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Joining us around the table, I'm pleased to say here in New York, the Fed Governor Chris Waller. Governor Waller, good to see you, sir.
Good to see you all again.
When we planned this, I thought you'd come in and talk about the labor market, but something else has taken over. What's your assessment of developments in the Middle East and ultimately what it means for you and the committee?
Yeah. I mean, I guess it's exactly the thing is what you're going to see is you're going to see a spike in gasoline prices. That's what the American citizens are going to see when they go to the pump and they're going to stare at it and be a little shocked in terms of how things go. But for us, thinking about policy going forward, this is unlikely to cause sustained inflation. This one reason we don't look at energy prices when we look at core. Core is a better predictor of future inflation. You're going to see this, but once these kind of supply chain issues that you laid out, Lisa, once they unravel, this will start coming back down. So, it's kind of very odd to think about the Fed maybe changing rates six months from now based on this. If it's unwound in a like as you said, Jonathan, in a couple of weeks or even two months, it's not going to be a big factor down the road. So, this is why we never look at energy prices. They bounce up, they come back down. It's not that it's something that we don't feel sympathy for people that that's what they have to pay when they put the gas in their cars, but for us thinking about the longer term in terms of policy. This is something we're just going to have to kind of put off for now.
When does it become something bigger?
It becomes bigger if it becomes more permanent because then what's going to happen? You're going to see this jump in prices. Then it'll start bleeding through to other parts of the economy. Energy is a big part. It feeds into everything else and then somehow those energy costs get passed along like everything else. That's what you're more worried about.
Economists on any given day, Lisa, Mike, myself, and they'll talk about the experience of the 70s and coming out of the pandemic and they'll say things like that officials at the Federal Reserve are somewhat conditioned, scarred by some of that. Is that your experience of things?
Well, in the 70s, remember, we didn't just have one. We had massive oil shocks. If you take 73, the price of oil quadrupled overnight. It went from $4 a barrel to $12 a barrel or three or went from three to whatever the numbers were. But that was a shock. And it never came back down. And then there was another one. Every time you turned around, there was another oil shock. Then Iran oil embargo in 79. So that was kind of the problem with the oil shocks. They just kept coming and coming and coming. So it's not clear this will be one shock after another after another. So that's why I'm more willing to say this is I hate to say, but more like a one-off event than what we saw in the 1970s.
Well, as Rosanna Dana used to say, it's always something because if it's not just the oil shocks, it's the whole idea now we're going to have a whole new round of tariffs coming through the economy. And we've got this low fire, low hire economy. How long do you think that continues? Does this just push out the time period for companies to sit on their hands, not invest because they don't know what's going to happen?
Yeah, I mean this is one of the things I've been concerned about since last June is how weak the labor market has been. There were a lot of factors last summer that were driving this kind of low fire. It looked like maybe in January we might be turning a corner. We'll find out today whether that was as I said last week signal or noise. But you know when you're in this world in which the labor market even with 130,000 jobs it was really concentrating a couple of sectors. 80% of the economy, the labor market wasn't doing anything. It was zero to negative. So that kind of fragility wouldn't take much for some sort of a serious shock to sort of start pushing people in another direction. Whether this is that kind of shock or not, we'll start finding out.
Yeah, it's early because of course these are going to be January numbers, but you've been on record as saying you'd like to cut more because you're still worried about where the labor market is. What would it take to get you to back off on that feeling? Because if we get the same sort of numbers we had in December, it still shows very narrow breadth of hiring and it still shows some reasonably good numbers for hiring.
Yeah, even with the January report, like I said it was all concentrated in a couple of sectors. So that was good. They were robust. We got a big number well above everybody's estimate of break even. But the concentration didn't give me a lot of comfort that the economy as a whole was doing really well. So that's where it, you know, my brain is telling me the number was good and the economy looks okay. It was above break even, but my guts are telling me it may not be that good. And that's where I'm waiting to see what today's number is. I'm almost certain it's going to get revised down because this has been a pattern in January the last few years.
Let me pair these two ideas. The idea of the oil shock that's creating some concerns about inflation and then a labor market that kind of is in question, right? Is it decelerating or is it reaccelerating? How much has your reaction changed potentially to today's report given the fact that we do see energy prices pushing on inflation? In other words, would you be less inclined to cut rates if there is strength that's demonstrated in the labor market today?
Yeah, that's kind of what I was hinting at last week that if we get another solid jobs report than last month, this month looks like the labor market's turning around. A lot of the downside risk I've been worried about for six months is kind of going away. We're going to get a hot PCE number given what we already have seen coming in. That's going to probably print from everything I've seen about a point four. Usually that comes down again. We've had this January effect. We have some more pass-throughs of tariffs, but because the inflation's hot, it's going to look even worse now with the oil prices, at least on headline. And then if you get a solid job number, it does say you can sit there and wait.
