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- [00:00]
A
So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now a global workforce of 300,000 can use AI to fill their HR questions, resolving 94% of common questions, not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business IBM,
- [00:33]
B
Bloomberg Audio Studios Podcasts Radio news the bond move continues.
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C
Yields slightly higher for a third consecutive day. Inflationary fares making a comeback and some people out there trimming Fed rate cut bets. Federal Reserve Governor Stephen Myron, I'm pleased to say, joins us around the table for a conversation about that and a whole lot more. Governor Myron, good morning.
- [00:52]
D
Good morning. Thanks for having me.
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C
Thank you for being here, sir. Let's start with the shock over the weekend. What is the prudent response for policymaker confronting a shock like the one blank out in the Middle East?
- [01:01]
D
Well, at the moment I think it's too early to sort of have any firm views as a result of that. Oil's gone up a bit. But the bigger question is does oil stay up or does it come back down? And that of course, will depend on how, on how things play out. But even that said, even if oil stays at these types of levels, to me it's difficult to get a lot of read through as a result of that. Sure, oil will feed into headline inflation, but the evidence that it feeds into core inflation in any sort of material way, unless there's a huge move in oil prices I think is quite limited. So it's difficult for me to get very excited about a policy implication of what's happened thus far.
- [01:32]
C
So some people come on the program, spoke to later and I and said these Federal Reserve officials might be conditioned by the post pandemic experience coming out of 21 into 22 and the inflation spike then and the energy shock that developed at the time emanating in Russia. Is this different in a different place?
- [01:47]
D
I think it is. I think that attitude is a little bit of fighting the last war. And I think that the Federal Reserve for decades has had the view that, you know, that that headline shot headline inflation shocks like oil are best looked through. And you sort of focus on core inflation because it's indicative of where inflation is going to go in the future and you focus on labor market. And that type of reasoning leads you to look through an oil shock. Now of course, what happened in 2022 was a bit different because the other policy settings were different. Right. Don't forget monetary policy was as expansionary as it had ever been. At the time, fiscal policy was injecting trillions of dollars into an economy that was recovering thanks to vaccines and medical, medical improvements and Covid passing on its own. And so the policy environment was very different. And so it was very easy for a slightly inflationary shock to feed through into the broader economy and create this type of persistent inflationary problem that the Fed dealt with. We don't have that right now. We don't have fiscal policy that's slamming on demand. In fact, if anything, supply is moving out quite aggressively and monetary policy is still modestly restrictive in my view. So the policy settings, the economic environment is different. To focus on that, as you described a moment ago, to me, is fighting the last war. That was a unique circumstance.
- [02:53]
B
At the same time, some people have argued that the January jobs report raised a question about just how weak the labor market actually was. Even Governor Chris Waller came out and said, ok, now it's a coin flip for whether we should cut rates at the March meeting. If we do get confirmation of that strength with the February payrolls report that we get on Friday, would that make you rethink whether March was an appropriate time to cut rates?
- [03:14]
D
So look for me, for me, we've got two years of a trend, two plus years of a trend of gradually weakening labor markets that sort of set in in 2020, in 2023. It's way too early to reject the notion that that trend continues based on one or two labor market reports. And when you look at the totality of labor market data, there's still evidence to me that it needs more support from monetary policy. When I look at things levels of young folks and folks without college degrees, when I look at people who are unemployed for long periods of time, long term unemployment, to me that's indicative of there still being slack in the labour market that monetary policy can accommodate. So I think it's too early to reject the notion that a two plus year trend is over on the back of one one print.
- [03:55]
B
Are you concerned though, that right now the market is moving the way that any rate cut would be perceived as heightening long term inflation pressures just by virtue of some of the supply shocks that we're seeing? And frankly, the fact that people do see strength reemerging in certain pockets of the economy, I mean, how worried are you that a rate cut in March could be potentially counterproductive and cause the long end of the yield curve to rise.
- [04:20]
D
Yes. So if you saw evidence in inflation markets that markets were concerned about long run inflation expectations, that's the type of thing that would give me pause. But I don't see evidence of that so far. Short run inflation expectations have come up quite a bit when you look at CPI swaps, but that's just because of the mechanical read through of oil prices into headline inflation. When you look at longer tenors, there hasn't been much of a move. And so as a result, I don't get the impression the market is concerned about long run inflation expectations.
- [04:46]
C
You've used this phrase modestly restrictive a few times in this conversation already. What is modestly restrictive to you? Can you put numbers on that kind of thing?
- [04:54]
D
Yeah, I think we're probably about a point above neutral now. And so my view is that we, we ought to start by getting back to. Getting back towards neutral.
- [05:00]
C
So the 100 basis points, points and reductions you want this year is not to become accommodative. You believe it's to get back to a neutral static.
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D
Yeah, pretty much.
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C
What would it take for you to start thinking about the need to get accommodative?
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D
So I would, I would want to start thinking about inflation coming in below the target, which is a risk that I've highlighted. If I end up being, you know, I've, I've emphasized how that risk.
- [05:19]
C
Governor, what would be the source of that risk to get below target inflation?
- [05:22]
D
Sure. I've emphasized housing markets a lot, that I'm expecting a faster convergence down of, of renewal rents to new rents which will lead housing inflation to converge quickly to new rent levels. And there's reasons for that that I've talked about at length. I don't need to repeat them here unless you want me to. But if I end up being right about housing and wrong about tariffs, and so I've also argued, I've also argued that I don't view tariffs as driving goods inflation. You know, I don't view that because imported prices, imported good prices are not inflating faster than all good prices, which is what you would expect to see. And given that, given that backdrop, I don't view tariffs as driving, as Dr. Driving goods prices. So if I end up being right about housing and we get a sharp deceleration in housing this year because of quirks of how housing is measured and because of dynamics of renewal rents versus new rents, and I end up being wrong about goods prices and goods inflation comes down quickly over the course of this year, then we're going to undershoot. We're going to undershoot our target.
- [06:17]
C
And you think that's a risk we need to get ahead of?
- [06:20]
D
No, I'm not saying we're going to, we need to get ahead of that. That would get me to argue. We go below neutral.
- [06:25]
C
That's the conversation we're having. How preemptive you might need to be in a moment like this when on the committee are thinking, let's wait and see. Wait and see what happens. Lisa was asking, how would you vote at the March committee meeting. Is this a moment to wait and see or a moment to act?
- [06:38]
D
No, I think, I think it's a moment to continue acting. We have, I have policy, I have projections for unemployment, I have projections for labor markets. So to my, for, for inflation. So do my colleagues. And I believe it's appropriate to continue acting in accordance with those projections until you get evidence that you have to change your projections. And thus far the evidence from event, from events over the weekend haven't led me to change any of my forecasts for the labor market for inflation over the medium term. So it's too early to respond to them.
- [07:04]
B
You said that you think that the news rate is a point below the 3.75 where we currently are. And I'm just wondering how quickly you think it's important to get to neutral based on the uncertainty, based on the disagreements that people have about A, where neutral is and B, how things are going to transpire.
- [07:19]
D
Yeah, so last year I was voting for 50s because we were higher away from it. And then as we made progress cutting and getting closer towards neutral, I felt it was appropriate to say, okay, now we, now, now I, okay, moving in 25 clips. I prefer to still continue moving in 25 clips until we got to neutral and then to reevaluate because at the end of the day I don't see an inflation problem in the United States. Now, of course, if we get evidence that what's happening in the Middle east is bleeding through into broader inflation, then that would change my mind. But thus far there's no evidence.
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C
What would that evidence look like? What would you look for spending specifically?
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D
I'd look for inflation expectations starting to move as a result, starting to move consumer based. I tend to think that the market based ones are more important, are more important to me or evidence that, or evidence the economy is starting to in some sense overheat again. Then I, then I would be comfortable sort of changing that view and moving more slow, moving even More slowly. But at the moment, you know, I see, I see it as appropriate to continue, continue cutting.
- [08:16]
B
Do you have any company on the committee?
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D
You know, I can't speak for, I can't speak for anyone else and I think most people probably end up sharing my view that it's too early to draw dramatic conclusions as a result of
- [08:26]
B
coming to a very different conclusion about what to do as a result of not drawing conclusions. They say, okay, well then don't move. You're saying keep moving. So I mean that's that they started.
- [08:34]
D
Everybody is, I think people are generally where they were last week. Right. And it's just too early to change your mind based on, based on what's going on. My, my forecast for inflation, unemployment in my view call for continuing, continuing interest rate cuts. Other people disagree, you know, and so they also haven't, haven't moved yet. But as we get information, they'll update
- [08:54]
C
two more things to work through. So the credit jet is one and another. I want to squeeze them both in if we can. So let's start with the jitters. So block, a fintech company came out in the last week or so and cut almost half of its staff and they said they're making a massive AI productivity bet. As a policymaker for you, do you consider that noise or signal? What is that?
- [09:13]
D
So that's one company. It's indicative of what you could have more of. But this is how productivity gains and technology work. They allow you to produce more with fewer inputs, with fewer resources. And so if you were able to produce the same amount with fewer workers and less capital, then your productivity goes up. That frees those workers not necessarily into unemployment, but to do other work. And this is, this has always been the story of, of human technological progress and human economic growth. We create new technologies, they destroy some jobs and then they create new jobs. They free people to do new activities.
- [09:47]
C
You don't think it's different this time?
- [09:49]
D
You know, I don't have a reason for, like I said before, you know, it's too early to reject a two year trend of, of, of labor market moving in gradual cooling direction. It's too early to reject a tens of thousands of years trend of how technology works in the economy.
- [10:03]
C
We've talked about these sources of risk and one has been the geopolitical problems. This is another two. And the third one is connected in some cases to what's happening with AI. It's also the credit jitters as well. So this raises the question about potential financial risk for you and the committee how are you thinking about things as they develop?
- [10:19]
D
But just one last point on the I. Even as it destroys old jobs and creates new jobs, that is the type of, that is the type of job transition that is typically accommodated by a central bank. Right. You don't want to prevent the new jobs from being created by having policy that's too restrictive. If you have an increase in job loss due to new technology, you have to accommodate that and allow the new jobs to get created instead of preventing it.
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C
Do we need to support what's developing in credit?
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D
I'm sorry? Credit.
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C
What's developing in credit?
- [10:44]
D
So look, you know, I am like with events in the Middle East, I'm not at the point where I have a strong read through from what's going on in credit into the economy. I don't, I'm not at the point where I think it's, where I think there's any sort of policy response that's necessary or adjustment to forecast that's necessary. One thing that I think is interesting about what's going on in credit is to me it highlights a potential shortcoming of our financial conditions indices. We've got a lot of people who argue it's inappropriate to cut because financial conditions are so loose. They've been arguing that for a long time. But one hypothesis of mine that I'm exploring is that those financial conditions indices aren't showing you what's going on in private credit because you don't get the marks for them. And to the extent that private credit has been a major driver of credit growth over the last half decade or so, that's missing from the financial conditions indices. So when we get these jitters in private credit markets and then say, oh, financial conditions are so loose, it's just because we decided not to look at the part of the financial markets that are tight.
- [11:36]
C
So do you think we are seeing an unwarranted tightening of financial conditions so far?
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D
Well, you know, sort of unwarranted is a bit of a, is a bit of a heavy load. But I do think, I do think it's, it's. I would be cautious about concluding that financial conditions are so loose when you're getting these, these things happening in private credit markets.
- [11:52]
B
I just want to ask, have you talked to President Trump recently?
- [11:55]
D
Not since I resigned.
- [11:56]
B
Not since you resigned. I'm just wondering how difficult it is to conduct policy with a huge unknown hanging over the committee about who is going to be the next Fed chair and what this process is going to look like past April.
- [12:09]
D
Well, I mean, I think we have a pretty good idea of who's going to be the next, the next Fed Chairman. We don't have a good idea yet of exactly when he will become the next Fed chairman. But I'm hopeful that we get that type of, that type of clarity soon. I think it would be, I think it'd be great to have that type of clarity.
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C
Governor, is it weird being on the Federal Reserve and not knowing when you're going to exit? Just sort of like there with an open ended calendar on what's going to happen next?
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D
It makes it difficult to plan
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C
for personal reasons. Governor, it's good to see you. Thanks for having me, for making time for us. We appreciate it. Governor Stephen Martin there of the Federal Reserve.
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D
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