B (2:27)

Just quickly you say markdown in the future because the Fed actually marked up GDP for 26. What do you mean in the future?

C (2:33)

No, so like, when you look at these dots right in the, in the, in the step, their projections of appropriate policy and projections of economic fundamentals like growth and inflation conditional upon, upon, upon appropriate policy. So my, my, my projections for growth and inflation are conditional upon getting my policy forecast, right? My policy projection. If I don't get my policy projection because the rest of the committee is more hawkish than I am, then we wouldn't meet my growth in inflation projections. We'd underperform them. And so because policy has been, in my view, too tight for the last year, that means that my expectations of growth will ultimately be, will ultimately be unsatisfied because we didn't get the policy that I wanted.

A (3:11)

You have GDP 2.6% roughly over the next few years. Are you saying that the appropriate growth rate is something like that, 2% and 2.6% and not necessarily 3% or above?

C (3:22)

Well, so that's conditional upon getting, upon getting the, the policy projection that I want. Right. And I think, and I think, and part of that is due part of the reason why it's a little bit lower than, I think 2.8, 2.9 is probably more, more where it would be if we got, if we sort of had the right policy the entire time. Part of the reason it's a little bit lower than that is because we got to account for policy having been too tight over the last 12 months.

B (3:44)

Right.

A (3:45)

There's also a question about the reaction function. We've been talking about the data that we're going to be getting tomorrow. What would you have to see to change your view? I mean, if we saw, let's say, the unemployment rate go down to 4.4%, would you start to question whether 150 basis points of cuts is really necessary this year.

C (4:01)

That's a great question. And before I answer it, let me step back a foot and say that my forecast is conditional upon shelter inflation coming down. Right. And there's people who agree with me, by the way, like you look at the research from Goldman Sachs, you know, it's pretty similar to where I am on shelter. They've got shelter inflation running below the pre Covid rate by the end of the year, similar to where I have it. Where I differ from a lot of my colleagues again is thinking that goods inflation is not being driven by tariffs. I don't see tariffs being driven by goods inflation. I see goods inflation. I'm not sure what's driving. I listed a few possibilities in the speech in December. I think the jury's still out on that one. But if I end up being right on inflation and gold, sorry, on shelter, if I end up being a shelter and Goldman ends up being right in shelter and I end up being wrong on tariffs and everybody else is right on tariffs, then we're going to undershoot our target. Two sided risk is back. And I think that people haven't really internalized that yet. And I think it's important to appreciate that. Now where would I be wrong? Because so much of my disinflation forecast is based upon shelter. I'm going to be wrong if market rents pick up again.

A (5:01)

So you think this is all an inflation issue and not anything to do with the labor market?

C (5:04)

No, as I said before, unemployment is. Unemployment is somewhat above the. Somewhat, somewhat above where I view the natural rate. And so it's 60 basis points, a million people, you know, of unnecessary unemployment that we could reduce by having a more appropriate policy which to Lisa's point.

A (5:18)

Is there a line in the sand on the unemployment rate tomorrow that would maybe have you think about this a little bit differently. What if the unemployment rate drops down 4.5% or even 4.4%?

C (5:26)

Yeah, I would absolutely adjust my. I would absolutely adjust my projection. So if you look at the September step, right. I was 50 basis points higher than I was in the December step. Part of the reason why I adjusted my dot down by 50 basis points is because the labor market didn't perform per my expectations that I had in September and because inflation actually outperformed to the downside. Right. So it was appropriate to adjust my dot down. And then on top of that we had the two type policies I described. So if the data come in a little bit better, yeah, of course I'm going to adjust my expectation in Just.

A (5:53)

The past few weeks we've heard from a number of your colleagues talking about how actually they feel like we're pretty close to neutral. Have you made any inroads convincing them that they're not right about this? The way you see the world?

C (6:04)

You know, I can't, I can't speak for them, but you know, I think that every month we come in and the unemployment rate ticks up a little bit and the inflation, you know, the inflation data sort of seem to be doing a little bit better. I think it's really difficult to argue that policy is neutral, especially when we've been on this, this course of gradual loosening of the labor market for a couple of years now. It's just really difficult in my mind to sort of argue that that policy is not, is not restricting the economy.

B (6:27)

A couple of words I want to pick out, and one is neutral and the other is correct. I think it's very difficult to say this is where I think neutral is and this should be the correct policy rate because it's such a guessing game as to where neutral is. And I think you understand that. Of course. I also want to pick up the difference between being an economist and being a policymaker. When you say two way risk, I think that really makes us all think about speed and the appropriate speed to adjust monetary policy when there is two sided risk. Why do you think we should be going this fast this year in your mind to cut that aggressively in 2026?

C (6:59)

Sure. So, so same thing as I said, in the last few times I've been here, we're still materially above neutral in my mind, and there's not really a reason to be materially above neutral. If the labor market is in a weakening path and inflation is, or an underlying inflation is already running close to our target and on trajectory to hit it, to hit the target. There's just not a real reason to be so restrictive. And we're running unnecessary risks on the labor market by being so restrictive. And so in my mind, it's like we're selling options for nothing. And I don't see why we're selling those options.

B (7:27)

This just requires such a strong amount of conviction though, coming out of the pandemic, I think what we all learned was a massive degree of humidity because there were so many things that we thought were obvious that actually things just turned out to be completely the opposite. And I wonder if this year we should have the same approach to monetary policy. As a monetary policy official, do you have to sit here and say actually the prudent way to do things is actually to move slowly and work things out meeting by meeting, because that's what I hear from other members of the committee. And I'm wondering why you see things so differently.

C (7:54)

Sure. So first of all, I'll say that I was right about inflation coming out of the pandemic. And if you sort of go back to 2020, when I was at the Treasury Department, you know, we were arguing for a smaller stimulus package because we didn't see, we didn't see Covid as a similar type of recession that we had post GFC, post.com bubble where you had persistent deleveraging, dragging on demand that caused the balance sheet recession with a persistent slow, crappy recovery. Right. Covid was like a switch turned off. Right. People stayed home and the switch turned on when they started going out again. And so there wasn't going to be a slow recovery. And that's why we were pushing for, for smaller stimulus packages, because we didn't think that it merited that type of package. We were concerned about inflation picking up. So I did, I did get that. I did get that. Right. And I do understand the value of, of, of. Of being cautious and having humility in these things. I will say my forecast, as I said before, is predicated upon shelter inflation. And shelter is a weird thing where market rents give us a window into measured, of measured inflation that's very different than other sections of the inflation index. We know that market rents, a weighted average of single family multifamily market rents, have been growing at a 1% rate for two years now. We know that average tenant rents have caught up to new tenant rents. Right. There are statistically mechanical relationships that give you a lot of confidence that measured shelter inflation is going to come down a lot.

B (9:11)

Right.

C (9:12)

You don't have that type of confidence when you're talking about goods. I said before, I don't know what's driving goods inflation. Right. I don't have this, this forecast that goods inflation is going to, is going to come down because it's just driven by tariffs that my colleagues seem to have. Right. I don't have that type of confidence on areas the index that I think are much more difficult to understand. Shelter is a mechanical thing from market rents to measured inflation. And therefore it's in my mind appropriate to have that high degree of confidence. And to Lisa's point, where would I be wrong? If the market rents pick up again? If the market rents pick up, then I'm going to say my mechanical pass through from, from market Rents into measured shelter. Inflation is getting invalidated. And we'll see that.

A (9:50)

Just to hone in a little bit on the housing aspect, since that has been a really hot topic, how much signal would you take if you did start cutting more aggressively at the Federal Reserve and 10 year yields rose and that actually created an issue for mortgage rates and the pass through there? It might actually help with the disinflation, but it might exactly be the outcome that you're looking for.

C (10:08)

Yes. So this is an area where I'd want to, where I'd want to have, I'd want to not jump to conclusions because I'd want to sort of try and analyze it very carefully and think about what the market is saying, think about what the economy is doing. And if it's the case that you cut rates and you sort of get a burst of activity in some sector of the economy that's not housing and that ends up crowding out housing, then, you know, you wouldn't really mind. You're focused on aggregates, you're focused on inflation, on aggregate inflation. You're focused on aggregate unemployment. Right. If it looks like you cut rates and the bond market is giving you a very clear signal, and I'm just talking about like, you know, trading behavior for a week, I'm talking about a very clear signal over the course of a period of time that it's not the right move, then I think, yeah, you want to, you want to take that signal and you want to think about what's the market telling me that I missed? Is the market right? Am I wrong? Let me rethink my framework.

B (10:56)

You're going to miss this when it's all over. It feels like you're enjoying this. You're going to miss this when you have to leave the Federal Reserve.

C (11:03)

Well, you know, that's not part of my forecast.

B (11:07)

Are you going to hang around?

C (11:08)

Oh, I have no idea. You know, we'll see. I don't, I don't make personnel decisions.

B (11:12)

Okay. You've heard nothing at all from anybody?

C (11:15)

You know, I think that, you know, we're very clearly now getting into, getting into the new year. And the president, you know, the president has said in the past that he would make announcements as we got there. So, you know, I imagine we'll be getting some at some point. But, you know, I don't know, I don't know anything about my future. So I would, I would, I wouldn't mind it.

B (11:33)

What a position to be in. We're all sitting here waiting. Just like you, Governor. Thank you. It's good to see you.

C (11:37)

Thanks for having me.

B (11:37)

Thanks for being so generous with your time. The Federal Reserve governor there. Stephen. Myron.

C (11:41)

Thanks.