Want to get over to Steve Leeman. He's got a very special guest this morning. A special interview with New York Fed President John Williams. Steve.
Andrew, thank you. Yes, I am here at the New York Fed where I've been. We don't know how many years in a row now, but several with President John Williams for a traditional December holiday interview.
Well, welcome back, Steve.
Thanks. And John, I was just remarking about how great our teams are who scheduled this months in advance. Knew there would be a shutdown, knew when the BLS would open, and knew that yesterday they would release the inflation report, which they of course did not know, but we're lucky here to have you to comment on it. Yesterday that inflation report came in lower than expected, but it was a little controversial. Give us your takeaway from that report.
Well, a couple things. I think that some of the data we're seeing is actually pretty encouraging in the sense of the CPI news. And I think it represents a continuation of the disinflationary process we've seen, and I feel like it's consistent with what I was expecting. Now on the headline though, there were some special factors, some technical factors that really are related to the fact that they weren't able to collect data in October and not in the first half of November. Because of that, I think the data were distorted in some of the categories, and that pushed down the CPI reading probably by a tenth or so. It's hard to know. We'll get some when we get the December data. I think we'll get a better reading of how much that distortion had, how big the effect was. But I do think that that was pushed down a bit by these technical factors.
Started you up, John, because this is a big issue right now. Did your army of economists already crunch the data and figure it was pushed down by a tenth? Is that a running estimate you have?
Well, that's just a rough estimate I'm saying. But yes, it is because of a couple of technical factors. One is they only collected data in the second half of November when all the sales are on, and that's going to give you a bit of a downward bias. Also, there was some issues about the rent data and things like that. So it's hard to know, but definitely I took some positive signs from some of the categories that weren't as affected by that. But I think that really this is just a continuation of the data we've been seeing, and I'm going to wait and collect some more data in the next month or two to get a better reading of that.
Also from the department of being lucky rather than good, we're two days after the jobs report. Give us your sense of what's happening in the jobs report and your level of concern with the level of payroll growth.
Well, I think the rise in the unemployment rate, and again, I think we have a similar story as with the CPI. I think the basic signs from the employment report, again they didn't have all the data for October, but they did have data for November. I think what we're seeing is steady job gains, especially in the private sector. So that's good news, a continuation of moderate growth. In the unemployment rate, I think due to some technical factors again because they weren't able to collect the data in October, it probably boosted the unemployment rate in November maybe by a tenth. So I think if you think about that, the unemployment rate has edged up to around 4.5%. It's pretty consistent with what I was expecting. Again, we'll get more data in the next few months to see those technical factors from the government shutdown effects. Those will fade away from the data. But my conclusion is that the labor reports have been pretty consistent with what we've been seeing, especially with this gradual cooling of the labor market. No signs of a sharp deterioration at all.
So put A and B together, the inflation and the employment war. Did any of it change your outlook for where interest rates need to be?
Well, so far that's just a few data releases. Fortunately, we'll get a lot more data before our next meeting, and of course we'll get a lot of data.
But just for the record, you're the one that put out the data dependent t-shirt.
Yeah. So I do see the data as broadly consistent with the patterns that I've been seeing, and I think we're consistent with the decision we made to cut interest rates at our last meeting. So I think that again, none of this data is changing my view of the outlook. I would take some positive sign from a little bit lower inflation data. That's what we've been looking for. But nothing that's a game changer yet. We'll collect more data, and I think monetary policy is really well positioned right now to gather more information, see what that's telling us about the economy, the outlook, and the risks to achieving our goals.
So you use that phrase 'well positioned,' which is a new operative phrase at least taken by the market, which means you're probably going to take a pause in January. Am I reading that correctly? Is the market reading that correctly? That's the way the market is priced right now.
Well, I never take a pause in my job. I'm always hard at work collecting the data, analyzing it, looking for all the signs of what it means for achieving our employment goal and our price stability goal. So I don't think of this as a pause or anything like that. I do think the data are telling us that we're seeing gradual movement of underlying inflation back to 2%, but we're going to have to watch all of the data as it comes in and see what it tells us. I don't personally have a sense of urgency to need to act further on monetary policy right now, because I think the cuts we've made have positioned us really well. One goal here is to stabilize the labor market. I don't want to see the labor market cool too far. I want to see inflation come down to 2% without doing undue harm to the labor market. It's a balancing act, and I feel like we've got this in a pretty good place.
John, I don't know the extent to which our viewers know that you're one of the world's experts when it comes to understanding this concept of the neutral rate, the rate the Fed would set to not grow the economy any, stimulate the economy, or cause it to contract. In your view, where are we relative to the neutral rate?
Well, the way I think of the neutral rate is in terms of the real or inflation-adjusted interest rate. So today, based on a forecast of inflation of a little under 2.5% for next year, that puts the real interest rate somewhere around 1 to 1.25%. So that's in the range of estimates of neutral that are out there. So I think we have moved closer to neutral. My personal view, speaking for myself, is that the neutral rate is probably a little bit below 1%. So we're still mildly restrictive in terms of the stance of monetary policy. We still have some room to go ultimately to get back to neutral, but that's not guiding my views on what we should do at a specific meeting. That's more of a conceptual framework to think about it. But clearly, I do think that we've gotten closer to neutral. I still think we're a little bit above.
But the question has to be the follow-up question has to be: do you feel a need for the Fed to remain modestly restrictive?
Well, I think right now with inflation still at something like 2.75%, and we need to get on a sustained basis back to 2%, I think that a modestly or mildly restrictive stance that we now have gotten after the cuts from last year is helpful in that regard. But I don't see this as overly restrictive or very restrictive. This is getting in the vicinity of neutral.
Can you walk us through your outlook for growth? Where do we end this year and what happens next year?
