I saw some comments from yesterday and for our audience that might have missed them, I'll share them with our audience. Now we can pick up on him. That has to be a surprise on the inflation front to change the outlook so dramatically. If we saw inflation surprises to the upside between now and then, that might give us pause for December. It'd be hard to imagine the labor market really heats up between now and December. That's just not that much time. Inflation data out just moments ago. Anything in that to disrupt this easing bias that seems to have gripped the Fed over the last few months?
Well, first of all, it's very fresh data, so I haven't had time to go through it in a lot of detail. But at least on the headline level, it seems to be confirming the path that we're on. We've made a lot of progress in the last year or so bringing inflation down. I need to go to the component of that release, which I have not done yet. But generally speaking, goods inflation is back down to where we want it to be, where it was pre-pandemic. Services inflation, which is tied to wages, is generally trending down. And then finally, housing inflation, we know is a lagging indicator. We know that it takes a couple of years for the new leases to turn over and the new leases are showing that we're headed in the right direction. So right now I think that inflation is headed in the right direction. I've got confidence about that. But we need to wait. We've got another month or six weeks of data to analyze before we make any decisions.
One of the things that has been very noticeable over the last week is the change in investors' views about where you're going to end up. If you're looking at SOFR futures right now, they only price in about 75 basis point cuts between now and the end of 2025. Are we entering a period, because we don't know what Donald Trump's policies are actually going to be, where the dot plot, the summary of economic projections, are kind of off the table, can't really put a lot of faith in them, and that maybe you're in the Lael Brainard attenuation phase where you slow down everything and people should expect not a lot of guidance from the Fed?
Well, you know, the dot plot is something that at times I'm glad we have and at times it's more of a frustration that we have to fill it out because there's so much uncertainty about the economic outlook. Over the past year or two, I've been surprised at the resilience of the US economy in the face of seemingly quite high policy rates. Yet the labor market has stayed strong and the economic growth continues to surprise us. So for me, I've been asking questions about where's the neutral rate for the last year or two. That's not about the election. That's just about how the economy has been performing over the past year or two. And so, you know, for example, there's been revisions that suggested productivity is now higher than it had been in prior years. If that higher productivity environment is maintained, that would tell me we're probably in a somewhat higher neutral rate environment. Again, that's not about the election. That's just about how the economy's actually been performing. And so for me as a policymaker, that's what's leading to my own uncertainty about where is our ultimate destination. And I think that people are raising questions about what is the new administration going to do, what is the new Congress going to do. I think that's also adding uncertainty about ultimately what's the growth trajectory of the US economy.
Well, Tom Barkin said yesterday, your colleague from the Richmond Fed, that right now there's no way to know. So one has to just kind of assume that things are going to be maybe stuck, inflation stuck above 2%. Would you join in that sentiment?
I'm not sure that I'm ready to say that inflation is stuck above 2%. I think it's right now running in the mid twos on a PCE basis. And as I said earlier, goods inflation is back down, services inflation is tied to wages and wages are generally trending down. And housing inflation, we know, is going to take a couple of years before completely before the new leases roll all the way through the housing inflation. So I have confidence that inflation is headed in the right direction. Is it headed there fast enough? Do we want it to get there more quickly? You know, we will see. But ultimately that and the labor market are going to guide our policy decisions.
Well, back in September on the labor market, you said that the balance of risks had shifted towards a more weakening labor market. Do you think we backed off that risk? Is it not as acute as it was since we've had the data since September?
Yeah, we had seen some data piling up up until that September meeting, which was pretty much pointing in one direction, which was a softening labor market. We then had a surprise in the other way, the labor market looked stronger, but then a reversal in the subsequent job report. And so I still think the labor market is softening. A 4.1% unemployment rate is a good unemployment rate. It's a good labor market. It's not as tight as it was a year ago or two years ago. So it's unquestioned that it has been softening. And right now we're in a good place in the labor market and we want to keep it there. You know, I do a lot of outreach to businesses large and small around my region, as well as labor unions around my region. Generally, what I hear is cautious optimism. People feel good about the outlook, but there are some trends that it's slowly softening and we just want to watch that carefully.
Note the election. We've got to talk about the election. And I know it's a difficult moment for the Federal Reserve. I think it's a difficult moment for monetary policy makers worldwide, for that matter. The chairman dealt with it in the news conference. It was pretty clear. We don't speculate. We can't make assumptions. But you're in the risk management business and you've been in the risk management business for a long time. It predates your experience at the Federal Reserve. Do you think we've introduced two-way risk in 2025? And when you think about the balance of risks, does that call for a slower approach to any move in monetary policy one way or the other?
Well, two-way risk, I think we've already had two-way risk. So we've got risks of the labor market continuing to soften and over-softening. And then we've got risks of inflation potentially getting stuck. I'm not seeing a lot of upside risk yet. We don't know what's going to get enacted. I'm not seeing a lot of upside risk that inflation is going to take off from here. The bigger risk that I'd be concerned about on the inflation front is just if we're landing at around two and a half percent level instead of back down to 2% level. I think that those risks existed before the election, and I think that there continues to be uncertainty now. And we need to just take our time, let the data come to us and let that guide us. Ultimately, for me, this goes back to the discussion we had a moment ago about where's the neutral rate? There's tremendous uncertainty in my mind about where the neutral rate is. And the longer the economy continues to exceed expectations, the more signal I take that we must not be as restrictive as I would have assumed.
Fed staff analyzed, though, during the first iteration of Trump, the impact of the tariffs. And everyone coalesced around this idea that there is a one-off increase in inflation. You can look through it. It wasn't going to be this vicious cycle, an ongoing inflation threat. Did you agree with that assessment at the time? And do you still think that that's what tariffs could do in terms of inflation?
I agreed with that assessment at the time. I still agree with that. But I think your prior guest touched on it, which is it really depends on what the other countries end up doing. If there ends up being a tit for tat and one country raises tariffs, they respond and you go back and forth indefinitely, that could lead to a longer-term imprint on inflation and potentially inflation expectations. And of course, we don't know what our own tariffs are going to be, let alone what other countries are going to respond with them. So we just need to be patient and see.
I had a note come in from one of the Wall Street analysts and had a line that I thought was really valid, and that is that if you're going to forecast inflation, you have to have a theory of inflation and what's causing inflation. We've got relatively strong labor markets right now and we've got concern about inflation. Real interest rates just keep rising and they're working in opposition to your rate cuts. What's your theory of inflation and how come we're seeing this kind of real rate reaction?
Well, I've done a lot of soul searching on why I missed the inflation run-up in the first place. I was surprised on the run-up. I was also surprised on the disinflation that followed it. And the one thing that's been constant is it was not the labor market on the run-up or the disinflation. It was mostly supply factors. And so, you know, supply chains got gummed up. It took a lot longer to resolve. The inflation took off. You had the war in Ukraine also pushing inflation up and then many of those factors unwound or didn't get worse, bringing the inflation back down. So monetary policy's role, in my judgment, in this episode has been to keeping long-run inflation expectations anchored and it has provided some gentle cooling to the labor market. I don't think the supply factors are what have caused the labor market to generally cool. I do think monetary policy has been doing that. And so you put all that together. It says that when I thought we were applying two feet on the brakes of the economy with monetary policy, we might only have been applying one foot on the brake. And so this goes back to where ultimately are we going to settle? We're going to have to let the economy guide us. We are now paying as much attention to CPI again as we are to the labor market.
