Economic Club of Miami hosts Federal Reserve Board Governor Lisa D. Cook

Thank you so much. Thank you. Thank you, Francisco, for that kind introduction and many thanks to the Economic Club of Miami for the opportunity to speak with you today. It is wonderful to see firsthand the vibrant and growing South Florida economy. I was sitting over here saying, 'Of course, this economic club is only three years old.' And of course, it went from 30 members to 300 members. Everything you all touch has that feeling. So, I'm not surprised. The Miami region's unemployment rate is below the national average, and consumers in Florida have been among the country's most resilient. I am happy to have the opportunity to engage with all of you who were central to that dynamism. I'm especially glad to have the chance to update you on my economic outlook shortly after the FOMC's first meeting of the year. As always, I am focused on achieving the dual mandate of maximum employment and stable prices given to us by Congress. This evening, I will discuss both parts of that mandate and give you my view on how the economy is evolving. I will then share some thoughts about the apparent disconnect between sentiment and activity before discussing implications for monetary policy. Broadly, I see the US economy as continuing to be resilient with recent data indicating that growth in the second half of 2025 was even stronger than previously forecast. Inflation appears to have stalled stubbornly above our 2% goal, while at the same time the labor market appears to have stabilized in recent months. While the overall condition of the economy is solid, I am carefully watching sentiment, delinquencies, and other indicators that show a worsening outlook for low and moderate income or LMI households. Allow me to start with inflation. While some data are delayed because of last year's government shutdown, we have a good sense of inflation's trajectory. Based on the latest available data, it is estimated that the personal consumption expenditures price index rose 2.9% for 12 months ending in December, still above our 2% target. Core inflation, which excludes the volatile food and energy categories, was estimated to be 3% at the end of last year. Those readings indicate that progress on inflation essentially stalled in 2025. I have long discussed how important it is to return inflation to our target. Such a plateau is frustrating after seeing significant disinflation in the preceding few years. To understand why inflation leveled off in 2025, I find it instructive to look at the subcomponents. The disinflationary trend has continued for housing services, an expected outcome as cooling and new tenant rents flow through to overall shelter prices. Inflation for non-housing services has also eased, consistent with a less tight labor market. Conversely, when looking at core goods prices, we have seen a notable uptick in inflation that primarily reflects an increase in tariffs last year on a wide variety of imported goods. With anchored inflation expectations, it is anticipated that tariff increases should only lead to a one-time price rise. That raises the likelihood that the recent disinflationary trend could resume once tariff effects recede into the rear view mirror. However, much uncertainty remains. The future direction of tariff policy is unclear. And even when tariff levels are settled, uncertainty remains with respect to how long it will take for that price rise to be complete and whether it will take hold in inflation expectations. I would note that measures of short-run inflation expectations have fallen since last spring and longer run inflation expectation measures have been stable. However, I am watching the clock here. The longer inflation measures remain above target, the greater the probability that higher inflation will become entrenched in expectations. With respect to the labor market, data available through the end of last year suggests that the labor market stabilized after having softened through 2024 and earlier in 2025. In December, the unemployment rate was 4.4%. While up from the cyclical trough, the rate was little changed over the second half of 2025 and remained relatively low. To put 4.4% in perspective, consider the average unemployment rate for the 50 years preceding the pandemic, which was 6.2%. Meanwhile, layoffs remain low and new applications for unemployment benefits have held steady for several years. The number of available jobs relative to unemployed workers seeking work is just below one. This reading is historically consistent with a solid labor market, although it is appreciably down from a few years ago when the labor market was considerably tighter. Risks to the labor market persist. Individuals who report working part-time for economic reasons as a share of employment jumped at the end of 2025 after gradually moving higher over the past few years. Furthermore, job creation has slowed. Non-farm payrolls rose by only 50,000 jobs each in November and December after declining in October as a result of a substantial decline in federal government employment. This low payroll growth does not necessarily indicate a weakening labor market as it is likely connected to the fall in supply of workers due to immigration policies and underlying demographics. However, it does suggest that the low unemployment rate is not driven by strong labor demand. Instead, labor demand has eased roughly in line with the fall in labor supply. Overall, these readings indicate to me that the labor market is roughly in balance, but I am highly attentive to developments knowing it can quickly shift. Looking ahead, as I have discussed in several speeches, I see the continued proliferation of AI is likely to have a significant effect on the labor market and on the economy. Growing evidence shows that AI has the power to significantly boost productivity. Better productivity gains would support economic output and allow real wages to increase. I also see AI accelerating the generation of ideas which could lead to the creation of new products, businesses, and jobs. Nonetheless, I'm aware that job destruction may precede job creation such that the unemployment rate might rise as the economic transitions causing hardship for many workers and their families. I am concerned that there is a dynamic inconsistency problem such that there could be a mismatch between the arrival of costs of AI investment and the arrival of benefits including higher productivity that is non-inflationary. The overall economy is solid. GDP rose at 4.4% in the third quarter of 2025, the most recent period for data that are available. That marked the second straight quarter of strong growth after a first quarter downturn. The third quarter's gain was driven by consumer spending, which broadly remains highly resilient, as well as an increase in net exports, which is a volatile category. Fourth quarter growth readings will be somewhat constrained by the effects of the federal government shutdown which should unwind in the current quarter. For all of 2025, I estimate that the economy grew just above 2%. And I see a similar rate of growth being maintained this year. Recent strong overall growth likely masks a challenging situation facing many families particularly LMI households. For example, youth and black unemployment rates, both of which tend to be more cyclical than overall unemployment, have risen since last spring. The deteriorating labor market experienced by these two groups mirrors other emerging strains in some households' financial health and balance sheets. Among these households, I have observed large increases in delinquencies and see some other evidence that their spending has stagnated when compared to robust growth that we see in other higher income components. This divergence is sometimes called a two-speed or K-shaped economy in which the well-off are doing well while vulnerable households are not. I think about this two-speed or K-shaped economy when I attempt to take signal from various sentiment readings. Consumer sentiment by many measures is lower than one would expect in a solid economy and perceptions of job availability have continued to worsen. Outreach calls I have had with business and labor leaders as well as with members of various communities and organizations similarly suggest a dissatisfaction with the economy and a worsening one especially among vulnerable households. Typically weak sentiment indicators are associated with a downturn in the economy and the labor market. However, there's reason to approach them differently at this time. I find it important to try to understand what is driving that discrepancy to ensure that I am not putting too little weight on what are called softer indicators. I've come to the view that there are four main reasons households are reporting low sentiment. First, households are worse off relative to recent history. Though the economy is solid now, it is clearly softened in the past year or two when it was running hot. It is natural that households would compare to their near past when assessing the economy's health and their prospects. Second, the introduction of AI has raised uncertainty about the job market. Even Americans who see the benefits of AI can also be concerned about the labor market transition and wonder whether in coming years jobs will be available for themselves and their families. Third, decades-long structural changes that present challenges for today's middle class families exist. Most notably, housing costs have increased sharply for both home buyers and renters and have far surpassed wage gains in almost every region of the country. Moreover, the cost of education, health care, elder care, and child care has risen by more than wages. Household debt has also risen and intergenerational mobility has declined. I conjecture that the growing pains of these trends may not be felt by American households linearly over time, but rather that they interact with other macroeconomic trends such that they become especially painful at times, including in recent years. For instance, I think the age distribution of our workforce may make these trends more salient now with young adults competing for housing and jobs with older, wealthier baby boomers. Finally, the fourth reason I will point to as an explanation for weak sentiment is a high inflation experience, not just today, but over the past 5 years. This reason also interacts with the long-standing trends I just mentioned. The recent bout of inflation would have called attention to the corrosive rise in real prices of housing, child care, elder care, and education that occurred over decades. In summary, the reasons for low sentiment are real and are deeply concerning, but they do not, in my view, reveal a signal about increased slack that we can tackle with our typical demand-side monetary policy. In fact, for the part of households' concerns related to the pain of inflation, the best we can do in our roles is to ensure that inflation returns and stays at target. When considering the proper stance of monetary policy, I see risks to both parts of our dual mandate. Inflation remains persistently above 2% and there is considerable uncertainty about when tariff effects will recede. While the unemployment rate has shown signs of stabilization, the lack of dynamism in the labor market likely makes it susceptible to downside shocks. Overall, uncertainty about the outlook remains elevated. Although I believe the labor market will continue to be supported by the three rate cuts last year, at this time I see risks as tilted toward higher inflation. As a result, I supported the FOMC's decision to hold the policy rate steady at our meeting earlier this year. As I described, there is an argument for being optimistic about the path of inflation. But until I see stronger evidence that inflation is moving sustainably back down to target, that is where my focus will be in the absence of unexpected changes in the labor market. As I have said before, but cannot repeat too many times, the FOMC's firm commitment to its inflation mandate is imperative. After nearly five years of above target inflation, it is essential that we maintain our credibility by returning to a disinflationary path and achieving our target in the relatively near future. At the height of the recent bout of high inflation, we promised that we would return to target. And it was this promise that kept inflation expectations anchored and allowed us to see the sharp disinflation from 2022 through 2024. If we were to lose credibility, the cost may not be immediately felt, but it would be resoundingly and painfully felt when we needed it the most in an inflation crisis such as the one we experienced three years ago. As I have laid out, I remain optimistic that inflation will soon return to a path that gets us to our target, that the labor market is stabilizing, and that sustainable growth lies ahead. My optimism is tempered with caution. That is why I remain vigilant in studying a wide range of incoming information so that I can pursue the best policy to achieve our dual mandate goals. My future policy decisions will be guided by incoming data, my economic outlook, and the evolving balance of risks. And finally, before I conclude, I want to briefly acknowledge the outpouring of support I received from so many friends, current and former colleagues, and many others in recent weeks. It is humbling, and I am deeply appreciative. I will not have anything more to say today about recent legal proceedings. I can say that it is an honor to serve on the board of governors of the Federal Reserve system. I will continue to carry out my sworn duties in that role on behalf of the American people. I look forward to discussing my economic outlook and the work of the Fed with you all today. Thank you again to the Economic Club of Miami for this opportunity. I look forward to your questions.

So, I don't know Kevin. I didn't overlap with him at Hoover and didn't overlap with him on the Federal Reserve Board of Governors, but I certainly look forward to getting to know him, but in general, I don't comment on nominees on candidates for either governor or for chair.

So typically we look at PCE inflation. That's our target and our target is 2%. So I mean I'm being facetious. I'll start with inflation. So we typically use the personal consumption expenditures index. So which is different from CPI and as I said in my speech the last reading was 2.9% and core PCE was 3%. Way above our target. So we are still trying to get back down to target. It's been 5 years. We've all felt the effects of that. So that is our commitment and that's what we want to get back to. Goods inflation has been the largest source of the inflation that we see right now. So that should be a temporary price rise due to tariff effects, right? But hopefully it is our hope that the tariff effects are okay I'm not going to use the word transitory but you know what I mean and I wasn't there when that term was being used. So we hope that they will dissipate and dissipate quickly and once they dissipate we should be in this disinflationary process back on the disinflationary path. So that's what it will primarily take. We've seen better results, let's say, in housing services with shelter prices falling over time, but we have to wait for goods price inflation to also wait.

Well I would say that it has stabilized and again relative to the 50 years prior to the pandemic it is tighter. But it is not as tight as it was 2 or 3 years ago. So we've seen it stabilize over 2025. It's been in September of 2025 it was 4.4% in December is 4.4%. There are still risks though to the labor market as I was pointing out in my speech. And one thing we know about the labor market is that it can turn very quickly. If we look at the unemployment data for past recessions for example, you see it climbing a little bit and then it becomes exponential. So we really have to watch that very closely.

So I think that we're mildly restrictive. We put a lot of easing into the pipeline at the end of last year and I think that given where the labor market is, where inflation is, this is the right time to sit back and wait to see what happens. And again, it should be a temporary rise. This rise in the price level should be temporary given the tariffs. So, we'd like to see us get back to the disinflationary path. So, I think it's mildly restrictive, but ever so mildly restrictive, and I want to wait to see what happens given what my mentor at Stanford, Milton Friedman, said about long and variable lags. So I appreciate that time and the patience to see what happens with that easing.

I did and he encouraged me to do the research that has turned out to be my most cited research on innovation.

That's right. That's right. Ken Arrow too actually.

You know, I look through the lens of innovation and AI to understand because that's what I was studying for 20 years before I came to the Fed to understand where r-star is because one of the factors as you know is productivity. Other factors are much more slow-moving like demographics. So I think of the investment in AI and in innovation as raising r-star as it would because investment demand goes up you would see r-star rising but r-star is a long run concept. So we can't talk about it really in a 2 or 3 year window as many people have talked about it currently and for our decisions it's not as relevant for our day-to-day decisions. It is imprecisely measured, you know, depends on models, surveys and what we have to be careful about is what happens in the long run and how this moves in the long run and that's what I'll be looking at because like I said with respect to some demographics it was a very slow-moving series so we should watch, we should see whether the short term turns into the long run but the short run right now I think is raising r-star slightly.

Okay John Williams if you're listening I'm a real big fan of Laubach-Williams. Real big fan of model-based r-star yes. But in all seriousness before I came to the Fed I primarily looked at model-based r-star right so I would say I have more familiarity with those models. But I find the New York Fed surveys of market participants as being very useful too and the SEP being useful.

They do. They're both great measures. FOMC members their estimates of r-star in the long run and same with market participants.