Reserve Governor Steven Myron. Governor, it's great to have you back at Post 9. Welcome.
Good day. Thanks for having me back.
So, I know you just gave this big speech at Columbia about inflation. And before we dive into that, maybe you could just explain why you dissented for even sharper rate cuts when some of your colleagues dissented because they didn't want to cut at all.
Sure. So, I think that policy is too tight. I think that underlying inflation, as I just talked about at Columbia, is already running pretty close to our target, within noise of our target. And the labor market is showing some signs of worry. And so there's some lags between when the Fed does something and when it hits the economy. We have to make policy for a year plus out. And my worry is that if we remain too tight for too long, we're going to exert too much restriction on the labor market and the unemployment rate will move too high.
So there's a lot there, but how about the fact that you see inflation closer to target? Because most people see inflation and they say 2.8% PCE, 3% CPI. That's not target. 2%.
No, it's not 2% and 2% is the target. And there's a lot of folks who point to measured inflation being closer to 3%. But my point is that the vast majority of the inflation excess over target is a result of quirks of how inflation is calculated. And so there's two main things that go into that. One of them is the housing market. The way that housing inflation is measured is really lagging because it looks at all rents. And people most usually only reset their rent when they change their lease, which means they move or they renew their lease or they're changing homes. And that means that all leases will lag current market rents. So we know there's a real lag there. And we know that market rents have been growing at about a 1% rate for a couple years now at least. So there's going to be a lot of downward convergence in shelter inflation. And the thing that gives me confidence in this is the period of catch-up. When you compare certain measures of all tenant rent to new tenant rent, the catch-up is done, which means the uncertainty there is gone. The other thing that really is distorting our view of inflation is what we call imputed prices for non-market services. And so I gave one example this morning of something that's really distorting people's view of inflation in my opinion, and that's portfolio management fees. Portfolio management fees have contributed about a quarter of a point, 25 basis points, to inflation in the last year. It's big, right? That's a really substantial contribution, way in excess of its historical averages, but it's totally imputed and it's based on the stock market moving higher just because that's how the BEA calculates it. But if you look at fees in the industry, everybody in the financial industry knows that fees have been in a downward trend. They've been in deflation for 20 plus years. They fell 6% last year in 2024, right? So we know that asset management fees are in trend deflation and have been for decades. And yet, because of the quirks of the measurement process, it ends up being one of the biggest contributors to core inflation the way we measure it. And to me, that just seems really wrong. We shouldn't keep rates too high. We shouldn't ask people to lose their jobs because of quirks of the statistical measurement process. That's just not how we should be setting policy.
So, do you disagree with Fed Chair Powell who said that a lot of the inflation remaining stubbornly high has been tariff induced?
Yeah, I don't see it that way. I don't see tariffs as being a major driver of inflation. I went through this in a lot of detail in my speech this morning about why I don't see that being the case, and I've been consistent about that. Now you might think that if I don't think the tariffs are driving inflation higher, then core goods will stay high for a long period of time and that would be a problem if I wanted to cut rates, but I see so much disinflation in the pipeline because of shelter that that doesn't bother me at all. As I said, market rents have been growing at a 1% rate for a couple of years now. I see shelter inflation coming down below where it had been growing pre-pandemic. And I think Goldman actually just a couple days ago...
They did. They did over on Friday. They see below pre-pandemic, below 2019 shelter inflation. And then PCE housing going to 2.1 by December.
So they see the same thing. So look, I don't see tariffs driving core goods at all. But if that's not the case, then core goods may stay high for a longer period of time. It doesn't bother me because there's going to be so much disinflation in the pipeline from shelter that we can tolerate it, and we know that shelter disinflation is coming because we can see where the market rents are. They are a window into the future.
To your point though on leases, it makes total sense. People get how leases renew and they stair step over a year. It takes a while. Couldn't you say the same thing about tariffs or pricing in general that's contract based, that maybe some of those aren't fully set yet? A seller hasn't had the chance to reset a price.
Yeah, you could. And as I said, I don't yet see tariff-induced inflation in the inflation data. My read of the data is that tariffs are not driving any material increase in inflation. However, I do allow for the fact that that may yet come. You may yet see tariff-induced inflation. However, if you do, I think there's a couple things to be said about it. One of them is that it's the type of thing that you would look through. Monetary policy works by balancing supply and demand in the economy. If demand is too high, we can raise interest rates to pull it back. If you get prices going up because of something like a tariff or something like a value added tax, standard central bank practice is to look through it because that increase in prices is not indicative of a supply-demand imbalance. Prices didn't move higher because demand moved higher. And so as a result, it's not necessary to pull in demand to compensate for that. That's just not how central banks should behave. So I don't yet see tariff-driven inflation. We may get some eventually. We haven't yet. If we do, standard practice would be to look through it.
And you don't really see it in the longer term inflation expectations. You'd see it show up there and we're not really seeing that. But here's my question, Governor Myron. Even if you're right and inflation isn't as pressing of an issue as some on the Fed think it is, arguing for a double rate cut at a time where the economy is doing pretty well and GDP is tracking 3.6% seems extreme.
Yeah. So, one, we don't know exactly how the economy is doing. The labor market has been showing a trend of weakening over this past several years and there's no evidence that the trend has changed, and the unemployment rate has poked up a little bit. Now, Congress didn't tell us to target economic growth. They told us explicitly to target employment. And so, that's what I think we need to be looking at. And indicators there are still that we're not at maximum employment, right? We're actually quite a ways away from it. And the trend that we're on is...
There's not like severe stress in the labor market yet. Yes, the unemployment rate has ticked up. The trend is not good, but that's why the Fed's cutting rates.
No, there's far from severe stress. The labor market as a whole, as it currently stands, is still in a good place. The question is what's the trajectory and how long are the lags of monetary policy? Now, nobody knows exactly how long the lags are, but I think conventional wisdom is about 12 to 18 months. I would say that's probably fair. And if that's the case, then you need to make policy now for 2027. We need to make policy now for 2027. And if we're looking at, as I said before, the supply-demand imbalance in housing being more reflective of 2022, right? We shouldn't be making policy for 2022. We need to make policy for 2027. And if the labor market continues on the trajectory it's on, and inflation continues on the trajectory that I outlined this morning, we will be in a really bad spot in 2027 because inflation will be undershooting, down towards our target, and the labor market will be quite a bit weaker because we kept policy too tight. Policy right now is too tight. If we don't take steps to adjust it, it'll be too weak further out in time.
This statement by Paul the other day that we're overstating jobs by as much as 60k. Is that a widely held view shared by you?
It may be. I'm sort of not one to try and game the revisions in the system. Economic data are almost always revised. CPI, of course, is an exception. I'm not one to second guess exactly what their revisions will be. When I try and get a more nuanced view of economic data measurement, it's of the type that I did this morning. Not in terms of second guessing whether the data are going to get revised away, but more of do the data mean what we think they mean, right? Do the concepts relate exactly to the concepts that we actually want to focus on? And the things that I analyzed this morning, I think the answer is no on a couple of them, right? Especially the portfolio management fees which, as I said, we all know in the financial industry they've been in trend decline for decades. I don't think that would be surprising to anybody watching this program. Every year there's a new article about how investors are benefiting from the lowest fees ever. So, how is it the case that this would be one of the biggest contributors to inflation?
I agree. And when PCE comes out, we talk about it on every print, how kind of silly it is.
It's silly. It's a reflection of the stock market. We shouldn't ask people to lose their jobs for that. I just think that's wrong. But I'm more of a let's think about the data in a very nuanced way. Do they mean what we think they mean? Do they relate to the concepts that we actually care about and that the Congress told us to focus on? I'm less of somebody who's inclined to say that the data are false at face value and are going to be revised away. And that may be the case. It's just never really been one of my go-to approaches.
So the other case we hear from the hawks, not just the worries about inflation and we're not at target, the other case that we hear is that it doesn't seem like monetary policy is too restrictive right now. It sounds like you very much disagree with some of your colleagues about just how restrictive policy is right now.
Yeah, I disagree. I think first of all, if you look at the labor market data, they speak for themselves in terms of confidence indicators of how plentiful jobs are or small business sentiment indicators about how difficult it is to find employees. I think the trajectory of labor market data is pretty clear. And then I think if you look at the housing market, which of course is the most important financial condition and the most cyclical sector of the economy, it's remained under pressure for a while now. I think there's no question about it.
