Stephen Miran, I'm pleased to say, joins us around the table for a conversation about that and a whole lot more. Good morning. Thank you for being here, sir. Let's start with the shock over the weekend. What's the response for policymaking like the one playing out in the Middle East?
At the moment, I think it's too early to have firm views as a result of that. The bigger question is, does oil stay up or come back down? That will depend on how things play out. Even that said, if oil stays at these levels, to me it's difficult to get a lot of read-throughs as a result of that. Oil will be feeding that headline inflation, but how they feed into core inflation in a material way, I think, is quite limited. It's difficult to get excited about a policy implication of what's going on so far.
Saying these Fed officials may be affected by the post-pandemic experience and inflation spike and the energy shock that developed at the time. Is this different?
I think it is. I think the Federal Reserve for decades has had the view that headline inflation shocks, when you focus on core inflation, is indicative of where inflation will be in the future. And that type of reasoning leads you to the oil shock. What happened in '22 was a bit different because other policy settings—don't forget, monetary policy was expansionary as it's ever been at the time. Fiscal policy was injecting trillions of dollars into an economy that was recovering thanks to medical improvements. And so the policy environment was very different. It was very easy for the inflationary shock to feed through the broader economy and create this persistent inflationary problem that the Fed dealt with. We don't have that right now. We don't have fiscal policy that's slamming on demand. If anything, supply's moving up aggressively and monetary policy is restrictive. So the policy settings, the economic effect is different. To focus on that as you describe, that was a unique circumstance.
Some people argue the January jobs report raised the question of how the market actually was, even saying it's a coin flip on whether we should cut rates in the March meeting. If we get confirmation of that strength with the non-farm payrolls report that we get on Friday, will that be a thing whether March was an appropriate time to cut rates?
We've got two years of a trend of gradually weakening labor markets. It is way too early to reject the notion that that trend continues based on one report. When you look at the totality of labor market demand, there's still evidence that means more support for long-term policy. When I look at things like employment levels and folks without college degrees and a look at people who are unemployed for long periods of time, to me that's indicative that monetary policy can accommodate. I think it's too early to reject the notion that that trend is on one print.
Are you concerned the market is moving the way any rate cut would be perceived as heightening long-term inflation pressures by virtue of supply shocks we are seeing and the fact people do see strength reemerging in certain pockets of the economy? How worried are you that a rate cut in March could be potentially counterproductive and beget the long end of the yield curve to rise?
If you saw evidence in inflation markets that they're concerned about long-running inflation and fixations, I don't see evidence of that so far. Short inflation expectations came up a bit, but that's just the mechanical read-through into headline inflation. We look at long tenors, I don't get the impression the market is concerned about long-term inflation expectations.
You've used this term, 'modestly restrictive.' What does that mean to you, and can you put numbers on that kind of thing?
My view is we ought to start by getting back towards neutral. It's not to become accommodative.
What would it take for you to start thinking about the need to get accommodative?
I would want to start thinking about inflation coming in below target, which is a risk we've highlighted. What would be the source of that risk? I've emphasized the housing market a lot, expecting a faster convergence down of new rents to existing rent levels. And there's reasons for that that I've talked about at length. But if I end up being wrong about housing, wrong about tariffs—I've also argued I don't think tariffs are driving goods inflation because imported prices are not inflating faster than we expect to see. And given that backdrop, I don't view tariffs as driving goods prices. If you end up being wrong about housing this year, because of course housing is measured for dynamic renewal rents, and you end up being wrong about goods prices and goods inflation comes down quickly over the course of the year, then we will undershoot our target.
Anything we need to get ahead of? That's where we go below neutral. In a moment like this, one is on the committee thinking, 'Let's wait and see what happens.' Lisa was asking how devoted the March committee meeting is. Is this a moment to wait and see?
I think it's a moment to continue acting. We have projections for unemployment, for labor markets, and for inflation. I believe it's appropriate to continue acting in accordance with those projections until you get evidence that you need to change directions. Thus far, the events over the weekend haven't led me to change any of my focus for labor market inflation in the near term, so it's too early to respond.
You think it's a point below where we currently are, and I'm wondering how quickly do you think it's important to get to neutral based on the uncertainty and the disagreements people have about what neutral is and how things are going to transpire.
Last year I was voting for 50s because we were higher, and as we made progress cutting closer towards neutral, I felt it was appropriate to say now we can move to 25 clips. I prefer to still move at 25 clips and then to reevaluate. At the end of the day, I don't see inflation that extends now. If we get evidence what's happening in the Middle East is bleeding through into broader inflation, that would change my mind.
