gap was wrong, then the first thing to do is probably to reverse course on the front rate. My, my view is probably not to sort of resort to balance sheet at the first opportunity. That balance sheet is the tool that you use when your more standard tools can't work for the, for the problem at hand.
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Michael McKee
A couple of lightning round questions here as we're getting a little short on time. Do you think that if you'd taken a sort of less extreme position, not come in arguing for 150 basis points or so of cuts, that you might have more influence on your peers on the open market committee?
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Federal Reserve Governor Stephen Myron
I don't think my position is as extreme as you make it sound. My, my dots for next year and the year after are not so dissimilar from the rest of the committee. All that's different is the fact that I want to get there a little bit faster. I think that most people on the, on the Fed, you know, so they operate with, in your Taylor rule application, you probably have an inertial parameter, right, where there's a sluggish adjustment. So wherever policy should be set, you sort of phase it in slowly from where you are. So if you're wildly off from where you are now, there would still be a very slow adjustment to where policy should be set. And I think that that's the type of thing that some people sort of default have in their, in their mind. Right? That's not my view. My view is that if policy is out of whack, you should adjust it at a reasonably, at a reasonably brisk Pace in part because if you stay restrictive for too long, you really run the risk of bringing up a gap materially wider that you, that you don't want. And in my mind, we're not at that point yet because policy just became more restrictive because monetary policy just became more restrictive, because our star just moved down. Right. We're not at the point yet where if you sort of keep it there another day, it's a crisis, but if you keep it there for an extra year. Yeah, I think you have, you have problems on your hands.
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Michael McKee
Given the import that the President has attached to the Fed. As a member of the Board of Governors of the Federal Reserve, do you feel like you exercise executive authority?
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Federal Reserve Governor Stephen Myron
No, I don't exercise executive authority whatsoever.
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Michael McKee
Have you talked with the President or anybody at the White House since you came to the Fed?
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Federal Reserve Governor Stephen Myron
Well, as I said, I think we two weeks ago, I don't remember. Time runs together for me these days. The President called me after I was sworn in to congratulate and that was, that was, that was very generous of him to sort of say congratulations. And he has never, you know, he has never asked me to sort of do, to take a specific policy action. He shares his views about where monetary policy should be, but he shares that with the world.
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Michael McKee
Talk to him since, since that congratulatory call.
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Federal Reserve Governor Stephen Myron
No, no.
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Michael McKee
One very quick question. Have you had your interview for Fed Chair yet?
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Federal Reserve Governor Stephen Myron
No, I have not. And personal decisions are not decisions that I make.
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Matt Miller
All right. Hey, thank you so much for coming in. It's been a fantastic interview. Really appreciate you being so forthright. Fed Federal Reserve Governor Stephen Myron as well as Bloomberg's Michael McKee, our policy and economics and correspondent. I will add to our terminal clients that we do have an adjustment for policy inertia in the Taylor rule function. You can see it on the terminal typing T A Y L go.
- [24:43]
Indiana University Narrator
Indiana University is shaping the future of health care. Advancing discoveries that become treatments for Alzheimer's, obesity, cancer and other 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.
- [25:16]
Federal Reserve Governor Stephen Myron
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- [25:39]
Federal Reserve Governor Stephen Myron
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