We've got a moment to step back and sort of reflect on your experience at this institution. We talked a lot about how you've been received externally. Can we just start with how you've been received internally over the last few months?
Sure. This has actually been one of the biggest surprises, you know, given all the drama at the beginning. I've been perceived internally, I think very, very politely, very cordially and very kindly. And I think folks have largely enjoyed some of the intellectual conversations, some of the challenges that I've leveled against some of the ways that there had been thinking beforehand. And I think that the overall response has been, you know, very welcoming and very kind. And that's one of the things that I'm most grateful for.
What are the kind of ideas that have been received well that are shaping debates right now, that will linger and continue beyond your departure?
Yeah, sure. So one example of one of those things is the importance of regulations for determining the supply side of the economy. I mean, we spend a lot of time, you know, out in the financial world, out in policy, discussing the effects of a 33 versus 35% marginal tax rate. But the truth is that regulations are often infinite. Taxes and being told you're not allowed to do something versus you are allowed to do something is a very, very strong difference. And this had played a very small role in a lot of the modeling discussions happening at the Fed, and a lot of the outlooks that I sought out that I heard people present. And I came in and really hammered that idea and I think sort of moved it forward. And now a lot of people talk about it very often internally and externally and, you know, sort of talk a lot about supply shocks. This is a positive supply shock that is unfolding and continues to unfold and will, I hope, mitigate some of the negative supply shocks.
But we also get hit by, well, let's talk about another supply shock. And I think it's been central to some of the arguments you've made on the committee. And that's population growth, the negative population growth that we've seen, which is low with the break-even, right, for the labor market and contributed to arguments in some places for hotter, stickier inflation. You've taken the other side of that. Can you just explain that for us?
Yeah. So I think this is a really subtle issue with a lot of moving parts. Now, at a very high level, what I would say historically is that we've seen a lot of countries in different places have declines in population growth rates and stagnant populations or shrinking populations. And I think the cross-country and historical evidence is that it's unambiguously disinflationary or even eventually deflationary. There's a few ways that that works. One is by reducing the, sorry, there's a few consequences of lower population growth. One is it does reduce the break-even payroll growth rate. So the number of jobs you need to create every month to hold the unemployment rate constant, that does come down. That's a mildly hawkish implication because it means you shouldn't get so concerned about very, very low job creation rates. However, there's also dovish implications as well which are that it lowers the neutral rate. It brings interest rates down over time. And we've sort of seen that across countries and historically to be the case. And it's also disinflationary through long-lived capital and consumer goods. And if you think about something like housing, right, the supply of houses is relatively fixed in the short run. And if you throw millions of new people into an economy, you're going to drive up the price of rents because they need places to live. Right. You're going to create inflation and that inflation is very, very persistent because of the way that housing inflation is calculated. It's very, very sticky. If you have declining population growth, you don't need as much home price growth. And that very inflationary tailwind gets taken away and ceases to be a major driver of inflation. And I think you sort of, you've been seeing that start to play out in the data. Market rents in this country have been growing at a 1% rate for the last few years. This is one of the biggest components of the inflation indices. And I think you're going to continue seeing measured PCE and CPI rents and measured PCE and CPI shelter inflation continue to converge down to those very low levels. So I think there's one hawkish implication which is the lower break-even rate. But there's also some very dovish implications because it reduces the neutral rate and it brings down inflation through some of these long-lived capital and investment goods.
This is a longer-term structure for how to think about inflation and the benchmark rate of the Federal Reserve, and how it sort of works with the sort of long-term inflation rate. Near term, though, one thing that you've been known for, a hallmark of your time on the Fed was that you voted to cut rates at least once at every single meeting. Do you think that that still holds, even though in the short term it does seem like the inflationary shock is overwhelming potential structural changes that could lead to disinflation?
I do, and I think this is maybe one of the biggest differences between me and a lot of other folks is that I take very seriously the idea of monetary policy lags, very, very seriously. Monetary policy doesn't hit the economy right now. If we changed interest rates today, it wouldn't flow through into the economy until 12 to 18 months from now. Right now, there's some disagreement over exactly how long those lags are, but I think 12 to 18 is the consensus view. And therefore for any shock that's hitting the economy today, you can't think about what the effect in the next few months is. You need to think about what the effect in the next 12 to 18 months is, and the effect 12 to 18 months out. So if oil goes higher, it's a supply shock. Straits of Hormuz are closed. Right. That's going to boost the oil price today. And with it, a bunch of other stuff that's very tightly tied to energy prices like airfares. Right. That's going to go higher very quickly within the course of a few months. And we've been living through that. And that is very real, right. There's no way that that is very real inflation, but it is not inflation that monetary policy can affect. Monetary policy can affect 12 to 18 months from now. So there's got to be a reason that you think airfares and oil prices are going to be moving higher in the summer of 2027 and the fall of 2027, not the summer and fall of 2026. And so it's those lags that really should be driving where you think about forward-looking monetary policy should be. And that's a lot of what I've tried to hone into when thinking about population growth and deregulation, and saying that the traditional view that we should look through an oil shock should prevail. This is very, you know, vanilla basic sort of traditional monetary policy.
Part of the problem is that the market doesn't agree, at least not in terms of where longer-dated bonds are trading and where yields are shifting, where you see them shifting higher, even as the front end stays where it is. Do you think that in this type of environment, it's imperative to have some sort of Fed-Treasury accord akin to what people have been talking about, where the Treasury steps in to sort of influence the long end while the Fed cuts rates in the short end?
So let me address those separately. So the market not agreeing is in part a hall of mirrors issue. Because if the Fed says we're very backward-looking and inflation over the last 12 months is going to determine policy that affects 12 to 18 months from now, meaning, you know, the economy in 2027 is affected by data in 2025, in that world, right, so very, very backward-looking. If that's how the Fed communicates that it's setting policy, then the market is going to start to reflect that. And so the market reflecting a lack of interest rate cuts, right, is in part because the Fed is telling them we're backward-looking. Right. And so that's going to create a self-reinforcing problem. Now, on the Fed-Treasury accord, you know, so first of all, you know, I won't be involved in that if it happens. But, you know, I have done some work on the balance sheet. And I do think it is important that one of the problems with having a very large balance sheet and lots of securities, lots of Treasury securities on the Federal Reserve balance sheet is it does start to get the Fed involved in questions that have some fiscal implications, right. If we own a huge chunk of debt, then that means that we're impinging on decisions that traditionally are the realm of the fiscal authority of what is the distribution of public debt that it issues that's held by the public. And so I do think it is important that if you have a large balance sheet, there needs to be certain, some clear delineation about who's doing what. And to me, these questions are really murky. And they, you know, they implicate independence to an extent. And therefore it's one of the reasons among many that I would favor having a smaller balance sheet.
How close do you think the Fed should work with the Treasury to achieve that? How closely should the Fed work with the administration?
Yes. So my view is that the Fed having a big balance sheet starts to implicate a lot of those lines and becomes problematic. So the Fed should strive to have as small a balance sheet as it can to achieve its goals and implementation framework. And if we can sort of improve that implementation framework and make it smarter to reduce the minimum size of the balance sheet that we need, then that's a great thing. And that was a major thrust of the paper that I wrote in the spring with Alessandra Barone and Anthony Dirks and Alyssa Anderson. And so that was a major thrust of that work. That was really important. Now in terms of coordinating, right, the Fed should do what it should do for monetary policy, and the Treasury should do what it should do in terms of fiscal policy and the level of coordination should, I think, be, you know, sort of separate, right? They should be doing what they want to do for each of their own priorities. However, there are times when there is going to have to be that type of coordination. So for example, you know, right now we're doing these reserve management purchases where we're expanding our balance sheet to sort of provide a minimum level of reserves into the economy to meet reserve demand. We're buying Treasury bills. We're letting mortgages continue to mature off of our balance sheet and replace them with Treasury bills. Right. Like in theory, if we did enough sort of conversion of our existing balance sheet into Treasury bills, we might be absorbing all of the supply. Right. And then some. So this is an example of a time where there would have to be very tight coordination.
