Welcome to Central Bank Central. I'm Kathleen Hayes. A very special day for the Federal Reserve in many ways. First of all, the new chair, Kevin Warsh, giving his first biannual testimony to Congress. On the same day, the inflation report, the latest CPI has come out and it's coming a bit better than expected if you're looking forward to seeing somewhat weaker inflation. So, this is a perfect day to bring back to Central Bank Central, Jim Bullard. Jim Bullard, former president of the Federal Reserve Bank of St. Louis, one of the nation's foremost economists, respected scholar leaders, chosen in July 23rd as the inaugural dean of the reimagined Daniels School of Business at Purdue University. Great to see you.
Great to be here. Thanks for having me.
Well, and of course just all we can talk about this later, but right at the beginning I'm going to say, how's the reconstruct, how's the rebuilt business school going? Are you guys almost there?
Oh, it's great. We have our new building coming online in less than a year here. So, we're very, you know, looking forward to that and we'll get all our students in the three buildings that we have. So, that'll be great.
Quicker to get to the football field, the basketball court for everybody?
I don't think we're any closer.
Well. Okay. Well, let's dive into the many big topics we're looking at today. Let's start with that better than expected consumer price index. The headline was expected to drop. It fell by 0.4 on the month. The core actually it dipped a bit itself. I think that was the real, you know, the plum in there. It was reported as zero, of course, even though the core only fell a little bit, you know, a 0.22% first core CPI decline of any kind in over six years. I'm sure you've had a chance to look at the report out at 8:30 this morning Eastern. What do you see there?
Well, it was a soft inflation report, which is very welcome. The committee had been enduring quite a few hot reports in a row, so this is welcome news. I think it's only one month's numbers. It probably doesn't affect headline PCE as much as it might first appear. So you're probably still looking at core PCE on a 12-month basis well over 3%. But still moving in the right direction and something the committee's been looking for, I think. In the very short term, I think this will reduce the probability substantially of any policy action in July. And it'll change the debate a little bit from there.
Of course, that's the big question now. You know, we know that oil plays a big role, right? And oil isn't just the price of, you know, what's going through the strait or what have you. It's not just that immediate cash price for oil, for gas, etc. It goes into other prices, right? And that's another thing people have been very wary of, right? The longer it stays high, that more it does that, the more it gets to the core CPI. So, how much of this is oil, and how much more is it there's some real trend in what prices are doing?
Yeah, I think some of it is real. I haven't seen a breakdown in how much, but one thing to just keep in mind is that the committee usually looks at core PCE, and that's at least on the surface, that's totally throwing out the energy. So, really the energy in some way shouldn't have any impact on that. You can also look at Dallas Fed trim Mean, which would throw out some data in a different way. That's running much lower and that's something that Bostic has talked about. But the committee has said that they like core PCE. There is some flow through from energy to other components. I always thought it was, you know, at most, 2/10 or 3/10 on that. I would say also about oil, that it does not look like the situation in the Middle East is going to resolve cleanly the way markets were hoping for and pricing in and I think policy makers were hoping for maybe, maybe 6 or 8 weeks ago. I think this is basically a long-running saga, that's going to continue. And markets are adjusting to that and they're no longer expecting a sort of clean resolution. And because of that, I think you can't really expect energy prices to come down in the near term the way markets had expected a few weeks ago.
So, when you look at things like services, that's another part of this. The labor market is holding up fairly well, right? At this point and that's the other side of the mandate, by the way. But I think that if people are working and there's demand, is that something then that people, you know, they want to go on vacation, they want to do all kinds of things and that hit services prices. Is that kind of looking steady to you? So, no worry for the Fed, you know, they can kind of sit back and relax, I think is what you're saying, wait and see sort of thing, certainly at the next meeting, or is that something you see as a possible sticking point for not inflation not just stopping to go up, but actually gradually coming down and particularly of course when you look at the PCE.
I think the economy is pretty strong. On the consumption side, I think you've got especially the top half of the income distribution that's sitting on major wealth advances from recent years. The wealth to disposable income ratio is at all-time highs. Stock markets are probably not too far from their all-time highs. For those people, and they are the lion's share of consumption, the world looks pretty good. So I think from a macro, of course there are others not doing too well, but from a macro perspective, you've got a lot of support for consumption and you've got the AI boom going on which is really leading to booming investment. So C plus I looks pretty good.
And so I think at least domestically speaking, you've got a pretty strong US economy that's probably feeding into some of the inflation pressures that we see. That's why that committee's going to have to be very careful with their preferred measure of inflation above 3%. I always regarded 3% as a kind of red line for the committee because that's, you know, you're 100 basis points off your target. Unless you can tell a pretty good story, this is going to go back pretty quickly. You really probably have to act to make sure that inflation goes back to target.
You know, you just mentioned at the beginning that you think that inflation report is such that it's a backdrop for the FOMC and people who vote on these interest rates to sit back. Don't worry about them even having to seriously consider I guess a rate hike at the July meeting. I think a lot of people have been not expecting a rate hike right away. Maybe more people in the markets, of the foreign Fed officials I've spoken to have also been looking, if anything, more toward the end of the year. So, but I assume that's what you would be saying now. That's your view. If you were sitting around that table in Washington, D.C., you know, you would be saying, okay, guys, we're watching this closely, but you would this is something you'd be looking for more before you would have to hike that rate.
Yeah, I don't know how much more you really have to look for. I mean, I don't think you with these kind of numbers if you got some hot inflation reports, I don't think you can wait till December. I think it would be too late at that point. Now, I understand, you know, the committee right now with the war going on, they were kind of looking forward to resolution of the war, and they were looking forward to a report like this one today on inflation tempering the inflation outlook compared to what it was. So, for that reason, I didn't think they'd be able to go in July, but by the time you get to September, you'll have more data and maybe a little bit more clarity. You've also got Jackson Hole in there. So, they could probably use the July meeting to at least make September a live meeting with a possible decision to raise the policy rate at that point. And I think that's the most likely outcome still as of today.
Okay. Well, I just want to remind everybody who doesn't, you know, watch the Fed every day, every week, every other week, we do. Most people do know about Jackson Hole. They've heard about the Kansas City Fed annual symposium toward the end of August. And of course, that will also be a first for Kevin Warsh because the Fed chair always kicks off the event, you know, the proceedings, with a speech. And over the years, Fed chairs have used that speech, that time, more and more to send a message. Do you expect Kevin Warsh to be sending any kind of message then? And if so, what would it be?
I don't know how he'll use the speech, but I'm sure he'll talk about a natural thing to do would be to talk about these issues around the task forces. And that they're in progress, and he's hoping for good outcomes on all five dimensions. That would be the sort of thing that you could use the speech for, and then as you get very close to the speech, that you can add in a paragraph or so that, you know, might give some indication about policy, but if or you can just sidestep that all together as a chair and not say too much about policy. So, I think he's disinclined to do forward guidance of that type. But we'll see when we get to Jackson Hole how he wants to handle that. I do think it's a major venue, and it's a chance to lay out longer-run issues. And Kevin Warsh has certainly talked about reform at the Fed. And so, he could use that as a moment to flesh out his vision for that reform and to give a progress report on how far along it is at that point.
Well, let me ask you a real basic question. Kevin Warsh testifying today, today is the House side of Congress he's speaking with. Right now you've got a headline on TV, the Fed has no tolerance for consistently elevated inflation. I want to ask you about some of his language so far and what he has said. Because today actually I think in his written testimony and certainly in the last policy statement from the FOMC at the June meeting, the Fed vowed to attain price stability. The statement said inflation remains elevated relative to the committee's 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors including in energy. The committee will deliver price stability. In testimony today, the Fed has no tolerance for high inflation. We share a resolute commitment to price stability. So I don't have yet a Chairman Warsh's decoder ring, so I thought I'd ask you to translate Fed speak a la Kevin Warsh. What is he saying? Is what he's saying different from promising to hit the 2% target? Are they just committed to the goal? How do we translate that? Because the Fed's been above target for what? About 5 years now?
They've been above target for 5 years, but I would draw a distinction between the earlier part of that period where inflation was running very high and threatening Fed credibility in a very serious way. The committee took substantial action during 2022 and 2023. And that was very successful but not completely successful. So they got rid of on headline CPI maybe 600 basis points of inflation. That's quite a bit without a recession. But the last 100 basis points or now 140, 130 basis points are still sticking. So they haven't been able to get that last run out of there, and that's really the second half of that five-year period. So, I would draw a distinction between those two.
So, I do think it's disappointing though that they haven't made progress in the last 2 and a half years. Whereas, you know, 2 and a half years ago they would have said by now you'd be right at 2% and they're not. And I know they've been citing temporary factors and tariffs and so on. I don't think those arguments are all that strong. I think it's just been they're a little bit more dovish than they thought they were. And so, they'll have to get tougher in order to get rid of the remaining inflation that they have.
Okay. Well, that sums it up, right? I mean, they were cutting rates for a couple years and I think at one point early in that time, when you had just left the St. Louis Fed, you were in favor of heading towards rate cuts, right? And those continued and yes, tariffs, there've been so many things that happened. But does it matter as much? Does it matter as much to the Fed? Does it matter that much do you think to Kevin Warsh that you really do have to get to 2% or at the very least say, well, we're going to be satisfied with a 1 and a half to 2 and a half target, at least get, you know, in that range to really then be credible and to, you know, and get to that point and convince the markets and everybody else. And I guess that's one of the biggest questions now for Kevin Warsh, he's the guy in charge.
Yeah, I've always liked the point target better. I think if you name a range, then there's kind of the implicit idea that if you're within that range, you won't take any action in either direction. And so, there's a range of inaction. And then when you get to the border of that range, then you would take action, but what happens in practice I think for countries that have done this is that the higher end of that range is always the place where the economy ends up. So, I think that would be too much inflation for the US.
And one thing we learned about the most recent inflation episode was that people really do not like inflation. And that comes through in survey work and other types of work on inflation experience for consumers and businesses, they don't like operating in a system where the prices are fluctuating around going up faster than they thought because they kind of get out of sequence. You want the prices to send a good signal about what the supply and demand conditions are. When you have a lot of inflation, that gets all mixed up and you make worse decisions both on the business side and as a consumer.
So, if the Fed makes a rate hike as soon as September, some people think maybe it's going to wait till after the midterm elections, right? Which would take us to December. Do you think there's been more rate hikes needed? Is one going to be enough or is this going to have to be something that continues for at least a couple more?
