Okay, welcome to our final session. It's a fireside chat with Presidents Bostic and Hammack from Atlanta and Cleveland. It's gonna be moderated by Brian Cheung from NBC. Take it away, Brian, you've got one hour until noon.
Thank you. Great, thank you so much, Mark. Appreciate all of you having me here at the Federal Reserve Bank of Dallas. Just to introduce myself, my name is Brian Cheung. I'm a business and data correspondent with NBC News. It is a pleasure to be joined here this morning with the Cleveland Federal Reserve President, Beth Hammack, as well as Atlanta Fed President, Raphael Bostic. And I think I'll just begin by having you say any hellos, any remarks you'd like to say to the crowd as well as any disclaimers as well, if you need to.
Well, I'm thrilled to be here. I think it's been a great agenda and really appreciate working with President Logan and her staff and President Bostic and pulling this together. I think it's been a good session to get people talking about some of the changes happening in bank funding and so appreciate everyone coming and everyone participating. And I will say the health warning that we always say that the views I present are my own, and not necessarily those of the Federal Reserve Bank of Cleveland or the system.
I'll just say plus one to everything she said and just to say like, this has been a great conference. I think it's really important that the Fed system does these sorts of things. And it's just been a joy to work both with Beth's team and Lori's team to put together a program that's been quite interesting. I hope you all have gotten nuggets to take with you to think about how we might move forward to improve the systems and make sure that we have a banking system and a payment system that continues to serve the needs of all Americans.
And plus two, my views also do not reflect the views of the Federal Reserve Board or the system. But I wanted to start off with a little bit of a fun question because obviously there's a lot of news going on. We'll talk about the economy, we'll go into some of the nitty-gritty of what's going on in the bank funding space. But as I was walking into the Federal Reserve Bank of Dallas today, it was my first time here. I saw there was something on one of the screens on the pillars coming in that said there was a watch party of some sort for the FOMC Press Conference, which happened on Wednesday, which got me a little nervous as someone that is in the press room asking questions of the Fed Chair. So I wanted to ask, what do you do as Fed presidents during the Fed Press Conference? So the decision comes out at 2:00 PM and at 2:30, are you still in DC? Are you already off to the airport? Like, where are you guys, what are you doing?
So it kind of depends on the day. The meeting usually ends by something like 10:15 or 10:30 on that day. And so generally the presidents, sometimes I'll catch a plane back to Cleveland, so I'll be on a plane when the press conference is happening. Sometimes I'll do meetings on the hill to meet with different congressmen and senators and just kinda hear their perspective and share some of the views that we have. But if I happen to be on the ground and available and have the time, I will sit and watch it very often.
It's the same. To be completely honest, I rarely see it live. So, you know, we're running around, I'm not in DC all the time, so it's an opportunity to go see lots of folks. But if I happen to be on the plane, you know, Delta shows CNBC and I always turn that on to make sure I can see it live. But in general, you know, they send us around sort of the transcripts afterwards and there's always a way to see it. It's just very interesting. But you always look great.
Oh, thank you. Very kind of you. That's good to know. I didn't know if you guys all had like a big popcorn party or a pizza party or something like that somewhere.
No, but they do, like, I know in our building they do have a watch party as well.
We do in Cleveland too, yeah.
Well, that's amazing. I want to now get to the substance of the meeting. So the Fed cutting interest rates again, second time, back to back meetings. I wanted to get your clarity on what you decided on because it seemed like there was a kind of fanning out of different views on whether or not the Fed should have cut interest rates by a quarter point. Did both of you support that decision on Wednesday?
So I eventually got behind it. You know, I've been on record for most of this year that I thought that one cut would be appropriate as we tried to figure out how the economy is working and we have our mandates. There's weakness on the employment side, but there's also, we have not been at target for almost five years on the inflation side. And so, figuring out which one is the most significant, I think is important. I was able to get behind it because it's more than where I was because I still think we're in restrictive territory. And that to me is the most important thing. We can't really signal or forget that inflation is a significant problem and we have to get that back down to our 2% target. And I think we can still do it, but with each step we get closer and closer to neutral in ways that make me uncomfortable.
Yeah, so I would've preferred to have held rates steady at this meeting and not have to reduce rates. As Raphael says, it's a challenging time for monetary policy. We're being challenged on both sides of the mandate. You know, we have inflation that is too high. It's about a percentage point above our target and has been there for a long period of time. My projection is that it's gonna stay there probably for the better part of next year before it starts making its way back down to 2%. And on the other side, we've seen some emerging signs of softness in the labor market that we need to be attentive to. There are a bunch of headlines that were out even this week about layoffs that are starting to happen. When we look at the data at the Cleveland Fed, we track that WARN notice data pretty closely. We're not seeing an uptick that's concerning, but these latest announcements will flow into the October data that we'll see in middle of November, so we'll stay current on that. And so, I think that given the move that we just made, I think we're right around my estimate of neutral and I think we're barely restrictive, if at all. And so I do think we need to maintain some amount of restriction to help bring inflation back down to target.
So, Beth, just to build on that, now that you've said that you didn't necessarily support that cut yesterday or earlier this week, what is it about the inflation picture that has you worried? Do tariffs kind of bake into that concern, knowing that it's still only been a few months that we've seen some of this current administration's tariffs kind of starting to take bite?
So the inflation picture is not just tariffs. When I'm out with businesses and when I'm traveling through Columbus and Cincinnati and small towns like Wooster in Ohio, I do hear people focused on tariffs. I hear the manufacturers are talking about it, importers are talking about it. Even retailers, if you're running a grocery store, they're talking about tariffs and they've been absorbing some amount of those costs, but they are starting to get to the end of that. They've gone into that margin compression about as far as they can from what I'm hearing, and that they'll need to start passing that on in the near future. But tariffs are really just one piece of the puzzle. I'm also hearing about concerns about electricity prices are continuing to rise. Insurance prices are rising, whether it's property and casualty or health insurance. And so, it's much more broad based. And so, one of the things that I'm focused on is if you look at that core services ex-housing, there's been little to no progress in that over really the past year. You know, we were at 3.6 last August, we were at 3.4 at its most recent reading in August, which is up from where it had come down to earlier in the year. And so to me, that's not tariff related. It's hard for me to see that that core services ex-housing is being driven by tariffs. And so you take that plus the tariffs and that to me creates a more concerning picture.
And I would just emphasize exactly what Beth said in the sense that we have a survey center. We do run a lot of surveys. We've been asking businesses: are you feeling price pressures? They all say yes. What is the source of it? And one thing that's been interesting, less than half of the source of upward pricing pressures are being reported as tariffs. It's about 40% I think in our survey of business uncertainty. So it is much more broad and the stalling out of the progress that we've been making. Look, we've made great progress, inflation was much higher than this two years ago, but we haven't gotten all the way there. And, you know, we are committed, I'm committed to making sure that we get to that 2% target and we're gonna have to do more and see more progress before I'll be comfortable getting us all the way back to neutral.
And you mentioned even on this decision, Raphael, for you, you did support the rate cut, but you had to eventually get there. I mean, tell me about the change in thinking, especially knowing that we're kind of, as the Fed chairman described it, driving through fog right now with the absence of at least on the labor market side of things, jobs data coming from the Bureau of Labor Statistics.
So I would say two things on this. So one, I actually really like the fog analogy. I think it really describes for me an approach, a philosophical approach to doing policy, which is when there's so much uncertainty, there's so little clarity, it's preferable to go slower. Take your time, don't rush to somewhere 'cause you may discover that you actually took a turn in the road that you didn't know 'cause you couldn't see. So going slow, being moderate in approach is important. The second thing I did wanna say though is that we're not completely flying blind. At the Atlanta Fed we have a whole survey center, 6,000 respondents give us information over a quarter. We have a bunch of advisory councils, we have 11 advisory councils that are pictures of individual sectors. We have a staff that goes out and talks in unstructured ways to leaders across the sixth district. We get maybe 100 or 120 of those in a cycle. And then we have 44 directors of boards across my six locations. So we get a lot of information. It's qualitatively different than what you get in the federal government side, but it is informative and it does really allow us to have information that's useful. I'm just talking about what we do. I know every one of my colleagues is doing the same thing and that doesn't always get the kind of airplay that it could, but it is really important, particularly in a time where we're not getting the same volume of data from the federal government.
Yeah, what are you looking at, Beth?
Yeah, I'll just echo that. I think this is a moment when the reserve banks and the bank presidents really shine because all of us are going out and spending time in our districts getting to know individuals, businesses, communities, and getting a really robust picture of what's going on. But I don't wanna overstate. I mean, it's critical information that we're getting, but I don't wanna understate that the BLS data is the gold standard of data the world around. And so, having that does help complete the picture. Having longer data series that you're comparing things against does give us better visibility. But we absolutely have a lot of great information right now that we're relying on. And oftentimes when the economy is shifting and when you're at these pivot points, I find that these anecdotal conversations can be good leading indicators of where we're headed. So we'd be leaning heavily on this part of the information set anyway. It would be nice to have the BLS data to complement it, but it would really just be a complement.
And, you know, when we talk about the labor market, 'cause that is where I guess we're not getting that gold standard data 'cause we did get one CPI report on inflation, albeit a little bit late. But on the labor market, it seems like the justification for doing these interest rate cuts is to make sure that there isn't any sort of substantial deterioration in the labor market, which I asked the Fed chair in presser on Wednesday, and he seemed to say we're not seeing signs of significant deterioration, but look, we're keeping tabs on it. From your perspective, Beth, you mentioned there were these big, splashy layoff announcements we saw from some companies, Amazon, UPS, Target, GM, the list goes on. In the absence of government data, are those anecdotes weighed a little bit more heavily and how do you figure out what is going on in this labor market since it's such an important part of the decisions and the policies that you're choosing to make as of the last two meetings?
Yeah, so I would say that when we moved in September, it was because we'd seen that sharp drop off in the payroll prints. We'd gone from being around 100,000 of new jobs being created to being, I think the average over the last three months that we have is about 29,000 per month. And so that was a notable drop off. Now there's a question of is that supply-driven or demand-driven because it aligns with a pretty meaningful shift in terms of immigration policy. And so, that I think was really the catalyst. Since that moment when we saw that shift down in job creation, we've been watching a whole host of other data. And so yes, we don't have the BLS numbers, but we do have the weekly state numbers coming through, and those have been low and pretty consistent with where we'd seen it. We are looking at things like the WARN notices, and as of its last reading, which went through September that we got in the middle of October, it had ticked up very slightly, but it's still within historical ranges. The Chicago Fed had put together an indicator that they're using that helps to predict where things are coming, where the labor market is going. So there's a host of other data that we're looking at that to me says maybe there's been a shift, but it's not obvious that that shift is coming just from the demand side. I think there is a supply side to that story, but it would be really helpful to have more information to help round out that picture.
Yeah, Raphael, how do you see the labor market now?
Yeah, look, I think the labor market is incredibly difficult to interpret today. There's a lot of churn that's going on. And for me, one of the questions that I've been trying to focus on is to what extent are the changes driven by cyclical things as opposed to structural things. Now we know that there are big structural things happening. I talk to businesses all the time. They tell us we're a lot more reluctant to hire entry level folks because we think that AI can do some of these things and we're gonna experiment and we're gonna try to figure those things out. I hear about those sorts of technological changes influencing the demand for labor pretty significantly. Beth mentioned the immigration policy, that could wind up being a structural change that happens. On the supply side, that could be significant. If you think about the changes in our trade policy, to the extent that that leads businesses to fundamentally change how they source inputs for their materials, that's also a structural change. And, you know, monetary policy doesn't do very well in influencing the trajectory of the economy if there are structural things that are going on. On the other hand, there are cyclical things. We have heard uniformly that the economy is slowing down, that for some consumers there are stresses, they're feeling the pressures of high prices and starting to do things that are showing that stress, which is changing the demand for a lot of baseline products. You know, we started hearing probably three or four months ago, lower-income borrowers, low-income households moving their purchases from say, pods for dishwashers or the washing machine to powder or liquid because you can ration that, you don't have to fill it all the way to the one line. You can fill it a half and then get more out of those things. And people are smart, they can figure out how to make their dollars go as far as possible. So it's all those sorts of things that are out there. And our sentiment measures from business leaders, they all tell us they do feel like things are a little slower, but slower is not necessarily the same as weak or non-existent, or troubling, or whatever words you want to use. And we're not hearing the extreme words. It is interesting, in the last cycle, nobody asked about the probability of recession or when a recession is likely to come. That wasn't in people's mindset. Today, it's a risk. And so, we have to be mindful that risks are out there, but in some ways, I feel like the sentiment is such that the risk of those kind of catastrophic outcomes have receded pretty significantly, and it's been an interesting shift over the last several weeks.
So risk management then, which brings us to the question of the December meeting. So as someone that's been covering the Federal Reserve for a while, usually all we get is a policy is not on a preset course. What we got on Wednesday from the Fed Chair was not only that, but December is not a foregone conclusion. And then far from it, we don't usually hear that. How are you thinking about December? Knowing that it's still a few weeks away, but how are you approaching that meeting?
Well, we have a lot of time between now and then, and hopefully we'll get more data, hopefully we'll get some of the hard data, but certainly we'll be out, our teams are already out in the district talking to businesses and trying to get a perspective on how things are evolving. The consumption data's been pretty healthy. We definitely are seeing this K-shaped or two-speed economy, however you wanna think about it. And a lot of the consumption that we're seeing is coming from the higher-income families. And that's been really sustaining the growth in GDP. And so that's something we need to watch because we are hearing that there's a lot more pressure and a lot more pain in those lower-income families. It's interesting, you talk about stretching the detergent or the washing powder. What we're hearing is even at a more affluent supermarket, they're saying that they're seeing 10 to 15% increase in promotional items and regular items, they're not seeing growth in that. So you're seeing it even now starting to creep up that wealth spectrum where I think it had been, we know that those lower-income households know how to manage that, they're working hard to do that, but we're seeing that creep up a little bit. So again, this is a challenging time for monetary policy, we're gonna have to watch closely to see how things evolve. As I said, I would've preferred not to have gone at our most recent meeting, but I wanna be very attentive to these announcements that are happening on the labor side. There may be something that I haven't seen in that labor picture that could be more signs of softness, and I wanna be open-minded to that because we do really need to balance both sides of our mandate. But right now, when I look at where we are on the unemployment side, we're missing our unemployment goal, maximum employment to me by maybe a couple of tenths. And we're missing on our inflation side by a full percentage point. And I think that's gonna persist for longer. And so when I weigh those two things against each other, I think we need to stay restrictive to continue to bring down inflation.
Yeah, I would say I was glad that the chair added those few words if only because I was really concerned, and I've been concerned for a while that a narrative would emerge that would suggest that we're on a march to somewhere, that there was an under-appreciation that we knew we had a ways to go and we were just gonna go independent of whatever information was gonna come out. And I mean, you can look at some of the market probabilities that were happening that suggested they started to think things were just marching and we were just gonna go there and get there. And, you know, that was not where my head was. And I thought that the chair really accurately reflected the range of views that are on the committee. And that was information that needed to be out into the public domain. So I'm gonna say, every meeting is live, we're not on a preset course, we're gonna let the information guide us and I'm gonna stop there so you can be happy.
Can I add one more thing to that? I think the market tends to overfocus on the median from the SEP. And they take, I mean, you hear different market commentators talking about that as a promise. It's not a promise, it's not forward guidance, it's our best view of what we think right monetary policy looks like. And in our September SEP, you saw a pretty notable difference between, you know, there were 10 participants that thought there would be three cuts between September, October, and December. And then there were nine participants that thought there would be two or fewer cuts. We've already had two cuts now. And so, if you even have one person who shifts their viewpoint, now that could shift. There's a lot of data that happens in between that September SEP and our December meeting. And so, it is important to remember that we are not on a preset course, we are looking at it, and what that SEP does, if you actually look under the hood rather than just focusing on the median, there's a lot of information. It doesn't tell you who's voting and who's not voting, but it does give you a better sense of the range of viewpoints on the committee and how things may progress relative to our expectations.
I'm just gonna add that the median is math, right? It is not a decision process, it's not a deliberation, it's not an argument, it's not any of these things. And I do agree with Beth in the sense that people interpret a mathematical statistic as process, as a decision. Like, when each of us puts in our dot, we have not talked to anybody else, we don't actually know what it's going to be. We find out what it is like Monday night just before the meeting starts. And so this is not something that reflects the decision. It's like, and I'll just say for me, my dot embodies an outlook, a narrative about where the economy is likely to go over the next six months, 12 months, 18 months. Each dot does that. But we have not talked about whether our outlooks are the same, what we think is gonna happen, which ones are gonna be more or less likely. And so, that chart is a nice picture. I think one of the big values is that just to make clear there is a range of views, and that we're a deliberative body and people are able to have their own view. But don't get too far ahead of us on this. Every meeting is live, we're gonna be data dependent. We're going to do all the things that we need to to make sure that the decision is appropriate at the time we have to make the decision.
And I do know this is a bank funding conference, I promise you there's a discount window question here coming in a second, but I just have to drill down on this one more time because, you know, the SEP, we didn't even get one this week. And so, you know, obviously we're expecting the next one next month, but this is a moment where the range of views is diverging at a level that I have not seen in a little while covering the Fed. And so, you know, what was the tenor, I guess, of the conversation knowing that you have so many, I mean, in this room we heard from President Logan earlier this morning talking about her views on the decision on Wednesday. We have two people in this room already that didn't necessarily support that quarter basis point cut. So as a journalist, right, I go on 'Today' show, I go on 'Nightly News'. I'm trying to explain to people what's going on with interest rates and what their borrowing costs are gonna be. Market participants are watching, people playing Fed funds futures, they're all trying to figure this out right now. So where do we go from here? What is to be taken from the mixed messaging that seems to be a risk with all these diverging viewpoints?
I think you're hearing differing viewpoints because we wanna make sure that we're doing our best for the American public and it's not clear what the right answer is. And so what we have in the room is you have 19 participants who come in from very different backgrounds, very different sets of experiences, very different perspectives, and it's actually a really robust conversation. It was one of the things I found that was surprising to me, I've only been in the job for 15 months, but walking into that room, the level of care and thoughtfulness that each person brings to their commentary and how everyone listens so carefully to one another. You see people in the room changing and adapting their viewpoints and thinking about things differently. And it's a really collegial environment. I mean, I really go in there and I'll say I probably learn more from the people who see things very differently from me and who end up on different sides of things. And I really value those perspectives because it challenges me and helps me think about what am I missing? How can I make sure that I'm doing my best to deliver on our mandate?
I agree with that completely. It's a wonderful collection of people that I have the privilege of working with. I will also say in my eight and a half years of doing this job, this is the most difficult time to make a forecast. There are so many things that are moving and so many things that are changing. If you had eight dimensions, and it was a yes/no on eight of them, for us not to be having different views, you'd have to have us all make the same decision about where we are on all those dimensions. And that is just not a likely thing to happen. So I think that the diversity is actually a positive reflection of the times that we are in. And the most important thing that I hope for and I'm seeing is that everyone is doing their honest best work. They're trying to do their best to discern what it is, and we may have different interpretations. You know, you talk about the cyclical versus the structural in labor markets. Some people think that it's mainly cyclical, others might think it's mainly structural. You're gonna wind up in different places naturally. A question about tariffs that you asked, are we through with the impact of tariffs on prices or is there still some to come? People have genuine and legitimately different views on that. This is why trying to get data and have the data inform can actually help us come to a closer appreciation and agreement on where the world is so that we can coalesce around an appropriate path for policy, and that's really gonna be our task. It's always our task. We're gonna have to double down on it over the next several weeks.
And can I just say, I think this is where our staff come in and I just wanna give a huge shout out to our staff, both at the Reserve Banks but at the Board of Governors as well. They do an amazing job in sifting through a tremendous amount of data, running different scenarios, running different alternative simulations so that we can have a broad perspective of not just what a base case is, but what a risk management case would mean. And this is why we have research economists that help us think theoretically big picture, long term, around how the economy might perform in different scenarios, might respond to different shocks. And that helps us to learn a lot so that we can hopefully do our best job.
Okay. So the bridge that I am now going to cross to go into bank funding is the balance sheet where we also got the announcement this week that the runoff would be ending December 1. Walk us through the thinking on that and what were you seeing in short-term funding markets that told you this was the time to do this?
So we've seen some pressure recently in repo funding markets. And so, our target is the Fed funds rate, but the Fed funds market is a pretty small market relative to money markets broadly. And so the Fed funds market is about $100 billion. Repo markets broadly are more like $4 trillion. And so we have to look at a constellation of those things when we're thinking about how the balance sheet is performing. My viewpoint is that we are in an ample reserves regime. I think that's the appropriate regime for us to be operating in. I think it provides a low cost of reserves to the banking system. I think that's efficient for us to do as a central bank to provide those reserves to the banking system. And what I wanna see, like President Logan articulated in her speech, is that I wanna see repo rates and money market rates trading roughly in line on average with IORB. And so, what we've seen more recently is that as we've been running down our balance sheet, as we've been letting the roll off happen, we've started to see more episodic movements. And so there are times when we're running at that level where TGCR is running in line with IORB, but then you have moments like today where there are big settlements in coupons, 58 billion of coupon settlements today, plus you have Canadian year end, and you see more elevated pressure. And so we have tools that are set up to deal with that, both the standing repo facility and the discount window would be another borrowing tool that banks could avail themselves of. Those are set at the top of the range, but it looks like a leaky ceiling. I don't need to call it a leaky ceiling, but it looks like some things, the balloons are floating away when banks aren't participating and taking advantage of those tools that we have like the standing repo facility for them to be able to monetize it. And to me, the standing repo facility is just a way for us to implement monetary policy.
And for us to have effective rate control because even though our directive isn't fed funds, I agree with Lori that the market has shifted quite dramatically since fed funds was our primary tool. And I think it's maybe time for a new measuring stick. I think it's time for us to look more broadly because we have very effective control over a $100 billion market, but the market is four trillion, and so you've got 3.9 trillion that's happening over here. We've gotta be able to have some amount of control over there to be implementing effective monetary policy.
And if you'd like to chime in on the fed balance and then also tri-party.
Very little to chime in on. Beth has been working on this a long time. I will say, for me, I think we have, it's in our interest to limit the amount of volatility you get in terms of the functioning of these markets, and the spikes that we've been seeing in the last several days suggest that we're already seeing volatility. Going appreciably lower than where we are now is just gonna add to that and lead to disruptions and leads us to having to do more continuous interventions in a way that is not really, I think, where we want to be. So I'm very comfortable with this, and I think for us the next steps are going to be how do we navigate as the economy continues to grow, as these markets evolve, so that we are always positioning our balance sheet so that there is stability in the functioning. And those will be conversations that happen over the next several weeks.
Okay, so my question now that, you know, I guess RIP QT for at least for this round, but is it mission accomplished on funding markets? Because obviously, you have lots of flashbacks of the 2019 repo crisis. There are certainly concerns that, you know, all right, well, if things flare up again, would you then have to potentially go back in and start buying assets again? Is that something that...
I mean, our balance sheet is a living, breathing thing, and there are elements of it that are within our control, and there are other elements where the sub-components shift around for factors other than things that the New York desk is doing to help maintain control. So when the Treasury's general account increases materially, that mechanically takes reserves out of the system. And so, what we need to make sure that the ample reserve regime is working is we need to have good visibility as to what some of those fluctuations are going to be. And that's a very difficult thing to project. It's very difficult to know exactly how those changes are gonna happen. Our goal was to end runoff at a point when we were just above ample so that we'd have some time to see how things were moving and then could evaluate when the right moment was that we would wanna grow reserves further. I think there's benefit for us in having the smallest possible balance sheet that we can while operating in that ample reserves framework, but it requires not just us watching the markets and understanding what that growth in reserves and currency is gonna be. It also requires the primary dealers to help transmit and redistribute reserves throughout the system in an efficient fashion. That's what I think is one of the key roles of the primary dealers. And so, it is disappointing when we put tools out there. Tools that I might say they actually had requested. I think primary dealers were one of the key groups that suggested having a standing repo facility would help eliminate issues like we had in September of 2019. And so we've put that tool out there, it's available for them, I'd like to see them take advantage of it to help redistribute reserves throughout the system.
So you're a little more in the, we can run this in a very efficient way. I'd like a little extra buffer because I do think because the balance sheet is so dynamic, it is organic, and the world has become sort of more uncertain, the swings that might occur could be outsized relative to our experience. And so having that extra buffer I think gives us even more space to ensure that these facilities can provide the amount of liquidity that we will need at the point in time. The thing I do worry about is the facility may have a certain capacity they can serve and we get some outsized unexpected shift or two or three things move at the same time, we find we need more than that and are not positioned to handle that. So for me, I'd like to see more in the buffer, but the point, I mean we probably should do an explainer on how the balance sheet evolves over time in ways that allows people to understand the dynamism that actually exists in it because it is quite complex.
