Bloomberg audio Studios, podcasts, radio news. Turning to the Federal Reserve, cutting interest rates by another 25 basis points this month but signaling the path is unclear for 2025. Fed Chair Powell saying he feels good about the economy but we are in a new phase in the fight against inflation. I'm pleased to say they're joining us around the table alongside Mike McKee and us is the San Francisco Fed President Mary Daly. President Daly, it's good to see you.
Nice to see you. Thank you for giving us some time.
Let's start with the forecast. Some controversy around the forecast. I'll go through the controversy. We don't speculate, we don't assume, we don't guess. And then a month later it felt like there was some speculation and some guessing about policy next year. I just want to talk about your approach to the forecast. Was it about the data for you or was it about the incoming administration?
It's about the data. It's always about the data for me. We don't know what the incoming administration is going to do. New administrations, no matter when they come, always put a slate of programs together. And really, a policymaker, I look at I want to see the net net effects once I see clarity about what those policies will be. So I was focused on the incoming information and what it means for the outlook. And today I feel like we've got policy in a good place, the economy is in a good place, and we are prepared for whatever comes before us.
What happened in the past three months that caused the Fed and perhaps yourself to be much more concerned about the stickiness in inflation?
Well, the data happened. And you look at the data and what's happened is that there are two things that have occurred. First of all, the economy remains in a good place and the risks to the outlook are equally balanced between a risk to inflation or a risk to employment. That's where we wanted our goals to be. And we adjusted policy when we had confidence that inflation was heading down, and we adjusted policy some more to ensure that we have a balanced labor market that continues. So that's where we are. But then the data on inflation have been coming in a little slower. I wouldn't even say sticky or stalled. I would say the progress has just slowed relative to what we had wanted. But that's a typical pattern. It's bumpy as you get from 2.5 or 2.8 to two. It's just a bumpy path at this point.
Okay, yeah, go ahead. At the same time, some people were wondering if there was the stickiness. And I'm looking right now at the Cleveland CPI now and it actually has ticked up for the month of December from November. There was this question: why did the Fed cut at all? Sure.
And I'm going to reassert that it's bumpy. Remember earlier in the year we had two months of data and people said, 'Oh my gosh, it's reaccelerating,' and then we had it come down. So inflation data, you can't focus on one month or two months. The most important thing for me was that we needed to recalibrate policy. I saw this as a close call. I was 75% enough to be the recalibration we were looking for. Right-size policy to meet the economy we expect, or do we need more? Ultimately, I determined that the 100 basis points was really the right level. Now I feel we've got that recalibration phase behind us and we're in the next phase. And the next phase is really looking at the incoming information. We can return to a more typical pattern of gradualism for the Fed. We've practiced that where, with a lot of uncertainty, you adjust the policy rate, then you wait watchfully and see what transpires, and then you make further adjustments. That's the phase I think we're now entering.
From September, the expectation in the markets was going into every meeting that you'd be cutting. Has that changed now? Should the expectation be that you won't be doing anything at any particular meeting? And from that question flows a second question: what are the criteria that you need to see to decide to go back to cutting rates?
Well, as you saw from the SEP, the median projection is two rate cuts next year. So that's already not every other meeting. That's two rate cuts. I was very comfortable with that meeting and that makes sense to me. But we have to remain agile. The thing that's got us here is being resolute to achieve our dual mandate goals. Price stability was our focus when inflation was very high. Employment has come into the frame so that we're focused on both. But then we also have to be agile. The world is uncertain, so we pencil in two. And as that estimate or projection gets further from when we made it, the accuracy of it probably falls. So we're just going to continually take in more information, consider it, and every meeting your listener should think about this: every meeting is live from the standpoint that you're debating, discussing, thinking what's the right level of policy. But my projection is that it will take many fewer rate cuts next year than we thought. But I'll watch the economy and see if that works out.
When we went into the cutting cycle, you were out front saying you were concerned about the labor market and that we needed to make sure that we didn't lose the gains that we had. Now, at least coming out of Chairman Powell's press conference, it sounds like the focus has shifted to inflation again. Are you comfortable with that as this new phase that he's talking about?
Well, I think it is a new phase as well. And I would characterize it slightly differently. I would say that for a long time, a persistent amount of time, protracted, we were focused almost entirely on inflation. That's because the labor market was quite robust and inflation was 7, 6, 5. That was the right way to focus then. Then the labor market came into the frame. That didn't mean we turned our focus totally to it. It just meant that after a long period of focusing only on inflation, we were now focused on both. I think that is still the case. But I see policy is already in that position where it's supporting both. The policy is restrictive. It's going to continue to bring inflation down, and it's going to do so in a way that doesn't strangle the labor market, break it, and then give people lower inflation but take their jobs. That's not what we're trying to do. We're really working towards that soft landing.
Mary, you've used the word 'we' a lot when you talk about what's happening at the Federal Reserve. We've had some people who were quite critical of the Federal Reserve and Chairman Powell's performance specifically. In this news conference, one excuse that was given was that maybe he was struggling to reflect the lack of a consensus on the committee. How much diversity of thought, disagreement, is there on the committee? You call it a close call for yourself, but was there some disagreement on the committee at this meeting?
Well, I'm not going to speak about the entire committee. When I say 'we,' I stay focused on the things we all agree on, which is price stability and full employment and our efforts to get there. What I would offer is that we have, in my mind, a healthy level of discussion and disagreement. You don't want an FOMC that thinks exactly alike. And I believe that what people are looking at is the fact that now the world is more uncertain and people are debating and bringing in their views, and that's appropriate. When it was a pandemic and there was only one direction to move into rates, we had to do it quickly, it was obvious, everyone agreed. When inflation's high, there was no disagreement, right? We're all marching up. Now you should expect more disagreement, more differences of opinion. But they're always framed to the same thing: how do we get inflation to two and restore or keep full employment?
When I hear 'the world is more uncertain,' a lot of people hear, 'Well, that's not about the data, that's about the incoming administration.' I would disagree. Why would you disagree?
Because we have a variety of risks that are the ones we always deal with. The housing inflation right now, there's a substantial housing imbalance in the United States. The models in our data and our past experience all say housing inflation will come down, but we are uncertain about that. It hasn't come down as quickly as the models would have predicted, and so that's an issue. The labor market and consumer spending and growth are much faster and stronger than people would have predicted at this point given the tightening we've done. There's a lot of uncertainty about the natural rate of interest, where's the stopping point. And then of course there's geopolitical risks, the risk to global growth. That's going to be the backdrop. And then you have a change in administration. So I would say this level of uncertainty is normal in the sense that we've had all those things going on. It's not as excessive as uncertainty after the pandemic or the financial crisis. Those were really big periods of uncertainty. So I think if you're a central banker, you just get used to uncertainty and you manage it.
