There you are right here. But Steve said something more revealing which is going to embarrass people in front of the room.
Reporter Steve Leeman joins us right now from Washington ahead of the Fed decision this week. Steve, you got a lot of news on your plate.
Yeah. We'll talk about maybe the Fed meeting later, but right now let's talk about this. The Fed chair sweepstakes apparently not a done deal just yet. Becky, the president confirming last night on Air Force One that he and Treasury Secretary Scott Bessent will begin a series of interviews today with candidates to replace Fed Chair J.
We're going to be looking at a couple different people.
The interviews come after the choice of Hassett received some criticism out there, including from some leading bond investors. The CNBC Fed survey finding that 84% of respondents thought the president would choose Hassett, but only 11% believe the president should choose him. Among respondents, Waller was the favorite, followed by Wars.
I'd like Jeffrey Song, would you come on forward for a sec? Just think, you know, there's nothing in it for the Fed chair to give you an indication that this is going to be...
Jeffrey, rather than look at you on video, we have you live 3D in the flesh. So, would you have the honor of introducing the governor and then I'll turn it over to Steve.
Happy to do that. Thanks, Jeff. And also thanks to you last night. Great conversation, always reminding us of our moral responsibility as business leaders. So really an amazing conversation for all of us to have. So thank you for doing that, Jeff. So I'm here to introduce Governor Waller who is the leading candidate as you saw for the chair of the Federal Reserve Board. He works incredibly well with Wall Street and has a lot of credibility in the market as we just saw as a member of the board of governors. He joined December 18th, almost exactly 5 years ago, to fill an unexpired term ending in 2030. Prior to his appointment, he served as the executive vice president and director of research at the Federal Reserve Bank in St. Louis. In addition to his experience in the Federal Reserve system, Dr. Waller served as a professor and Gilbert F. Schaefer chair of economics at the University of Notre Dame. He was also a research fellow at Notre Dame's Kellogg Institute for International Studies. From 1998 until 2003, Dr. Waller was a professor and the Carol Martin Gatton chair of macroeconomics and monetary economics at the University of Kentucky. During that time, he was also a research fellow at the center for European integration studies at the University of Bonn. From 1992 to 1994, he served as a director of graduate studies at Indiana University's Department of Economics, where he also served as an associate professor. A fun fact, Governor Waller can deadlift 350 pounds, and we're wondering if you think you'll have to flex that skill in your upcoming interview this afternoon. In all sincerity, we are really looking forward to hearing your thoughts on the state of the US economy, the sanctity of the Fed's dual mandate, and the role the Federal Reserve Board would play under your leadership. Thank you so much for joining us today, Governor. Over to you, Steve.
Thank you very much. Just Steve. I don't know how you and I would do lifting heavy weights and we both taken off a bit. However, heavy metal is more your expertise, but turn the show over to you if you would take it. Steve Leeman, who needs no introduction.
Thank you, Jeffrey. You know, Jeff, I feel like there's a Star Trek movie where Captain Kirk's at the bottom of the well, being judged by a bunch of aliens. I feel like that's where we are here.
The over calling them that.
No. No, I think they know who they are. It's okay. Let me start, chairman. No, Governor Waller, let me...
Chris. Okay, Chris. Let me start with the jobs data we got yesterday, which I think people are wondering how the Federal Reserve is processing and how you're personally processing this data here. We had a tick up to the unemployment rate at 4.6%, a return to job growth in November after job losses in October. What's the state of the labor market in your opinion?
Well, earlier this summer when the jobs numbers were looking very good, I had a lot of anecdotal evidence talking to CEOs around the country and other sources of soft data that told me the labor market wasn't doing that well. People were kind of like, what's he talking about? And then the August 1st and July jobs report came out. Everything was revised down pretty dramatically. And so we've now come around to this view that the labor market is very soft. The jobs numbers are around 50 to 60,000 the last couple months on average. We know that that's too high and those are more likely to get revised down when we get the unemployment insurance administrative data later. It'll take a while before we get that. But board staff is estimating take off another 50 or 60,000 jobs. So, we're close to zero job growth. Now, that's not a healthy labor market. Now, we expect that to kind of come back in 2026 due to a lot of tariff uncertainty going away. Our rate cuts have helped try to soften things up going forward. That was the whole point of doing these preemptive rate cuts that we started in September. And then also, a lot of the fiscal bill will probably have some impact. And then we'll see if the AI stuff really starts kicking in with serious measurable productivity. So 2026 could turn out to be a better year in terms of that. Now whether that pulls the labor market along with it I certainly hope it does but right now my focus as a governor has just been to focus on the labor market. Inflation I'm not particularly worried about. I know it's above target but I believe it's coming down the next few 3 to 4 months. And so the critical thing for me is the employment leg of our dual mandate and inflation will come back down. And we see that when you look at market pricing, inflation expectations, tips, and things like this, it's pretty well anchored around 2%.
Chris, if you're already at zero, does that mean you're behind the curve?
Well, that's what I'm saying. What we don't quite know is how much of this is AI driven. When I go around and talk to CEOs around the country, everybody's telling me, 'Look, we're not hiring because we're waiting to try to figure out what happens with AI. What jobs can we replace? What jobs we don't?' That sort of stall in hiring could be just temporary. After a while, people are like, 'Nah, we still need these people to do this or that.' Or they don't. So, we don't quite know yet what the AI impact is going to be on the labor market. But, I think we got started cutting in September. I think those cuts will come in as we go forward in the next year.
For the record, you wanted a cut in July.
I wanted to cut in July. Yes. I felt like it was needed. That was before we got the jobs revisions. Again, people thought I was nuts, but the data came in and said, 'Look, that guy was right.'
I want to go back to the same question, though. If you're already doing a goose egg on jobs, are you behind the curve? And is further stimulus needed now?
Well, I personally, I don't speak for the committee, but I personally think because I don't think inflation is going to reaccelerate. There's no forces that are suggesting that inflation is going to take off again in 2026. If anything, the tariff effects, whatever they may be, those will start coming off as a one-time price effect. So, we're not going to see persistent inflation from it. So if I believe inflation is under control, inflation expectations are anchored, standard central bank wisdom is you look through one-off price effects like a tariff would be if it has inflation effects, then the labor market's telling me we should continue cutting the rates. And that's kind of my view about things.
And the journalist central bank reporter handbook says to ask the governor, how much should you cut rates?
Well, I don't think there's any... we're not seeing a dramatic decline of labor market going off a cliff. Just kind of continuing to just soften and soften. So, we can go at a moderate pace. I don't think we have to do anything dramatic.
If you have to do something dramatic, it's too late. Usually, you've waited too long. So, where's your neutral and should the Fed be at neutral now or even stimulative soon?
Well, I tend to be on the lower in the survey of economic projections. I'm kind of in the lower half of the...
Below the median, which is about three. And I've been there since I joined the Fed. This is nothing new or different. I gave a speech in Iceland about a year and a half ago kind of laying out all the reasons I felt that way. So, you know, I still think we're probably maybe we're 50 to 100 basis points off of neutral. We still got some room. We could bring things down.
Again, I hate to come back to the same question. If you're at zero...
Because I got to... If you're at zero and you're 100 or 50 basis points above neutral, should the Fed be stimulating the economy now to spark job growth?
That's where the inflation comes in. Right. So, you're running about 2.8%. Two is your target. So, inflation's above target. I think unemployment's kind of potentially below target now with unemployment rising and that's the committee's trade-off. Do you want to still keep things tight because of inflation to ensure that it comes down or do you start cutting to try to head off the soft labor market? I think the inflation's going to come back down. I don't see any evidence whatsoever that inflation expectations are taking off. In fact, even in the survey data I'm a little suspicious of, they've been coming down. Market pricing doesn't show any future inflation beyond the next 6 months to a year. So, I'm less worried about it. But I have colleagues that are very concerned inflation is going to get stuck and that the only way we're going to get it back down to our 2% target is to keep rates where they are.
Chris, there's a chart that I saw yesterday which shows job growth. I can do one of my famous air charts. Goes along like this. Right here is liberation day and then job growth comes down. Are tariffs responsible for job losses?
I don't have any direct evidence of that. Those were an announcement. There were some put in and then a lot of them came off or then they got paused. So it's very hard to basically say what happened. Again, like I said at the time, there was a lot of trade uncertainty more about trading partners not so much about tariffs where we were going. There was a lot of discussion about firms had hired a lot of people and they had maybe overhired when the labor market was tight and it was time to let jobs just shed. So nobody was in a firing mode. They just weren't replacing or backfilling. That had nothing to do with tariffs. And then AI, AI, AI, that is all I have heard since the summer. So those are the three factors that kind of came into being that I think caused the slow job growth.
You're going to be meeting with the president later today. And first of all, yeah, it's what we've reported. I want to thank you for continuing to keep your appointment for this conversation, which other people might have otherwise. But I'd like to say the president called me into a pre-in. That's not precisely what happened. President has said that he thinks he ought to have a say in interest rates. I imagine he might say that to you. I wonder if you might share your response to the president if he says he ought to have a say in interest rates.
Well, I think the president makes himself very clear on what his views on policy and what they should be. I don't think there's any confusion about it. You know, it's the one thing you want to do. I think there are other channels for that kind of communication rather than direct one-on-one. If there's something very pressing, I know in the past Fed chairs have talked to the president at certain times but you know...
In times of crisis, that is when you should have a coordinated response. COVID was clearly an example where you needed a coordinated fiscal and monetary response. The pandemic, there's nothing wrong with that. It's not a threat to central bank independence in any way shape or form. That is actually needed for the country when those type of events happen. But you know, the Fed chair and the secretary of the treasury have breakfast every two weeks, so that's a normal chain of communication where information can be passed from the White House to the chair about what the administration's views are. I think that's a typical channel of communication that's well understood and I don't think there's anything wrong with continuing that channel.
Will you emphasize to the president the importance of Fed independence?
Absolutely. I spent 20 years of my life working on central bank independence and why it was important. There's no doubt. I've got a long paper trail of this. The one thing everybody always forgets in central bank independence is there's another side of it which is accountability. There's no institution in this country that is unaccountable to the electorate. That's not, and that's what people often forget is that we want central bank independence to be free of political interference but we still have to be accountable to the American public. And we try to do that with the chair testimony to Congress twice a year. After every meeting we make a decision, we have a press conference, the chair goes out and tries to explain to everybody why we did what we did, answer questions. And it's all about transparency and accountability. And that's my own view is that's the importance of having the press conferences. It's for us to try to explain to the American public and the markets why we did what we did. Now, you may not agree with us. That's okay, but at least we tell you why as opposed to the old days. We made a decision and you had to go figure it out by looking at what was happening to reserves and the banking system. And I don't know why that was a good model.
I'm going to end the interview portion of the presidential interview portion of this right now. I'm not going to ask you what your greatest weaknesses and strengths are. These guys know what I'm talking about. It's the stupid interview question. I want to get back to the economy. There's a sense that next year there's a lot of stimulus coming down the pike. There are estimates that tax refunds on average could be $1,000 greater. You're going to have the kicking in of some depreciation tax changes for investment. Give us your outlook for next year and whether, again coming back to your notion of we need to be down towards neutral, if you're concerned at all that the inflation we haven't seen from tariffs could potentially happen next year if you have an acceleration in demand.
Well, on the demand side or on the fiscal side, you have two aspects of it. You have possible demand type stimulus, tax refunds, straight cash kind of payments or any other spending. But then on the supply side, because of the depreciation, these are all things that typically down the road help with productive capacity and increase output, not putting upward pressure on prices, but downward. So there's both pro-growth supply and pro-growth demand things that come into play. And because of this and potential increases of productivity, I think inflation's still going to start coming down the first half of next year towards our target, and we can continue to cut rates just on that alone. There's no reason we have to keep rates high just because there's positive growth in the economy. That doesn't cause inflation per se. But because inflation is still up, we can take our time. There's no rush to get down. And so that's my view is we can just steadily kind of bring the policy rate down towards neutral. Keep an eye on inflation. And I'm not too worried about, you know, if growth is 2.5% this year, which is above our kind of long run estimate, I don't view that as being overly stimulative to inflation.
I have about 3 minutes before the great Jeff Sinfeld takes over. The balance sheet, you guys have turned around and you've started buying net assets again. Looks like 40 billion a month for a couple months and then maybe you come down after April. People again talking about social media, they love to go on social media and say lots of things that aren't true, right? One of the things I keep saying is this is quantitative easing again. Is this quantitative easing?
And how would I know the difference?
Right. So, our balance sheet grows naturally over time from currency demand and then just demand by banks for reserves. As banks expand their balance sheet, they want more reserves. That's what we call organic balance sheet growth. We estimate that to be about 20 to 25 billion a month. So our balance sheet is going to grow at 20 to 25 billion a month just from normal demand for currency and bank reserves. One of the problems we face is in tax season, the US Treasury is the checkbook for the US Treasury. And so when tax season hits, people pay their taxes, the treasury's account goes way up but that money comes out of the banking system into us, reducing reserves. So what we are going to do is build that up for a few months so that when that drain comes in we don't get too low and then later we'll get back to more normal. So this is just a temporary adjustment to get reserves up to protect against taxes. It's not QE.
The follow-up is you may not be doing this intending to stimulate the economy but that doesn't mean it isn't stimulating the economy.
You know, you could argue it's doing some short-term effects. We're mainly at the short end of the yield curve, not buying anything long. Long-term rates aren't really moving from any of this or any announcements of this. So, if anything, it has some short yield curve effects, but it's not that much. I mean, it's about 20 billion over normal.
If you were chair, which I believe is conditional future tense, would you want to see the balance sheet be shrunk appreciably?
Well, I gave a speech in July kind of trying to put my college professor hat on again and try to explain our balance sheet. And if we had never done QE and we moved to what's called an ample reserves where the banks have plenty of liquidity, there's never a need for them to go hunting through the cushions at night looking for spare change. Well, what would that balance sheet look like? And how much would you need? Now, from that, I estimated we'd have about $3 trillion in reserves. That's just enough. There's not excessive amount, but just enough. That number seems to be roughly where we're at now. And the market we're starting to see rates starting to come up a bit which is telling us that reserves are pretty close to what we call ample. So if you got rid of a bunch of regulatory reasons that banks have to hold a lot of reserves like liquidity ratios and things like that, then you could possibly see it come down. But unless you get rid of those type of regulations, we're probably about the size of the balance sheet we want to be.
Last question, Chris. For some reason at the end of the year, everybody gets really prescient about the next year. So, give us your sense about where do we end growth this year and what happens to growth next year?
Well, this year it's going to come in roughly on average about 1.6%. I think because we had a negative first quarter...
Plus or minus potential right there.
