Headline

  • Fed’s Mester: Fed needs more evidence economy is progressing as expected.
  • Fed’s Mester: The slowdown of QT is not imminent, but the Fed will discuss this year.
  • Fed’s Mester: This is the year we will start to have the conversations on the balance sheet.
  • Fed’s Mester: Right now, the evaluation is how long do we need to keep rates and policy restrictive.
  • Fed’s Mester: March is too early for me for a rate cut. I think we need to see more evidence.
  • Fed’s Mester: We need to calibrate policy so we do achieve a soft landing.
  • Fed’s Mester: Incoming data has been consistent with a soft landing.
  • Fed’s Mester: Contacts tell me it is harder now to pass on price increases.
  • Fed’s Mester: This year is about looking at balance between both parts of our mandate.
  • Fed’s Mester: My contacts tell me labor market not as tight as before.
  • Fed’s Mester: On inflation, we need to see housing and goods price pressures continue to move down.
  • Fed’s Mester: We don’t want to see progress in inflation stall out. This report does not suggest that though.
  • Fed’s Mester: The Fed is in a good spot to assess conditions has they come in.
  • Fed’s Mester: We won’t get to 2% target this year.
  • Fed’s Mester: The important thing though is that disinflation has happened while the labor market has remained healthy.
  • Fed’s Mester: December CPI shows the job isn’t done yet.
  • Fed’s Mester: Today’s inflation data doesn’t change my view of where the Fed is.

Replay || Bloomberg News via yahoo finance

Transcript

Michael Mckee: “CPI day. We got mixed news. A little bit of an increase in the headline, a little bit of a decrease in the core. What do you take away from it?”

Loretta Mester: “Well, first thanks for having me. It doesn’t really change my view of where we are. I think, if you think about where we start the year, the economy and monetary policy are both in a good place to inflation. Today is in a much better place than a year ago. And we’ve really seen this discernible progress on the inflation. But the December CPI report shows that the job isn’t done yet and that we’re on the FOMC, as you know, are committed to finish the job of getting inflation back to our 2% target. But the important thing to realize is that disinflation that’s been happening has happened while the labor market conditions remain healthy. So that’s given us an opportunity, I think, to really look at where the economy is going, how it’s going to evolve at the beginning of the year and really assess whether the economy is evolving as we expect it to. My own forecast is that we’ll continue to see inflation move down this year. We won’t get to our 2% goal this year, but we’ll see continued progress and we’ll see continued progress in the product side of the market of getting things into better balance and on the labour market, getting supply and demand into better balance there. So I think we’re in a good spot to really assess conditions as they come in and to really evaluate the balance of risks around both parts of our mandate. And so I’m kind of… obviously we don’t want to see the progress in inflation stall out, but I don’t think this report suggests that’s happening. It just suggests we have more work to do and we’re committed to do it.”

Michael Mckee: “Housing is one of the more interest sensitive sectors, and yet shelter prices have gone up. Do you have a problem with housing and are the delayed lags maybe going to hit it? What’s happening there?”

Loretta Mester: “I mean, housing is complicated because of two things that have happened. Obviously, supply has been constrained. This was before the pandemic even there was constrained supply of housing and now the pandemic exacerbated that. At the same time, demand for housing changed during the pandemic, as well as people wanted to move, move or have a larger house. So they, in the typical play of higher interest rates on the housing market, has been affected by supply and demand conditions that are not typical. I do think we’re going to need to see housing inflation continuing to move down. We’re going to need goods inflation continuing to move down, and we’re going to need to see shelter for shelter ex housing continue to move down inflation and that all three of those components are going to need to see more progress. And there’s research here at the Cleveland Fed that suggests you can’t take one of those out. We’re going to have to see that and we’ll likely need to see some adjustment in wages, although we have seen wage growth come down again to be much more in line with 2% inflation. “

Michael Mckee: “There are some people who look at the wage numbers that we saw in the employment numbers last Friday and the CPI today in terms of real earnings and the Atlanta Fed wage tracker, 5.7%. What are the chances that wages are going to push inflation back up again?”

Loretta Mester: “Well, you talk to a district contact and wage setters and what they do say is there’s been discernible like the labor market they would characterize is still tight, but it’s not nearly as tight as it was before. There’s still, jobs that demand higher wages, but the rate of increase of wages has come down. So, again, we see the adjustment coming. If you look at a lot of different indicators in the labor market, what you see is that supply and demand are coming into better balance. Part of that supply, that labor force participation rate has gone up. People are coming back into the labor market, which is great. I think that’s a really good development and that’s helped us in a number of ways because obviously we’ve been able to do the disinflation. At the same time, labor market conditions remain healthy and that’s made us not have to face a hard trade off there. We have we knew what the job was. Job one was to get that inflation that was exorbitant under control. We have had good progress there, but we just have more work to do there. But this year is going to be one of our really looking at the balance now between both cards are a mandate. And so we’re going to be focused on and I certainly will be focused on making sure that we continue to get inflation on a sustainable and timely path at 2%. While we can maintain healthy labor market conditions.”

Michael Mckee: “You mentioned district contacts. I’m wondering what they’re telling you about their pricing power now, whether they intend to keep trying to get some additional price margin as we go along or whether they have tapped out on price increases because customers are pushing back.”

Loretta Mester: “So we hear mix, as you would expect. So we definitely have had or our contacts tell us that pricing pressures have eased and from their side in terms of their input prices, they’re come down. But also their ability to pass on past increases has been that it’s harder now, right? Customers are pushing back, not uniformly. So some firms have been able to maintain pricing power, but there’s fewer firms that say, we’re not going to push back. They have to sort of work to get those price increases in. But at the same time, they’ve been able to maintain their margins because you’ve seen goods prices and input prices come down. And so, wages haven’t come down that much. But in terms of other input costs, they have come down. So firms have able to maintain their margins. We’re getting mixed pictures as well from indicators like initial jobless claims, which have been flat on a seasonally adjusted basis but on a non seasonally adjusted basis have spiked in the last few weeks.”

Michael Mckee: “I’m wondering what your business contacts in the district are telling you about their plans for their labor force. Are they hiring? Are they status quo or are they beginning to think they might have to let some people go?”

Loretta Mester: “So we’re not hearing much at all about letting people go. I mean, you do hear from bankers that in areas where they’re not making a lot of loans like mortgages, they’ve already reduced staff there. But there isn’t the kind of staff reductions that one would expect to see if the economy was slowing materially. A lot of our firms are still looking for workers. They’re still looking for workers, especially with hard to find skills. But they do say there’s more applications and that fewer of their staff are quitting to go look for another job so that the conditions are so healthy. They still have plans to hire in areas where they need workers and they don’t really have plans to layoff any workers at this point. They’re you know, they’re order books still a pretty decent you know, one thing that did happen is because it was so hard to find workers and all the effort that went into we do still continue to hear from firms that say we’re going to do what we have to do to keep keep our workers on staff because it’s just so costly to the firm If we lose workers and then we need to go back into the market to hold back. So that’s a good thing in the labor market in terms of keeping people attached to the labor market. And that’s why I have, in my own baseline forecast, I have the unemployment rate, which is extremely low right now, ticking off a little bit, but not really moving up that appreciably. And that’s what I mean by we can get inflation down by continuing to keep some restrictiveness in our monetary policy. But we can also have the labor market remain healthy as we do that.

Michael Mckee: “Janet Yellen, you know her and she knows a little something about monetary policy said last week that the economy has achieved essentially a soft landing. Would you agree or would you push back?”

Loretta Mester: “I think we’re aiming to achieve a soft landing. And I think the incoming information that we’ve seen and how the economy has evolved has been consistent with that. But, you know, when you look out, there are some risk around the forecast. And of course, my forecast is basically a soft landing. And so you wouldn’t want to say, okay, job done. We’re on a good path to a soft landing. It’s basically made me made it. We just have to keep attuned to the fact that we need to calibrate our monetary policy so that we are achieving the soft landing and we have to be attuned to risks around that and risk to both size and romandie. I mean, at some sense last year it was the inflation part of the mandate had to have our focus. Now, as the economy has come into better balance, right, the risks have become more in balance as well in terms of those size or mandate. And I think that’s the job this year is to make sure that we’re calibrating our policy to maintain healthy labor markets even as we continue the process to get inflation back to 2%.”

Michael Mckee: “Okay. If you’re calibrating your policy, how do you calibrated market thinks that May is the most likely month, but there’s still a very good chance that you might cut rates in March. Where are you?”

Loretta Mester: “Well, I mean, it’s hard to predict the future, as you know, and it’s really going to be dependent on how the economy evolves. I think March is probably too early in my estimation, for a rate decline. “I think March is probably too early in my estimation for a rate decline, because I think we need to see some more evidence. I think the December CPI report just shows there’s more work to do and that work is going to take restrictive monetary policy. But I do think that as we see continuing disinflation and we could get more evidence that is convincing that inflation is on a sustainable downward path to 2%, then I think we’ll have that conversation about, okay, is it time now when we look at inflation, but also importantly, inflation expectations? Right. Is it time now to move the inflation rate, move our Fed funds rate or monetary policy, start that process of moving it back to a neutral rate? And what I would say is I do sort of a soft landing scenario, right. As being the most likely, but I do think there’s risks around it. We have to be attuned to both sides of the mandate. So a reduction in the funds rate that is, is because we try to keep monetary policy well calibrated to what’s happening on the inflation side of the mandate and employment side. That’s different than having to cut the rate because we’re heading into a recession. So, rate decreases that keep the real rate, not from rising. So when the inflation and inflation expectations begin to come down, right. If you didn’t do anything to your funds rate, you’d actually be sort of passively saying a tighter policy. That’s the part of the evaluation that we’re going to have coming up. But right now, evaluation, I think, is and the policy evaluation is how are we meeting the key interest rates and overall these restrictive stance. The next phase will be about, okay, is it now we’ve seen the conditions we need to start reducing the funds rate and reducing our funds rate back to a more neutral stance. I don’t think we’re there yet. I would like to see more evidence that the economy is progressing as we expected to, as I expect it to before we can do that.”

Michael Mckee: “Well, let me ask you this. In terms of timing, Lorie Logan says the Fed should begin to talk about tapering. Quote, John Williams says no. Which side would you be on?”

Loretta Mester: “Well, I can never say we shouldn’t be talking about some issue. Right. Because I think this is something that’s going to be coming up. John, I think rightly pointed out when he gave his remarks earlier this week that the balance sheet reduction is going as it’s been planned. And we did announce when we announced that started that in May of the plan in May 2022, that at some point as the balance sheet and reserves come down, we’re going to want to sort of reduce the pace of the reduction and normalize. But we still have a lot of reserves in the system, so we don’t have to do that imminently at all. I think there’s time and I’m sure this year will be when we start having the conversations of what that plan would look like and as we also committed to is will make sure that market participants in the public know what the plan is well before we implement it.”