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What is sort of technically your last 24 hours as a Fed governor? Your term is up tomorrow, but you're staying on.
Thanks for having me back. It's good to see you again. Look, as you say, my term expires over the weekend. But per the Federal Reserve Act, I'll be staying in my seat until someone is confirmed to replace me, presumably Chairman Designate Kevin Warsh. This is common practice and has happened many times by other governors who have waited for someone else to be confirmed into their seat.
Now the question is how long is that going to take? Have you had any indication from the White House or from anybody on Capitol Hill? We know that Senator Tillis is threatening to block the nomination, but that could easily be handled. That could go away anytime. Do you have any idea how long you're going to be still at the Fed?
I have no idea. I mean, I wish I knew. You know, my confirmation process took what, six weeks or so? A little bit more than that. So you know, I have no idea how long it will take for Chairman Designate Warsh, but you know, I'm confident that the process will work and the Senate will come together.
All right. So you get to March 18th at the next FOMC meeting. You're still going to dissent for lower rates, and I ask because this time you only dissented for 25 basis points instead of 50.
Yeah. So I dissented for 25 instead of 50 for a couple reasons. One of them is that we did cut since I joined the FOMC in September. We cut three times. You know, we reduced the federal funds rate by 75 basis points. That means we're less far from neutral than we were when I arrived in September. Now, I still think rates are too restrictive. As I've made very clear, I still think we need to cut interest rates substantially further from here. However, given that we've made some progress reducing rates, we can now, in my view, proceed at a slower pace of about a quarter point per meeting. It's no longer as imperative to move in 50 clips as it was. The other thing that happened is the labor market data did come in a little bit better, and they didn't come in to an extent that they alleviated all my concerns about the labor market. You know, far from it. Indeed, the labor market has been on this gradual cooling trend for over two years now. And it should take much more than just one data print to make you change your mind about the trend in the labor market. But nevertheless, we did get a little bit of better data and that helped alleviate some concerns for me, but not all of them. You know, I still have some concerns there.
Well, we got a 4.4% unemployment rate last month, and the next Friday, we're expecting to get the same thing. So, that's two months at least of evidence that the labor market is somewhat stabilized, which is what the Fed was saying in its statement this last time. And yet, Jay Powell said, given the numbers that you've got to work with, it looks like PCE inflation on the core is going to go to 3% or more. The optics don't look good for cutting rates when inflation is going up and the labor market is stabilized.
So, I disagree with a couple things you said. First of all, the unemployment rate, even though it's the single most important indicator, is far from the total of information that we know about the labor market. There's plenty of evidence in the labor market data that indicates that we can accommodate additional demand for labor. There have been signs like it taking longer for some folks to find jobs. Pockets of weakness among younger folks and folks without college degrees. Increased part-time work for economic reasons. All this indicates that there's additional slack in the labor market beyond what's indicated in the unemployment rate alone. If you look at the employment to population ratio for younger folks, it's been trending downwards for a long period of time and it has shown less stabilization than the overall unemployment rate is. And this is the type of thing that is concerning for me. So I disagree with the assessment that there's enough labor market stabilization that we can drop our concerns about the labor market. I still have some concerns. Now I'm not as concerned as some others, but those concerns still do exist for me. And on inflation, I think, you know, I've been making this argument that almost all of the inflation overage over our target is due to quirks of how we measure inflation. It's due to two things. It's due to the portfolio management services which pick up just the stock market prices. So AI pushes stock prices higher that mechanically feeds through into portfolio management services which contributed 36 basis points to core year on year. A normal year is six basis points. Right? So there's over a quarter of a point of core inflation excess. That's basically just the stock market moving higher. And all of the professional investors in the audience know there's been decades of fee deflation in that industry, not inflation. So there's an error in how this thing is measured. The other thing is housing. The way the housing inflation is measured, it's picking up the housing market rents of 2022 and 2023, not 2026 or 2027. We shouldn't be making policy based on what happened in 2022. We should be making policy based on what's happening in the next 12 months. So once you correct for these two errors, the backward-looking nature of shelter and the messed up portfolio management fees, you look at market-based core ex-shelter instead of looking at regular core. Inflation's running 2.2%. That's within noise of our target. We don't have an inflation excess of any inflation that's relevant for supply demand imbalances of the type of monetary policy we respond to. We should not be making monetary policy. We should not be asking people to give up their jobs because of quirks of how inflation is measured. That just to me is not a good idea for policy. It's a grotesque interpretation of stable prices.
I am curious, Steve, just about how we start to measure things going forward. And I just want to go back to the labor market for a second because there's been a lot of discussion about the stability or maybe the potential instability there. I spoke this morning with the CEO of American Express and he actually talked a lot about small businesses, kind of middle market businesses, if you will, that at least in his view weren't as healthy as some of the larger businesses. And I'm curious if there's been any meaningful discussion at the Fed about that kind of middle market of our economy.
You know, excuse me. There is conversations about that. You know, people talk a lot about K-shaped economies and things like that. And I think usually they're talking about households when they talk about that, but there certainly is an element of that on the firm side as well. You know, from my perspective, some of that stuff is helpful for understanding where the economy is going, but I don't believe in targeting a specific sector of the economy. I believe that the statutes that Congress gave us instruct us to target the overall macroeconomy as a whole. And I'm focused on aggregate employment. I'm focused on aggregate inflation and so I do see, you know, there definitely are pockets of weakness here and there but I'm focused on the overall levels.
But there was some discussion a few years back with Jay Powell when he did start to look at certain segments, the idea that when you look at the economy in aggregate sometimes it obscures certain things whether it's to the upside or the downside. Is there not any value in maybe trying, I guess, to bisect or dissect things into different sections?
Oh no, there absolutely is because it can help you predict where the overall is going to go, right? And I did that a moment ago with the labor market. When you, as I was saying, if you look at younger folks, if you look at folks that have college degrees, if you look at folks that are marginally attached to the labor market, I think that very often they're leading indicators of where the overall labor market is going to go. And they portray additional slack beyond what just the unemployment rate itself would give you. And I think, you know, to the extent you're seeing weakness in some smaller business segments like the AMX CEO that you mentioned before, that is the type of thing that I would be interested in knowing more about in terms of what it portends for the overall economy.
Stephen Miran, I want to talk about Kevin Warsh. Of course, that's the big news of this morning. President Trump posting on Truth Social that he will nominate Kevin Warsh as the next chair of the Federal Reserve. This has been the horse race that has been captivating Wall Street. I want to bring you this note from Neil Dutta over at Renaissance Macro. He writes that if you get a few cuts now to appease the president, you may well get tougher hikes later. Moreover, because Warsh has been a policy hawk his entire life, his newfound dovishness looks very suspect. Now, that's maybe a little bit more blunt than I would have phrased it, but there's a lot of people on Wall Street on the sell side who share that view. And I'm curious how confident you are that, you know, as a Fed chair, Warsh will be the dove that it seems that President Trump wants.
Look, I think Neil is fantastic. I'm a huge Neil fan. But I think that Chairman Designate Warsh has a long and illustrious career and history as a very insightful thinker on monetary policy. I think he's a fantastic pick from the president. I think he's got enormous credibility. I think he's got enormous gravitas. I think he's got enormous respect from financial markets, from economists, from everyone. I think he's going to do just a knockout job. What specific policies he supports or he's going to support going forward? You know, I can't answer that. I'm not him. You got to ask him those questions.
Well, I would love to. So, fingers crossed there. But as a Fed governor, I mean, as you know well, the job of the Fed chair is not just their opinions on where policy should go, but it's building consensus, you know, in the room itself. And so with the current makeup of the FOMC, I mean, you think about some of the views on interest rates, on the balance sheet, do you think that Warsh will be able to basically build that consensus with that makeup?
I do. I do. And the reason is that he's been there before. He knows how the place operates. He knows a lot of the key figures involved and he's got the respect and the credibility that you need to do that and I think that people want him to succeed. I think people want the Fed to have a good role in the economy, a good role in the country and I think that they'll want him to succeed and I think that he will be able to marshal the arguments and the evidence that he needs to persuade people of his policy views.
