Fed Governor Christopher Waller with Bloomberg's Tom Keene at CFR (Full Q&A)

Well, one of the criticisms that's been leveled at the Fed for a long time is we engage in groupthink. Every policy decision is a 12 and nothing vote. There's no dissents. And that if you're all going to do exactly the same thing and think the same way, we don't need 19 of you. We need one. But what I always try to point out is it's through speeches and public speaking that everybody presents their views and you can go out listening and they're not the same. So all the public speaking, the speeches are the way for us to show our diversity of opinions about the direction of policy. This is a good thing. It's not a bad thing. Despite you say it's a cornucopia of noise, it's actually signaling where people stand when you come to the meeting. And I always try to stress this to people. We have to make a decision every six weeks. We do not get to kick the can down the road. And what that implies is that to get a reasonable, consistent opinion, we have to kind of compromise. You have to come to a decision. And that's why our votes are often 12 nothing, 11 to 1, because we all understand we have to compromise somewhat on our positions to have a clear, consistent policy setting for markets and the American people.

Yeah, I'd like to avoid the fist fight every six weeks. But I mean, I personally think there's nothing wrong with dissent. It's a way to communicate differences in policy stances. You know, the whole complete consensus largely comes out of the Greenspan era, where it was like, if you have a 12 nothing vote, there's no doubt about what policy should be. Everybody agreed with the chair at that time, and that kind of tradition continued. Whereas the Bank of England has showed there is no point of having 19 of us if we always do the same thing. So at that point, what's wrong with having a few dissents? I don't actually. Personally, I dissented at the July meeting. I don't personally think that shows anything about loss of faith in the chair or not the right policy. But that's the whole point is to say, look, I'm on this committee to have my own independent view and make these points, and that's what people are doing.

No, I think this is where we're in this unusual situation where we have this kind of zero net immigration instead of roughly, say, 400,000 a year. Actually people leaving the country. And this is kind of I said this before, it's masking this decline in labor demand. So just think about if it's all immigration and you have a decline in labor supply, then the following things should happen. Employment will go down. Wages should be built up if you have a labor shortage. Vacancies should go up. Quits should go up. That's what you should see with a very tight labor market and declining labor supply. When did we see that? 2020 to 2021. That's what we saw. And that was a very tight labor market. If things are driven by a decline in labor demand, just kind of thinking about labor supply is concerned, you'll see jobs fall. There'll be downward pressure on wages. There'll be downward pressure on vacancies. Quits rates will fall. That sounds to me more like what we're seeing in the data. So all that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand. And I've seen some estimates that if you just kept the labor force participation rate where it was right here, unemployment would be 4.95%. Okay.

Well, that's where you've got to take a position on. What do you think the labor supply is doing? Is it fine that it's 4.3? Because the fact that people leave or drop out of the labor force, that's just a natural part of the economy and therefore 4.3 is exactly reflecting things. Or do you think like I do, which is like we're seeing falling labor demand, and if it wasn't for this decline in labor supply, we would be hurting and there'd be no doubt about cutting rates, absolutely no discussion about it. So that's where we're in this weird thing. We've never seen falling labor demand with a big fall in labor supply at the same time, I at least not in my career that I can remember, and that speaks of the technology I'll get to in a minute.

Well, I thought I said you have to kind of pick a new what you think is the neutral rate, which means you're either stimulating or contracting the economy. That's the simplest way I describe what the neutral rate is. I have. I just typically look at the CPI, the survey of economic projections, and the median is around 3%. So for the committee as a whole, if it's 3%, you know, you've still got 125 basis points to go to get to neutral if everything starts coming back closer to the target. And that's where I think things are going to go.

Yeah. So that's actually an interesting way of thinking about it. I never have. But typically when people talk about R star, I mean, how many interest rates are there? It's not like there's one that's just been unique. R star. So I gave a speech last May 2024 on R star in Iceland, and I always have to look at it this way. For me, R star is a policy rate. I control reserves in the banking system. What's the closest substitute? Short term liquid government debt? So for me, that's the real R star that I should be attached, not the return on capital, not the return on corporate debt, return on safe liquid government debt. That's the answer I look at. And that's driven by global demand for treasuries versus a global supply of treasuries. That's how I view R star. I mean, your point is actually a very good one, that what's restrictive, if you think about R star being restrictive, it's more restrictive for some groups than it is for others. That's probably always true. It's not just now, but it seems to be very stark this time that upper income groups, everything's fine, wealth is booming, the stock market's booming. They've got no problem financing stuff. I hear this from retailers. We pass tariffs through to high income customers. They don't bat an eye about it because they can afford it. Low income households, they can't pass them through. They don't walk out the door. So that's the tension. Again, one of these tensions that we have, kind of this dichotomy in the economy between the upper income groups and the lower income.

Yeah, I mean, I think we're at the point where we run ample reserves. I gave a speech in July on our balance sheet. We run an ample reserve to ensure that there's sufficient liquidity in the banking system, in the financial markets, that people don't have to, at the end of the day, go scrambling around looking for nickels and dimes in the couch to cover their reserve positions. That to me is idiocy. So you have ample reserves. The reserves are there. Nobody has to spend the whole evening looking for money under the cushions. We're about at that point. We have an excessively large balance sheet due to quantitative easing. We ended that. We've been on a quantitative tightening policy since May of '22, and we're basically back to where we think we should be just for ample. All the QE stuff is taken out in terms of how much liquidity. It still has affected the composition of the balance sheet, which was part of my speech I gave in July. QE really distorted the maturity structure of our balance sheet and then our next choice, even though we get the level right. Our next job is to try to get the composition right, and that'll take some time.

Yeah. So, I mean, if you go back to some kind of basic economic theory, one kind of rule of thumb is for every $1 of wealth, you get the real interest rate, say 3%, 2%. Your consumption should go up by 2 to 3% for every dollar in wealth you get. So like two or three cents for every dollar of wealth. That's what we mean by the wealth effect. Now those numbers also mean that wealth increase is permanent. It's not a one time. If it's just a one off, you're not going to change your entire consumption path. So this is always kind of the challenge with the wealth effect because it's not that big of a number in terms of a dollar increase. It's only like three cents of consumption. But that also has to be permanent. It's not like a one off and then comes back down. So wealth effects sometimes are smaller then. But the run we've had for the last few years, right, that's looking pretty permanent and pretty big. It's not just a $1 increase.

I mean, I personally have doubts about whether we should have the FCP at all, but I've been told that. What are you trying to hide? Then what? Why would you take them away? Why would you not be as transparent? What would happen if the dots went away? Well, you can be back to 2011, and then, you know, we would say now you could change the dots. I personally believe you should get rid of the calendar dating, get rid of the long run numbers and just say, look, what's the next optimal policy over the next six, 12, 18 months? That's as good as we can do. So then it's a rolling number and you get away from this crazy thing like, 'Wow, there's three meetings left in the year. How many more rate cuts this year?' Who cares? The media. We wouldn't have a job. So if I said okay at the September, he said, here's how many over the next six months, that's what the focus would be, not the end of the calendar year. So I would do that and then get away from the long run stuff. Just the best we can do is six, 12, maybe 18 months out. Any kind of forecasts. We're no, we don't have any genius insights or everybody else on Wall Street who does this. So that would be one of the critical things I would do is change the calendar dating and shorten the horizon that we actually do it.

Well, like I said, I wrote this paper back because at the time there was a lot of discussion about central bank independence and institutional design. And the kind of presumption was once you pick the central banker, that's the policy. And every other external influence just kind of went away. And I was kind of looking around going, 'That's not what I'm hearing. That's not what I'm seeing back in the eighties.' Right. There was a lot of criticism. And so this idea of bashing was what the administration can push the Fed one way or the other by publicly criticizing the Fed. Now, when I wrote this paper in 1989, 1990, I didn't think I'd be the one receiving it 25 years, 30 years later. So when I reread the intro the other day, I was like, 'Wow, what was I thinking about?' So, but I mean, that is kind of the situation. And it's not just the current administration. This has been done forever. I mean, George Bush, right? Greenspan, Burns and LBJ giving him costing in the election. Criticism had come out and this was the norm until basically Bob Rubin came along and then it was like, don't talk about the Fed. And that kind of became the rule through a sequence of administrations until President Trump came in and in 2018 started criticizing the Fed more publicly than had been done in a long time.

I mean, at the end of the day, and this is what I tell everybody, I just go to work and I try to do my job the best I can. That's all I can do. A lot of this is just out of my control. You know, whether the administration's views drive people to push one way or the other. And, you know, I can't speak for anybody else, but I just try to do the best job I can using the theory that I know, the models in the economy that I use, and the data that I use. So, you know, the call I made in June, which was I was saying the labor market is not as good as it looks, and I was accused of being political. August 1st, that suddenly didn't look so political. The data came in exactly the way I said it was going to. So what? Sometimes it looks like people say, 'Oh, they were interpreting this as purely a political position.' Suddenly the data said, 'Maybe it's not. Maybe it was actually the right call.' And so that's how I kind of think of this. You can always look at something and interpret it as political when it's not. That's kind of a problem in what we decide and what we do.