Welcome to Central Bank Central. I'm Kathleen Hayes. There is so much going on for the Federal Reserve right now. So much that it almost seems like their next policy meeting, now, it's not till March. Nevertheless, whether it's going to be a cut, a pause, who knows? Seems to be like one of the least of the questions. A new Fed chair will be coming in in the next few months. The big question where the Fed is heading, what kind of pressures will be put on it, what will come from new Fed officials and more. So, I'm very happy to bring back to Central Bank Central James as in Jim Bullard, former president of the Federal Reserve Bank of St. Louis. He was there from 2008 to 2023, the longest serving Fed president in history. Also was then and still is considered a respected scholar leader in this field and now of course he is at the Mitch Daniel School of Business Purdue and busy there but taking some time out for us today. Okay. So, Jim, it's great to see you again.
So, like I said, a lot going on, but let's start with the simple part because the last time I saw you, before the end of the year, you were looking for possibly one rate cut this year. Is that still the case, or are there enough questions about, you know, both sides of the dual mandate, not just the inflation, but also the jobs and the labor market, that you've had second thoughts?
No, I think they're headed for one more cut and I think it would be in the second half of the year. And so I would stick by that. I think it'll be a good year for US economic growth. For all the reasons Wall Street analysts have been citing: fiscal policy tailwind, AI boom, you know, reasonably strong consumption. And I think, you know, tariff uncertainty, we can talk about that but I think still under control here. So, for all those reasons, I actually think it'll be a good year for growth. And then on the inflation side, I think, you know, inflation's continuing to hang up higher than the committee would like and that's going to make them reluctant to move too quickly. And so I think that all adds up to about one rate cut during the year.
Do you think there's any chance there won't be cut at all? I mean some people have even...
There's uncertainty, could go a lot of directions but I'm just saying based on the data today and the outlook today that's what I would guess.
And so inflation is stuck if you look at the core up around 3%. That's well above the 2% target for the headline but it's still I think people figure that's where you got to get to eventually. What do you think of inflation expectations at this point? You were somebody who's argued for a long time. These are very important for Fed credibility. You know, how long can you stay up at this above target rate and still get everyone convinced that you're really serious about getting inflation back down to 2%.
Yeah, I would look at TIPS-based inflation compensation that seems to be in reasonably good shape in, you know, in trading over the last month or so. So I think those numbers there are the ones that you would expect if the market really was expecting inflation to go back to 2%. So I think that's very comforting for the committee. They would like to see actual inflation be coming down but for a variety of reasons there might be, you know, sticking up a little bit higher. So I think they'd like confirmation on that before they make any moves.
Well, but the problem I always have with that humbly, humbly my problem. I'm just a, I'm not a former Fed official, PhD economist. But you know, it's people who buy things. It's people whose expectations seem to me are count because those are the people who are going to say, 'Well, I guess I'm willing to pay more prices, right?' And at some point, well, I guess I'm going to need to ask for more wages. And could look at that part of it because if you look at University of Michigan survey, one of the more controversial ones, nevertheless the oldest survey of expectations in the country, you see some that is stuck at a higher level. What do you make of that part of it, is that something you're watching as well?
Yeah, I mean if you look at the theories there, they have price setting behavior by the firms. So the firms, you know, in a grocery store they have to decide what price they're going to put on their product on the shelf, maybe some coupon discounts or something in certain situations, but they've got to make that pricing decision. So, that's posted pricing. The consumers of course coming into the store, they want the lowest that they can get. And good for them. But I think it's the expectations of the businesses. What do they think, can they raise prices or not? If they thought they were in an inflationary environment, they might raise prices consistently every quarter to keep up with that. That happened during the 2021 inflation. But if they think that inflation is going to go back to 2%, then they'd be very reluctant to raise their prices because they might lose customers. And if they do lose customers, cost of customer acquisition is very high. So, it's very hard to get those customers back. So, I think they're generally speaking, they're kind of reluctant to raise the prices, based on the expectations that are out there. They're always reviewing their pricing decisions, of course, and they also have to consider regular, you know, sort of bread and butter supply and demand, you know, of their product and what innovations are occurring in the market and everything else. But with respect to inflation, it's probably the business expectations that are the most important. So you could look at those, there are surveys of business expectations and I think they've been, if I'm recalling my chart correctly, I think they've been drifting down a little bit. But I like the market-based expectations because the market is taking all of that into account, including the Michigan survey, including the business expectations, and then they're making bets on what they think will happen to inflation, looking at all that data, and they're putting real money on the table. So, I think it's an information aggregator, to look at actual markets, for inflation expectations.
So how about the labor market? You know the jobs growth has come way down but of course what population growth is low. We've had the deportations. We've had the big drop in migrants coming into the country. So a lot of people say supply and demand. How do you look at it, if is the, what is the natural rate of employment growth? I mean, at the levels we're seeing now, do you think, oh, that's another reason to be thinking about cutting rates, or do you say no, labor market is different, at least for now, and it's much more about inflation and some of these other factors?
Yeah, I think an important piece of research was done at the San Francisco Fed and they've recently blogged about that and it's a detailed study of immigration, undocumented immigration, from let's say 2021 till now. And excellent analysis, a lot of detail about where workers might go, what kinds of industries they might work in, what the rate of growth and rate of decline in those places has been. And they found almost a one-to-one correspondence between the change in immigration policy and the change in labor market employment growth. So I take that as what we've witnessed over the last few years is almost entirely due to supply factors coming from immigration policy. Very rapid growth during the earlier years in this sample and then after as you come into 2024 and 2025, you know, much less or negative growth or much less growth because the immigration policy changed. So I think that's very informative about how we should think about non-farm payroll employment. We have been thinking, you know, a good number is like 150 or 200 or 250 or something like that and we're used to those kinds of numbers but I don't think that's what's happening going forward. If we keep the same immigration policy that we have then I think you should expect only 30,000 per month. And even today, even though this argument has been made a lot and people have been talking about it a lot, I'm not sure the market has really adjusted down, you know, their entire expectations about what they think a typical jobs report should show us. Also, you'd expect some negative numbers in there. The variance hasn't changed. So, you'd expect some negative numbers in there and that's supposed to be okay. That's supposed to be consistent with the normal growth of jobs in the economy given the natural variation in the data. So all of this makes me think that the unemployment rate maybe takes outsized importance here. It's always been important, but since non-farm payrolls isn't really giving us the same signal that it did, should probably look at unemployment and that's been ticking down and unemployment insurance claims also showing very low levels. So I think that probably the best interpretation is that the labor market's in pretty good shape given the new immigration policy that we have and the economy is probably doing pretty well.
Just have to ask this here. AI, okay, a lot of discussion on AI, artificial intelligence is productivity, you know, so how much it's going to boost it, you know, this year, next year, that's another thing that could have an impact on the Fed's policy decisions, right? More productivity, higher growth, you can afford to be still on rates. And you're at Purdue, you know, you're at the business school, Mitch Daniel's business school, so let's just start with what do you, do you see any signs? Can anybody expect to see any real valid signs of what AI is doing in terms of jobs, in terms of productivity as well?
No, I think it's a great technology. It will enhance productivity. So that part I think is absolutely true. We actually put in AI requirement here for all undergrads in the business school and now that's been adopted by the university as a whole. So everyone's going to be immersed in AI that's graduating from here. So I think it will increase productivity. I think it will be like a lot of the other great technological changes that we've had over many decades and centuries even in the US. And it will enhance worker productivity ultimately and that will allow workers to make more, wages will be higher for an hour of work because they will be more productive. So, I think that's exactly what's going to happen. These kinds of doomsday scenarios that are laid out, you know, they don't take into account if you really thought everyone's going to be unemployed and down and out, you won't have anybody to sell a product to. So, that can't be an equilibrium there. That can't be a good prediction to make. The value of the labor is going to change depending on how much they're using the new tool or not using the new tool. And I think that's the way to think about this. So I'll just give a simple example. So we've had a lot of snow here this winter.
So suppose I have a snow removal business and all my guys use shovels and they're great and they use shovels and they're good customer service and it's a good business. You invent the snowblower. So what am I going to do? Well, I'm going to adopt the snowblower. I'm going to use less people to shovel all this snow and I'm going to have a more productive business and that's going to settle down into an equilibrium. So, that's exactly what's going to happen here. It does mean that some of my snow shovelers are going to have to go get different jobs. They're going to have to move to different industries, but the history is that new jobs are created in other ways, in other places that wouldn't have been there previously. And that's what's going to happen again this time.
Growth, GDP, what do you expect there? You are still looking for this rate cut maybe second half of the year, so not immediately. You're waiting to see what happens, but you know, there's some pretty positive views of GDP this year, right? And if growth is strong, if the unemployment stays at this low kind of level, you know, even if payrolls don't grow as fast, then what then?
I think we'll get 3% growth this year. When all the dust settles and at the end, you know, by this time next year, we'll know that number. But I see no reason why it wouldn't be a very strong year in terms of GDP, real GDP growth. I think the labor market accordingly will continue to have a relatively low unemployment rate. I would say the current rate is very close to what most people would estimate as a natural rate of unemployment for the US. And so that's going to keep the committee, you know, waiting to see if they get the additional disinflation that they've been waiting for for a while. And unless they see that, I don't think they'll come down any much further or any further on the policy rate. That's why you got to wait till the second half of the year to see that develop.
So, but if productivity is going to be increasing and the economy stronger, isn't the maybe the neutral rate higher than the majority on at the FOMC thinks that and so maybe you don't really need it? I guess that's what I keep wondering. What is the reason especially if inflation hasn't gotten a lot closer to 2%.
