Wall Street Wants Rate Cuts. The Fed Doesn't.

We're now just over three months into the conflict with Iran. President Trump just said that the Strait of Hormuz could remain closed until Labor Day, though he doesn't think that's likely. How do things look to you right now when you look at the U.S. economy? Well, I think there's two factors influencing the U.S. economy right now, and they're kind of working in opposite directions. One is definitely we're experiencing higher energy prices, and households are paying more for gasoline and other goods that have a high energy component. So we're definitely seeing some hit to kind of household spending from that and some negative effects from that. But at the same time, we have this huge A.I. wave of investment in data centers and A.I. and technology. So what I'm seeing is an economy that continues to have solid growth, GDP growth around two percent this year, maybe two and a quarter percent. So that's good. And importantly for monetary policy, a labor market that is stabilizing in a pretty good place. We're seeing unemployment be around four and a quarter, four and a half percent for the past six, nine months. Latest indicators, the labor market continues to be, I think, healthy, and those are very positive signs. Of course, so that I feel like the economy is in a pretty good place. Now inflation is the other part of that story. We definitely see higher inflation readings, partly because of the effects of past tariffs, but also importantly now because of the higher energy prices. So we're definitely seeing inflation up quite a bit because of that. And I expect, you know, assuming that the straight actually does open in the next few months, I would expect inflation to peak in the next couple of months, but be pretty elevated through through the rest of this year. Well, let's talk about inflation a little bit more, dig into that, because you just said you expect headline inflation to peak in the next couple of months. What if the street remains closed through Labor Day? And what about the fact that we saw core PCE up 3.3 percent in April on a headline basis, up nearly 4 percent? Wholesale prices up 6 percent. And you warned back on April 16th that we're already starting to see energy prices, higher energy prices being passed on. You're not worried that we could see broader ripple effects for price increases that are stickier? You're not worried about longer lasting inflation? Well, I'm I'm I am obviously thinking carefully about that. And but let me go back to where where inflation is really elevated right now. And it's really in goods. So we're seeing in energy goods and anything that uses a lot of fuel or energy. So definitely we're seeing that. And that's from the conflict in the Middle East. We're also seeing in imported goods through the effects of tariffs. And there's a third category as well. We're seeing in prices of chips and semiconductors. That's dream driven, I think, in large part. I mean, primarily by the A.I. boom and the global demand for chips. So those are the three areas in the goods category that we're seeing the higher inflation. When you look at services, you look at housing services, other services, that inflation actually has come down quite a bit. And I think it's going to stay relatively steady or continue to come down. So I feel like a lot of the inflation is because of tariffs, because of higher energy prices, but also this added thing about chips. So, you know, when I think about how do I see inflation in the next six months or so, I expect the tariff effects to basically be kind of near their peak from the past tariffs, depending on what happens in the Middle East. Hopefully energy prices will stabilize and maybe even come down later when the street reopens. And on the A.I., I think that we're going to continue to have some upward pressure on inflation. Right now, I'm not that worried about dramatic second round effects or persistent inflation. We haven't seen any indications of that. Inflation expectations remain well anchored. We're also seeing costs from the labor side be very contained and consistent with low and stable inflation. Labor market is, I think, in a good balance. So we're definitely getting some drivers of inflation higher. But other factors, I think, are kind of more pointing to stabilization, to lower inflation. But again, I don't want to take anything for granted. Watching all of these indicators of data very carefully to make sure that the inflation that we've seen recently does not get embedded into higher, more persistent inflation, because that obviously would be an outcome I don't want to see. So it sounds like at this point you feel like you can look through this? Well, I mean, when you say look through, I think you have to be careful about what that means. I mean, yes, in the terms of I don't expect energy prices to increase dramatically next year and the year after. So it's more of a one time kind of effect. But I do think there's always we always have to keep in mind that higher energy prices means higher airfares. It means higher fertilizer prices, which means higher food prices. So there are effects of energy prices and some of the tariffs that probably will last through the year and into next year. It's really just looking for other signs of kind of inflation getting more persistently embedded. I'm not seeing that yet, but definitely there's a risk of that given, you know, how much of a kind of a boost to inflation we're seeing. Well, yeah, I mean, on the tariffs now, the U.S. is proposing tariffs of at least 10 percent new tariffs on imports from at least 60 different countries. So that's another thing, right, that you need to be on the lookout for. And I know you said you don't see a second round effect, but. Right. So, you know, one of the things that did happen is with the court decision, we saw tariffs come down. I think some of these announced tariffs, assuming they go into place, will kind of replace in a way the earlier tariffs. So depending on what happens, this could be kind of maybe not a large impulse to higher inflation on its own, but we'll have to wait and see what happens with these tariffs. We've been watching that data very carefully. Clearly, the tariffs are passing through into higher U.S. prices. So if there are higher tariffs, that would be one of the factors to include in kind of the thinking about where inflation is going. Given your outlook for inflation, do you believe that the easing bias in the policy statement should be dropped or retained? My view is right now, first of all, monetary policy, I think, is exactly in the right place. I don't see any need to raise or lower interest rates right now. The same time, you know, to get to your question, I do think the upside risks to inflation have increased somewhat given or increased significantly, actually, given recent developments, especially with energy prices and some of the other factors pushing up inflation. At the same time, which is very good news, we're seeing the economy be remarkably resilient, continue to have solid growth and the labor market stabilized in a pretty good place. So I do think that those balance of risks to achieving our maximum employment and price stability goals, we've seen the risk maybe on the price stability go up. And some of the risks on the employment side have, I think, edged out a little bit. So, you know, my view is, you know, I don't see an obvious argument to that we should change the interest rates, but I also don't see an obvious kind of direction where we would go in the future. So to answer your questions, I don't see, you know, I don't see you would change the language. I don't think I don't think forward guidance is particularly helpful right now in terms of direct, you know, in terms of trying to communicate monetary policy. I think where interest rates are now is where they need to be. And I would leave it at that. Well, to your point, you said you don't think the Fed needs to raise rates or lower rates right now. And given that you think baseline headline inflation is going to be peaking in the next couple of months, is it safe to say that you don't think we're going to need rate hikes later this year for the duration of the year? Do you see sort of holding rates steady? Well, I think, you know, I'm going to say it, you know, that we have to be data dependent. And that data dependence means, you know, depends what happens. It depends what happens in the conflict. But right now. But right now, I feel like we're in a very good place. But we do need to respond if conditions change, whether it's on inflation, whether it's on the employment side of the mandate. Of course, we need to, you know, just be focused, as we all always are, in doing our very best to achieve our two goals. I do need to ask you about the bond market, because you have said that you think you're modestly restrictive at this point. First of all, is that still your stance? I do think that we are modestly restrictive. OK. But the bond market doesn't think you're restrictive enough because the yields on the two year treasury has been 25 basis points above where the current range of the Fed funds rate is right now. Do you think the bond market is wrong that they're pricing in a 25 basis point rate hike? Well, you know, I don't know about right or wrong because, you know, people who are buying and selling these securities are having to come to their own conclusions. And I think talking to market participants, they're very focused on what happens with the conflict in the Middle East. So they come to a view of where the risks to that, what are the risks to inflation, to the economy, and they come up to come to their own judgments about where interest rates are likely to go. I mean, my reading of Fed funds futures and the bond market in general is, you know, basically they have us on hold for a while, maybe with a slight upward tilt to the path for interest rates. But they've proven to be very data dependent themselves. When the news is better on the Middle East, you know, expectations of yields come down or yields come down. When the news is maybe not as positive, you know, they move up. So to me, the bond market's kind of dealing with the same issue we're dealing with, which is trying to predict where the economy is going in a very, very uncertain environment. I do have to question you a little bit, though, on the notion that you're modestly restrictive, because you've said that the neutral rate has moved up because productivity has gone up and that you don't see productivity being driven by AI at this point. But there's the thought that it will drive productivity going forward. So if that's the case, how can you be that modestly restrictive? And if headline inflation is also going up, doesn't that de facto on a real rate basis make you a little bit more accommodative? Well, you know, I always think of this in a forward looking way. So it's absolutely right. The inflation right now is higher. And so the real interest rates, if you will, is lower. But I'm looking ahead to next year and thinking about where's inflation likely to be next year, which is significantly lower than now because the tariff and the energy price effect should have been behind us. And so thinking about interest rates relative to that. My view about, you know, it's very hard to know is policy restrictive or not. We're not that far from a neutral interest rate. But I always look at how is the economy performing? Is the economy, do we see continued downward pressure on underlying inflation? I think we are seeing some of that. Are we seeing we've we've seen quite a bit of, you know, kind of containment of, you will, of wage pressures and and labor market kind of cooling over the last couple of years. So I feel that that's how I interpret it. But, you know, this really depends on how things play out right now. I have a you know, I'm hoping that inflation will come down later this year and next year as the effects of the tariffs and and energy price increases become more, you know, in the rearview mirror. But we have to just see what actually happens. Kevin Warsh was confirmed as the new chairman of the Federal Reserve about a week and a half ago. Have you spoken with him? Oh, of course. He's he's, you know, you know, obviously in his role now as chairman leading the Fed and the FOMC. Chairman Warsh is very focused on his job that is incredibly important, obviously, in terms of leading the Federal Reserve and also a very challenging time in terms of the issues we just talked about in terms of the economy, all the different factors influencing the U.S. and the global economy and the factors influencing inflation. And obviously he's very committed to doing his best and our best together to achieve those goals. So you said on May 28th that clarity and transparency are, quote, critical and foundational. Do you believe that Fed officials should speak frequently? Do you have any plans to change the frequency with which you communicate with the public in the markets? You know, I think I do believe that this transparency and clarity is really what's important. So I don't I'm not particularly worried about how often someone speaks or, you know, I don't plan to change what I'm doing in terms of speaking. But I think, you know, we always need to and have been very focused on how to you know, what what's what are our goals? What are we trying to achieve? How do we view the economy and what's the best way to achieve that? And of course, you know, by you know, by design, the Federal Reserve, the FOMC has 19 participants. We have a wide range of views of people, different backgrounds. They have different perspectives, bringing their views from across the different regions in the country. And I think that diversity of views and and, you know, understanding of what's happening and thinking about the risk is actually really healthy. We don't have groupthink. We have people who think, you know, very carefully, very hard about how do we best achieve our goals. And I don't think that undermines the Fed at all. I think it's just it's an honest reflection of the people's perspectives and really, you know, our shared agreement about the importance of achieving our goals. So we're really debating, like, how do we think of the economy, where the risks are and how to best do that. Switching gears, Governor Powell, sounds strange to say that now, former Fed Chair Powell, said on Sunday that Fed governors and Reserve Bank presidents hold office with legal protection against removal. He stressed that administrations play no role in the selection of oversight of the 12 regional Fed bank presidents, of course, of which you are one. He warned if any administration finds a way to remove Fed officials over policy difference, then future administrations will also do so as well, and that will hurt the credibility of the Fed. What are your thoughts on that? How do you view that? Well, I mean, I've just a couple of comments, you know, from my perspective. One is the independence of the Federal Reserve is, I think, really very important. It's not it's not important for because it, you know, feels good or it's convenient, but because it helps serve the American people. You know, when I I've now been, you know, in the Fed over 30 years and I've had the privilege of witnessing, you know, the policymakers and staff come together and, you know, grapple with the very difficult issues that we've seen over the over these decades. And they come in with a without a partisan agenda. They come in with one agenda and that's how do we best serve the American people? And I think that's one of our best strengths. And we want to preserve that. You know, from my point of view, I'm just focused on doing my job as best I can. I, you know, we're just starting to ramp up now, preparing for that FOMC meeting, getting the best thinking, getting the best analysis and coming in and having an honest and open debate and make the best decisions we can, knowing that six weeks later, we're going to do it again. Really quick, because we need to wrap. What is your message to the markets? Because we're about to go into the blackout week before your next meeting. Well, I think the main message I have is I think that that monetary policy is right where it needs to be right now. We'll, you know, we will be data dependent and depending on how circumstances change. And we're just focused on getting inflation back to 2 percent on a sustained basis.