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Let's attempt to get a clear view on things, not just buy stocks. Let's talk about the future of this Federal Reserve. The White House casting a wide net to replace Fed Chair Jay Powell. The US Treasury Secretary Scott Bessent praising a quote very good meeting with the former St. Louis Fed President Jim Bullard during his search. Jim joins us in the studio for more. Jim, good morning.
Good morning. Thanks for being here.
Not many people get to experience what you've just experienced, sitting down for a conversation to potentially become the Fed chair. Can you walk us through what that was like? What's the process like?
Well, as you say, they have a lot of people on the list and they're following through. It's a transparent process. I think that's good. I think all the people on the list are good. So, this was a meeting just to talk in broad terms, but I can't really report out details of what was said.
The Treasury Secretary is incredibly dialed into the economy and financial markets. I'm sure you experienced that in your conversation with him. I think you can share with us the kind of questions he's asking you, which essentially is how do you view things right now? How do you think about the labor market?
I thought the Fed's decision was a good one. This looks like a sequence of three moves in a row through the end of the year. You want to be data dependent, and the chair stressed that in the press conference, but I think the committee was worried about the non-farm payrolls report that revised the previous months down considerably. Non-farm payrolls is kind of the key number for the Fed. So I think that made them a little bit nervous. There are stories you can tell about why that's happening, but on the other hand, it could be weakness in labor markets. So, I think that tilted things toward a little bit more dovish policy. So, they brought October into the picture and now you've got markets pricing probably 75 by the end of the year. That would be a significant move by the end of the year, and they have a little bit of optionality if the data goes the other way. So, it's a pretty good decision from the point of view of how this works.
You said they have optionality if the data goes the other way. How high is the bar for strength in the economy to really prevent the Fed at this point, given everything, from going three times this year?
Yeah, I think the committee's also spooked a little bit by last year because last year the data looked weak but then turned around abruptly. So they'll be nervous about that. It's hard to say exactly how high the bar is. That's a judgment call that'll have to be made by members of the committee.
There's this other disagreement on the Fed. Clearly, there are a lot of them, and understandably because on Wall Street there are a lot of disagreements as to what the economic backdrop is. But you could see a spread in terms of where the neutral rate was from say 3% in terms of the long-term dot for some of the Fed members or 4% for some of the others. Where do you sit?
I think it's still fairly low. So you could argue maybe three and a quarter or something like that. So if you're still above 4% with the policy rate, you're still 100 basis points above that number. So that's why I've been saying they have room to maneuver. They have room to come down some on the policy rate and still put downward pressure on inflation. Inflation is still above target and has been debated at length over the last 6 months or so, but I think they're in a pretty good position right now.
How credible do you think the pursuit of 2% actually is?
I think the committee is very dedicated to the 2% target. I think it would be foolish to abandon that target. It has set an international standard across all the countries of the world, and if the lead economy says we're going to back off that, then all the other countries would back off. You'd be back into the 70s and you'd have a lot of chaos. So that is not a good idea, and the committee will try to get back to 2%. However, I think you want to get back on a nice smooth asymptotic path to 2%, and the forecasts always show that. That's always the way the Fed thinks about it.
The 2-year rolling view. Now, some people might say that's aspirational, magical forecasting. It's just we're always forecasting this two years out, but never actually hit it based on history. Which raises the credibility question. The Federal Reserve's cutting interest rates with inflation closer to three than it is to two, with unemployment closer to four than it is to five, and with equities at all-time highs. Is this the right time to back away from that restrictive monetary policy that's going to lead to that glide path back towards 2%?
It's restrictive, but even when they come down it'll still be somewhat restrictive. I think one of the pieces of risk management you have to think about here is suppose the economy is tipping into a marked slowdown. Then the committee would want to be accommodative in that circumstance, and you'd want to be below your neutral rate. So you'd have a long way to go. You'd have to really scramble if that happened. I'm not saying that's the base case, but that's a possibility. And so you probably want to be a little bit closer to neutral so you didn't have to work so hard if you got into that scenario.
One of the tests for a lot of people is if inflation does go up maybe say at the end of this year, early next year, which a lot of people are expecting that it will. What's the Fed's response? Do they keep cutting or do they look past it as simply a one-time price adjustment?
