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- [00:00]
Governor Stephen Myron
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- [00:23]
Host 1
Heading into the opening bout, let's turn to the Federal Reserve. The newest Federal Reserve governor, Stephen Myron, making the case for aggressively lowering interest rates to avoid damaging the economy. Diverging from some other FOMC members, I'm pleased to say that joining us this morning live from the Federal Reserve is Governor Myron himself. Governor, welcome to the program, sir. We've got tons of time to talk about what's going to happen next. Your thoughts on the labor market, the balance of risk, the broader economy. I actually wanted to lead the conversation with this one. Governor, what was your experience like? I'm sure this was unexpected 12 months ago. What was it like walking into the room and was it different to what you expected?
- [01:00]
Governor Stephen Myron
Good morning and thanks for having me. It's great to see you again. Look, you know, walking into the room, you know, I had had a good briefing ahead of time about what the meeting wouldwhat the meeting would be like and so that was very helpful. But I will say that everyone was extremely friendly and welcoming and kind and collegial and I really appreciated that. And you know, it's important to understand that the FOMC is a body, the Federal Open Market Committee is a body that makes decisions by arguing on the merits of the economics and the economics and the merits policy. And, and that's how it was. And everyone was very collegial in airing their views and and I the same and that's how it'll continue to be. You know, we make policy, as the chairman said last week, by persuasion. And so I will continue to try to lay out my views and make the case as best as I can.
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Host 1
Governor, I since you got the opportunity to articulate your argument, just how much daylight did you sense was there was between you and everyone else on the committee?
- [01:56]
Governor Stephen Myron
Well, I mean, you know, it's sort of funny if you look at the dots in the summary of economic projections, you know, obviously there's a diverg my, my projection for appropriate policy for 2025 versus where the weight of everyone else's is. But if you look at next year and the year after, you know, I'm sure I'm still on the low end. But you know, there's not really that much daylight between all the rest of the dots and myself and following year. So it's really just about the speed with which we come down to what's closer to neutral.
- [02:25]
Host 1
Well, let's get into the neutral argument. I think that's what separates you from a lot of people. So you've got it in the mid twos, Governor, and you think we should get there quickly. Can you just build out why you that's the case and why we should get there so fast?
- [02:38]
Governor Stephen Myron
Sure. So look, you know, I discussed a number of forces which have kicked in over the course of this year and which are, I think, in stark contrast to where they were last year. So I've argued that neutral was higher in the past than it is now and that that neutral was higher for a variety of reasons. But I've highlighted recently fiscal policy, you know, sort of driving up net national borrowing, decreasing net national savings, and as well as immigration policy driving what was the biggest positive population growth shock in my lifetime and has now turned into the biggest negative population growth shock in my lifetime in very rapid succession relative to how changes in population growth normally occur in the data. And so to me, when you have huge swings in net national savings driven by fiscal policy, and you have huge swings in population growth driven by changes to border policy, it would be bizarre for me to think that that wouldn't have implications. The fundamental structure of the economy gets reflected through for monetary policy in the neutral rate. So my view is that neutral was higher last year because of these reasons. And so last year policy was not as tight as a lot of people believed. And now neutral has come down or is in the process of coming down. And now neutral, and now policy is more tight than people believe. And this has happened recently. You know, these policies didn't change, you know, sort of overnight. They've been kicking in over the course of the year. And that means that policy is becoming tighter every day as these policies continue to kick in. And my view is not one of enormous economic pessimism. You know, I don't think the economy is about to crater. I don't think the labor market is about to fall off a cliff. However, the neutral rate is drifting down, and as a result of that, it's incumbent upon policy to adjust in response. And the longer that policy stays excessively restrictive, the greater the risks to the downside for the economy. If policy stays excessively restrictive for too long, then you do get to in a situation in which you have a meaningful, a meaningful increase in unemployment rate and a, and a failure of the employment mandate.
- [04:38]
Host 1
So, Governor, that's the tension. I think in your view, that's worth exploring just a little bit more. On the one hand, you don't think the economy's at risk of breaking down, but you also think we are excessively tight at the moment and getting tighter. There are some people who would say, and we've had this conversation around the table this morning, if we were as tight as you're suggesting, why is the market within 1% of record highs, why credit spreads super tight and why is this economy still doing okay?
- [05:03]
Governor Stephen Myron
Yeah, so that's a perfectly natural thing to ask. Sorry. And let me say two things. One, I don't think that all financial conditions are universally loose like that. In particular, if you look at the housing market, I think it's in quite a different state than, you know, sort of some financial markets and you know, sort of security markets. So I don't think that that's necessarily a holistic look at the world of financial conditions in the economy. But even that aside, I think that, you know, people in financial markets tend to focus a lot on monetary policy because interest rates are, you know, sort of huge tradable instruments, Right. But there's so much more that goes into determining economic growth and the state of the economy and inflation and employment than monetary policy. And I think that attributing all changes in financial assets to monetary policy can be a mistake. And in particular, that's what I tried to do in my, in my speech, you know, was, was to draw out some of these, some of these effects from non monetary policies that are affecting the economy and of course, therefore also financial markets. And so if you have changes in tax policy, right, like significant incentives for investing that lower the effective tax rate on capital, of course that's going to get reflected into capital assets. If you have significant changes to the regulatory environment where you're removing barriers to operations that companies can make more, more cheaply, which by the way is disinflationary and pushes out the output gap, then of course that's also going to be reflected in asset markets. So I think it's a mistake to conflate the state of financial conditions with monetary policy. They're connected, they're related, they affect each other, but they're not exactly the same thing. And in the speech I go line by line through these different items. And the reason why monetary policy doesn't have to react to the hawkish side in response to these act into these policy changes is because they push out the supply side of the economy at the same time that they Push out demand. And so if you're increasing supply and demand at the same time, there's no change to the output gap. And of course it's monetary policy job at the end of the day to be balancing the output gap, to be balancing aggregate supply and aggregate demand in the economy so it doesn't overheat or, or underheat.
- [07:05]
Host 2
I think there are a lot of people, Governor Myron, who would agree with you that probably the neutral rate is quite a bit below where we are now. You said even the other Fed governors did seem to agree with that, but not necessarily the speed. And I'm still unclear why do you think it is so important to get rates down by 125 or 150 base 150 basis points more year if inflation is still running hot and you're not seeing anything alarming in the underlying economy?
- [07:33]
Governor Stephen Myron
Yeah. So this year is merely a function of where the calendar is. So my, my view is that policy is quite restrictive and so I'd like to adjust quickly to get back to a more neutral area. Right. That just means a series of 50s until you get, until you get much closer to zero. The fact that it's this year is just, just a function, just a function of the calendar. But again, it comes back to the longer that you stay restrictive, the greater the risks. And let me put it this way, like it was just a few years ago that we were having endless conversations about declining population growth rates and the whole world becoming Japan in terms of interest rate profiles. Right. Those forces are still real. Those dynamics are still real. They didn't go away. Those channels, you know, those channels by which population growth affects neutral rates didn't disappear. I would rather react, I would rather act proactively. Right. And sort of. We know that we just had the biggest population growth shocks in many people's lifetimes, mine included. Right. I would. We know what the consequences of those are economically. I would rather act proactively and lower rates as a result ahead of time rather than wait for some, you know, giant catastrophe to occur because you suddenly wake up and find out that you, you are sort of resuming those dynamics. In my mind, if you wait to sort of to see the result of that, you have waited too long and there will be, there will have been a potentially quite material downside. Downside, miss. To the employment mandate.
- [08:52]
Host 2
A lot of people on this show have been wondering what the reaction mechanism is going to be for a Federal Reserve that does start to see inflation as transitory. Once again, the idea that we have been above 2%, the 2% target for the Federal Reserve for 53 consecutive months for more than four years. If there is an upsurge in inflation, how long are you willing to look through that if you are cutting rates before you say, hold on a second, maybe we need to stop.
- [09:20]
Governor Stephen Myron
Yeah. So I would want to understand why there was an upsurge in inflation and what was driving it and then sort of think about whether that shock is likely to be persistent or whether the shock is likely to be transitory. And it's the nature, it's the nature of the shock. It's not just is inflation higher for a certain number of months, it's why is it higher or why is it lower and how long are those, and how long are those shocks likely to persist? And, and if you have a situation in which inflation is much higher because there's, you know, sort of, let's say a very significant expansion in national borrowing that drives up demand, could be driven by fiscal, could be driven by something else that might be the type of thing that you would expect to be, to be more persistent in my mind, if you have the type of shock that's driven by a, you know, basically one off change to tax rates. Right. Whether that's a VAT tax or tariffs or anything else. You know, that in my mind is not the type of chalk that would lead you to think that inflation is going to, is going to be sticky for a long period of time.
- [10:15]
Host 2
Time.
- [10:15]
Governor Stephen Myron
And in fact, there's, you know, most central banks around the world, I think actually all of them would sort of, you know, encounter this in a much more direct manner through changes in value added taxes. And they always look through them. You know, they always say, okay, look, the VAT went up or the VAT went down and that's going to affect the inflation statistics for a period of time. But then we all know that this was basically a fiscally mandated price change. And monetary policy shouldn't respond necessarily to fiscally mandated price changes because that's not indicative of changes to the underlying supply, demand, balance in the economy, which ultimately drives the type of persistent inflation that the central bank cares about.
- [10:47]
Host 2
Governor Martin, I'd love to get your thoughts a little bit more deeper on housing this thing. Matt Miskin, Neil Dutta have talked a lot on this program about going into next year. Do you think the housing market will weigh on a deceleration of inflation? Is that part of your thesis on inflation coming down?
- [11:03]
Governor Stephen Myron
Yeah, I mean, it explicitly is. I mean, look, you know, supply and demand dominates all things Economically. Right. And if you're increasing the demand for housing by dramatically increasing population growth without a material increase in the supply of housing at the same time, of course you are going to get upward pressure on shelter inflation and then vice versa. If you start decreasing population growth because of a change in border policies without destroying shelter supply or shelter supply keeps on expanding at a rate that it has been in previous years, then you get a relative change in shelter inflation once again. So it's just, it's, it's simple, you know, it's simple supply and demand. If we have a material downward population shock because we have negative net migration, that's a net increase in the supply of shelter. And I think that the study that I cited in the speech on Monday work where Albert says found that elasticity of one basically that a 1% increase in the, in the, in the number of immigrant renters leads to a 1 percentage point change in the rents.
- [12:04]
Host 2
Right, but immigration is short term, right? This is a short term story. Would you be willing to revise up neutral if immigration is not much of a drag?
- [12:14]
Governor Stephen Myron
Well, I mean, you know, I have good reason for expecting that the immigration story is going to persist at least for another three and a half years and I think quite likely potentially after that also. So I'm not convinced that immigration is really a short term story.
- [12:28]
Host 1
Governor, just before you go, because I know you've got to run. Have you got a taste for this? Is this a position you'd like to keep beyond the end of this year?
- [12:36]
Governor Stephen Myron
Look, you know I love this country and I'm happy to serve this country in any way that I'm asked to do so. But personnel decisions are not decisions that I make.
- [12:43]
Host 1
Governor Myron, appreciate your time. Diplomatic end thank you sir. Thank you very much Governor Myron from the Federal Reserve on the next views from the Fed and his argument for a much lower neutral rate.
- [12:53]
Host 2
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