Well, the meeting starts in earnest this morning with the chairman's speech, and that'll be the kickoff. The data that I've seen since our last meeting has been to me very much in line with the picture that I was seeing before. And of course, I'm setting my policy views based on the forecast of where I think the economy is headed rather than where we were over the past several years. But we've been missing on our inflation target for more than five years. My forecast is that we're going to continue to end this year around 3% inflation, and by the end of '27, we'll hopefully get down to the mid-2.5%, the mid-2%. But that's not meeting our 2% objective. So to me, there's no tension in our mandate. We've got an employment picture that's right around my estimate of maximum employment. It's been stable and in balance for the past 12 months, and we've been missing on the inflation side. I don't see restrictiveness in the markets. When I talk to people in the capital markets, what I'm hearing is that capital is free-flowing. Investors are looking to put more capital to work. Businesses are looking to make bigger investments. And so I think we need to put some restriction into policy, and so I believe it's time to act for us to do that. The longer that we wait to get inflation under control, the more pain is felt by everyday Americans, and the more difficult it may be for us to ultimately get it back down.
We were talking last night about the meanings of the word reaction function, and some of our colleagues were saying, "Wow, that's kind of a fancy name, super technical, super technical name, mathematical formula." What is it that Kevin Warsh is not doing? I mean, how do you define what Wall Street is looking for, and how do you put your own views into that?
Well, I can't tell you anymore what Wall Street's looking for because now I'm on the policymaker side. I'm no longer on the market participant side. But I can tell you I view communicating about my viewpoints as a critical part of the job. I think talking to the public, listening to the public, hearing what they're experiencing, hearing how they're seeing the economy unfold is a critical part of what I do every day. And I need to help put my views out there so that businesses and households can make better-informed decisions. I like to tell people when new data comes in, how is that going to change my perspective? How might that change the decisions that I and maybe my colleagues are going to make? Because I feel like that will help them to manage their businesses and their household finances.
Well, when you look at what the chair might have to say today, kind of the bottom line question for other members of the open market committee is: how do you feel about the idea of not giving forward guidance, and particularly given your background, having the bond market tell the Fed what it thinks is happening in the economy?
Well, the markets are definitely one component that I look at. Financial conditions and FCI indices are something that I spend time looking at to get a sense of how monetary policy is transmitting into the real economy. But having spent 30 years in markets, I can tell you that market participants tend to be focused on making money for themselves and their clients, and they do that by betting on what the Fed will do, not what the Fed should do. And so I think markets are an important complement, but not a substitute for the Fed.
And you are underselling yourself. 30 years—you were sterling in the repo market at Goldman Sachs. There's no one in the history of the Fed that understands short-term paper like you do. You got it done. But it's true. You undersell yourself.
I think we have a lot of experts. The staff is incredible at the Fed. That has been one of the—
I agree on that. Plus, you're out of Cleveland Fed where you invented in 1983 how we look at inflation with the Cleveland series. Do you still see trust in the market before and after this speech and the litmus paper, the narrowness of the repo market? Do we still see trust in what we're doing?
I think our credibility comes from our ability to deliver on our commitment to the dual mandate, and we are committed to delivering on bringing inflation back down to target.
So this is critical. Ed Yardeni publishing—I was literally on—you had the Gulfstream, sorry, I was coming on United slow motion—and Ed Yardeni published that, look where nominal GDP is, we have plenty of room. Let's not fear it. Beth says raise interest rates. Let's raise them because we're nowhere near nominal GDP. Discuss that dynamic.
I think what I'm seeing is that there's not a lot of restriction in the economy. You see businesses going out and raising lots of capital, trying to make new investments. That is good for growth. That can be helpful. But as Ed Yardeni points out, we've been seeing GDP growth coming in above what I'd think of as kind of long-term averages. When you have that kind of growth, that can put pressure on inflation. That can put pressure on people chasing prices higher. And what I hear when I'm out in the district is I hear from businesses that they're seeing their input costs go up. I was talking with an auto parts manufacturer in Northeast Ohio who was telling me he's seeing double-digit inflation in some of his input costs. He's trying to pass those on, but it's hard to get those increments to go through.
Do you actually see signs of froth in the market? Things that actually are excesses that need to be taken out?
That's not what I'm focused on from a policy restriction perspective. It's more about getting inflation under control.
But I guess that the question is what exactly would raising rates do if it can't necessarily affect the price of oil? It can't necessarily affect the price of tariffs, and frankly, it's not exactly going to curtail AI borrowing if there is all of this backlog that we're seeing from the likes of Nvidia and other semiconductors.
We have one blunt tool. We have interest rates. That is our main policy tool that we have. We have the balance sheet. We have our communications. That's kind of the full suite. But primarily we use interest rates. And so when I see an economy that to me seems like we've got inflation too high for too long, what monetary policy would tell you to do is to raise interest rates.
Do you think that interest rates are still the primary tool of this Federal Reserve given some of the questions around exactly what Fed Chairman Kevin Warsh plans to do?
