Jim Bullard is adamant. Inflation has come down enough and the labor market is normalizing enough for the Fed to start cutting rates - now. Inflation is well behaved enough, the labor market is “normalizing” enough it is time for the rate cut cycle to begin. And the Fed is moving in the right direction, waiting for more data in this month and next to make sure that its first rate cut makes sense.
He is also adamant that the carnage in the stock market kicked off by weaker than expected July payrolls numbers and a jump in the unemployment rate will NOT be met by an emergency rate cut by the Fed.
We covered lots of ground - why the Fed is not behind the curve and the economy is not in a recession, will the Fed’s Dot Plot change at the September meeting, what should Chair Powell say in his major speech at the Kansas City Fed’s annual symposium in Jackson Hole and more? I have “headlined” some of it below. Do take the time to hear what Jim has to say. He was a thought leader in his 15 years as president of the Federal Reserve Bank of St. Louis and he continues to be one how.
FED WON’T DO EMERGENCY RATE CUT
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Jim Bullard — This is an equity sell off and a lot of times you know, the the fed doesn't want to react to equity price movements, because it's kind of a fool's errand. You know, these could easily turn around soon. And all this, you know, what are you gonna do then? Are you gonna take back your rate cut? So I think the volatility of these markets is just something they have to live with and I think this is an interesting moment. But really you had a lot of run up in us equitie this year, and you know, some of that was probably overdone, and probably the jobs report was a catalyst to get some of that going.
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This is just I would say, repricing of us equities after a long string of success for them, and higher prices, especially for the mega cap stocks, but for some of others as well. But it all started with the jobs report.
BULLARD SEES LABOR MARKET NORMALIZING, UNEMPLOYMENT HEADING TOWARD NATURAL RATE
Jim says payrolls gains of 114,000 don’t worry him. “Yeah, it's a low number, but it's not that low.
00:04:18.209 --> 00:04:35. “The trend rate of growth is usually considered to be around a hundred 1,000, or even less than that in the Us. So if you were slowing to a trend page, this is the kind of number you'd expect, you know, if you were gonna have a recession number it'd have to be substantially negative.
So I think it was a little bit over interpreted. I think also the 4.3% unemployment rate is much closer to the natural. Most people's estimates of the natural rate of unemployment, which is something that the fed has been talking about for a long time that the unemployment rate would gradually rise to the a more natural rate. What was unnatural was the 3% 3 handle on the unemployment rate for such a long time.
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And coming out of the pandemic, we just have such strong labor demand that you just have very low unemployment rate but that has normalized, and I would say both of those numbers while they were a little bit farther than what markets were expecting are are really a part of the normalization process, and the jobs number in particular gets gets revised and can be bumpy from from month to month, as we know.
BULLARD: FED WON’T CUT RATE 50BPS IN SEPTEMBER, NEEDS TO SEE MORE DATA
FED LIKELY TO DO THREE 25 BPS CUTS BY END OF YEAR
Kathleen Hays: So what about the fed starting off with a 50 basis point rate cut in September? You have, already said publicly that you were in favor of a 25 basis point. Cut a September move. But at the Press Conference on Wednesday, when fed chair, Powell was asked about the possibility of a 50 basis point cut in September. Did it? Did you guys discuss it? He said, we didn't even talk about it. Our markets getting ahead of the fed there, too?
JIM BULLARD —
00:06:06 Probably. I think they probably want to see more data between now and the December or September meeting. They've got these inflation reports coming up. We've got another jobs report they would want to see that before making a decision. But I think the message of July was that. You know, we're gonna the fed would go ahead in September with high probability. That was certainly the way it came out of the meeting. And I think they mean that. And markets, of course, priced it in, you know. And I I think also given the data that's come out. Since then the market is probably priced in November and December as well. So now you're looking at a baseline with 3 cuts in a row, which I think is about right.
00:06:54--> And now today, of course, people are going much farther than that. But I don't think the data is really supporting that. And so this is probably more a reaction to the global financial turmoil that that we're seeing in the last few hours.
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Kathleen Hays: You say the the markets are pricing in 3 cuts. You don't think that would be for the rest of the year. Right? That'd be so bad.
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Jim Bullard | Daniels SB: What's interesting to me, though, is that
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Jim Bullard | Daniels SB: as the market has already done the easing.
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Jim Bullard | Daniels SB: so the so the the follow through at those 3 meetings would just be
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Jim Bullard | Daniels SB: would would not have any market impact, because it's already priced in today. So those are, say, well, the Feds behind the curve. Well, the markets already done all the pricing, anyway. So what are you worried about?
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Kathleen Hays: That question is the fed behind the curve? Do they risk waiting too long and causing a recession? That's another argument out there.
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Jim Bullard | Daniels SB: Yeah, I actually. And I think you know, I gave these talks during the 1st half of the year, saying, You know, the funds rate looks a little high.
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Jim Bullard | Daniels SB: and I just think that the committee did want to reduce the policy rate
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Jim Bullard | Daniels SB: because inflation had come down so far in the second half of 2023
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Jim Bullard | Daniels SB: that there's certainly a rationale there for a lower policy rate, but one that would still put downward pressure on inflation.
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Jim Bullard | Daniels SB: They just got numbers in the wrong order, I think, in January, February, March.
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Jim Bullard | Daniels SB: and they just couldn't find a moment to make that 1st move. And so that's how we ended up in in September here. But
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Jim Bullard | Daniels SB: I do think that the policy rate does need to be lower. And I think the committees come around to that view, and they've got a plan to get it lower, and that's already been priced in the market. So.
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Kathleen Hays: Okay. So let's say you're at the fed. You're waiting, looking ahead to September meeting, and you're you're already thinking about
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Kathleen Hays: I guess. I guess the question is, what would it take for these forecasts? For 50 basis points, 50 basis points in at the at that of those 1st 2 cuts from. Okay, we'll we'll start with 25, and we'll see what happens. You know, I I just.
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Jim Bullard | Daniels SB: Yeah, I think you'd have to. You'd have to get very soft inflation reports, and and another week
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Jim Bullard | Daniels SB: jobs report. And then then you would create more urgency, I think. But just as likely is that
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Jim Bullard | Daniels SB: inflation doesn't really go down in the next 2 reports, and and you get a, you know, bounce back in the in the jobs report the next jobs report. So if that happens, I'll probably just stick with the with the 25
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Jim Bullard | Daniels SB: so I I think there is some scope for maneuver here. But but I do think it's
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Jim Bullard | Daniels SB: there's other data coming in. You don't want to react to one just one data point.
WHAT IF INFLATION RISES IN THE JULY AND AUGUST REPORTS?
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Kathleen Hays: Okay, you just touch on a couple very important things, but certainly want to follow up on your point that it's very possible that inflation won't be coming down in the next couple of reports, and that's what people are saying that it's partly your over your comparisons. It's just partly how you know, inflation numbers can get a little bigger and a little smaller month after month, and the likelihood is us. Some economists are saying that the
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Kathleen Hays: that the monthly numbers that we see for July and August are going to be such that inflation looks
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Kathleen Hays: at the very least like it has stalled out again in terms of its its downward move. What were exactly were you thinking when you said.
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Kathleen Hays: when you alluded to this sense that maybe the inflation numbers would even go back up again.
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Jim Bullard | Daniels SB: I I think you could get. I think, if you got numbers that kept the the Committee on track
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Jim Bullard | Daniels SB: to hit 2.6% core PC inflation for 2024 at the end of the year. If you're on track to hit that, or you thought that you're going to hit that. Then that would be fine
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Jim Bullard | Daniels SB: if if you come into the September meeting, and you have to say, Oh, we're raising our dot for the end of the year, which is only at that point, is only, you know, 90 days away, or something
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Jim Bullard | Daniels SB: we're raising our dot
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Jim Bullard | Daniels SB: for the end of the year to, you know, 2.8% or something like that. That would be a kind of a tough situation, I think, because you wouldn't have seen further progress on inflation. But you're gonna ease anyway.
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Jim Bullard | Daniels SB: Now the committee did say this time this past time, hey? We're you know. Of course we pay both, you know. Pay attention to both sides of the mandate.
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Jim Bullard | Daniels SB: and that's always really. But they emphasize that at the meeting. And
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Jim Bullard | Daniels SB: So you know, they could say, well, we're lowering the policy rate
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Jim Bullard | Daniels SB: E. Even even if we're not making further progress on inflation, we're lowering the policy rate, because we're worried about the other side of the mandate. And so I think that's something that they could do. But I don't think they really would want to do that at this point the the labor market is really normalizing. It's not deteriorating. And that's the message that they've been carrying for a long time. Markets think
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Jim Bullard | Daniels SB: you know, down is down, but you're going down to the
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Jim Bullard | Daniels SB: to the trend rate that not down to recessionary levels, at least not yet.
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Kathleen Hays: So
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Kathleen Hays: is the focus? Well, which one is more important now. You said a couple of very interesting things there.
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Kathleen Hays: should we say, yes, it's a dual mandate, but right now it's the
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Kathleen Hays: the job side, the unemployment side of the mandate that is more important to the fed.
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Jim Bullard | Daniels SB: No, it's it's inflation. It's been, you know, with with inflation hitting, you know.
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Jim Bullard | Daniels SB: core inflation over 5% at 1 point
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Jim Bullard | Daniels SB: on an annual basis. That's traumatizing for a central banker. With a 2% inflation target. It's way way too high. So the the fed got into the mode of inflation only.
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Jim Bullard | Daniels SB: For starting in 2022, and that paid a lot of dividends in 2023, and 2024. And now we have much lower inflation. So that's been good.
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Jim Bullard | Daniels SB: And in the meantime the labor market has been extremely strong.
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Jim Bullard | Daniels SB: It's not as strong as it was. But it's it's still a a reasonably good labor market. You have 1.2 job openings for every unemployed worker.
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Jim Bullard | Daniels SB: so that seems like
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Jim Bullard | Daniels SB: a worker that gets disrupted, or a business that that goes out of business, or whatever those workers should be able to do a reasonable search and hopefully get a a good match for their skills and get a good job. So still, a pretty good labor market, even though even though it's not as strong as it was a year ago or 2 years ago.
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Kathleen Hays: You seem awesome. So so what is your view?
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Kathleen Hays: or okay? Or would you say, Okay, I'm gonna say.
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Kathleen Hays: is, is your view? There will be a cut this year at each meeting, or is it more like, well, Kathleen, if I were the fed I'd be making a move. I think we cut in September, and then we see.
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Jim Bullard | Daniels SB: Yeah, I would have liked. And I argued in the spring, I you know I would have liked to see some kind of technical adjustment story where? Yes, we're lowering the policy rate. But we're not giving up on our fight against inflation.
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Jim Bullard | Daniels SB: I I think you know. But I just think that the committee couldn't find the right moment to make that kind of argument, but that's the sort of thing I would have liked to have seen, because I think the policy rate
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Jim Bullard | Daniels SB: should not be in the 5.
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Jim Bullard | Daniels SB: You know the low 5% range.
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Jim Bullard | Daniels SB: It should be, you know, in maybe in the upper 4% range or something like that. You could still argue that that was a a restrictive monetary policy, and you could still argue that you were putting downward pressure on inflation, but that you wanted to get inflation to asymptote to 2%, you know, not crash down to 2%. So so but these are kind of.
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Jim Bullard | Daniels SB: you know. These are kind of hair splitting sort of arguments.
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Jim Bullard | Daniels SB: And I think the fact that the committee couldn't move in the 1st 6 months of the year
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Jim Bullard | Daniels SB: means that they're a little bit out of position. And now they have to or will want to lower the policy rate a little bit faster than they might have otherwise been thinking.
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Kathleen Hays: So do you. So is that like saying, I do think you'll.
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Jim Bullard | Daniels SB: I at every meeting, I think I think only a month ago, or 6 weeks ago, you might have been saying, well, they'll go every other meeting, you know something like that. And then you wouldn't get to the neutral rate all the way out for 2 years, or something like that, but that seems a little slow. In this environment, given the
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Jim Bullard | Daniels SB: tremendous success they really have as a soft land, I mean, the economy is not in recession, and not really close. And and the
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Jim Bullard | Daniels SB: and inflation has come way down, you know, from where it was. So that was considered
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Jim Bullard | Daniels SB: something that that couldn't be done, but it was done. It was done effectively, and
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Jim Bullard | Daniels SB: it's much more like a 1994 situation 90 95, where you could make some technical adjustments now.
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Jim Bullard | Daniels SB: and and get set up the economy for really good growth for several years to come.
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Kathleen Hays: So.
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Kathleen Hays: Is it safe to say
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Kathleen Hays: that you do not at this point see a recession coming
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Jim Bullard | Daniels SB: Yeah, I think the other data. The other data is, not really supporting any kind of recession call, even unemployment, not really supporting any kind of recession call it, would have to go up.
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Jim Bullard | Daniels SB: We've come up to the natural rate of unemployment. So now, if you went up substantially from here.
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Jim Bullard | Daniels SB: Okay, then that'll be an argument to make. But I think you should probably calibrate the psalm roll from here.
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Jim Bullard | Daniels SB: not from the 3% levels that we were at.
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Jim Bullard | Daniels SB: because those were unnaturally low, I would say, and were due in part to the recovery from the pandemic. I think the sound rule, if I recall the chart correctly, would say that we're in recession right now.
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Jim Bullard | Daniels SB: and usually when the summer rules triggered, then then you're already in the recession, and that isn't the case here.
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Jim Bullard | Daniels SB: and I don't think anybody would would call. I don't think the Nbr dating committee would call this a recession so and and that's the right way to look at this. I mean 4.3% unemployment. That's not a recessionary level unemployment insurance claims. They're not at recessionary levels. Consumption is strong. Growth just came in at at
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Jim Bullard | Daniels SB: 2.8% at an annual rate in second quarter. These are not the kinds of things that you would see so so it's a recession scare. And you know markets are nervous about it. But some of that is that the
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Jim Bullard | Daniels SB: market has run up so aggressively this year that there had to be some moment where they find an excuse to sell off, and I think that's what they have here.
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Kathleen Hays: Well, I know on the Som. Roll. Claudia. Sam herself has said that it's what they say. It's a historical regularity getting it doesn't cause getting to a certain level in a certain period of time and unemployment rate doesn't cause a recession. It just suggests that you're historically, this might be a level. I think your point, and she has also said she doesn't think we're recession. Just thinks the momentum, she said. This very recently is such that it's like a warning signal for the fed, and they have to respond.
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Jim Bullard | Daniels SB: Yeah. And I think that's fair. And that's the way I've interpreted it as well is that
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Jim Bullard | Daniels SB: you should pay attention to the momentum component, because when you do get recessions, that is what happens.
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Jim Bullard | Daniels SB: But you think about the pandemic some rules triggered at some point, and it was accurate. It said that we were in a recession, but
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Jim Bullard | Daniels SB: it wasn't the cause of the recession. We all know in that case, what the cause of the recession was, it? Was the pandemic. So
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Jim Bullard | Daniels SB: this time around. I think it might have to be refined a little bit, or reinterpreted a little bit compared to some of the other episodes.
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Kathleen Hays: Yes. So in terms of the jobs report, I want to ask you a couple, or at least one very specific question it was kind of puzzling Friday morning when the the Bls Bureau of Labor Statistics puts out its report, and I'm I'm going to paraphrase. And the the big hurricane in Texas didn't have a significant effect on on the the unemployment and and the the growth of jobs. But in the same report it shows that people couldn't get to work.
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Kathleen Hays: In the United States, because of weather.
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Kathleen Hays: went up 461,000. The average for the month of July is something around 40,000. So I think more and more people who are skeptical of this whole call of recession. What the market's doing is
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Kathleen Hays: you that that report may have to be taken with a lot more than a grain of salt. It may need a whole salt Shaker. What do you see? There.
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Jim Bullard | Daniels SB: Yeah, I haven't seen an analysis of the the weather patterns there. But I'd be very sympathetic to that. It does seem like a hurricane in.
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Jim Bullard | Daniels SB: I believe Houston is the 4th largest city in the Us. That's gonna disrupt quite a few things. And the numbers you just cited. Sure, sound like
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Jim Bullard | Daniels SB: there's special factors going on. I do think the Us. Labor market is normalizing. So you would expect this number the Not far payroll number to gently be drifting down. This went down a little farther than people think, but, like, I say, I don't see a hundred 14,000, and it's like the
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Jim Bullard | Daniels SB: it would. Didn't have a negative sign in front of it. It was, you know, and and you know, and like, I say, a hundred 1,000 would would sort of be a rule of thumb for a kind of steady state growth and jobs in the Us. Given the
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Jim Bullard | Daniels SB: Demographics over the medium term in the long run. So yes, it was weaker than expected. I don't think it's quite as weak as interpreted.
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Kathleen Hays: Just want to make sure I understand something else you're saying here on the on the labor market. If if the labor market's normalizing
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Kathleen Hays: and you're saying it was almost too low. It was unusually low after the pandemic, and it stayed that way.
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Jim Bullard | Daniels SB: One thing you can do is look at the year over year growth rate and non farm payrolls, which no one ever does. But I actually like that number percent change year over year in non farm payrolls. And like, last, a year ago in the spring 15 months ago, that number would have been about 2 and a half percent growth.
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Jim Bullard | Daniels SB: And then it came down this year to 1.7 1.6
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Jim Bullard | Daniels SB: 1.5, you know, percent growth year over year.
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Jim Bullard | Daniels SB: And the pre pandemic number was 1.3%.
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Jim Bullard | Daniels SB: So I think this shows a if you plot that over the last year it shows this nice downward, sloping line, and it gets at the idea that you're yes, the growth rate is of job growth is slowing.
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Jim Bullard | Daniels SB: and it's slowing to the pre pandemic pace. So I kind of like that as a way to characterize, what do we mean by slowing instead of emphasizing
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Jim Bullard | Daniels SB: sort of one month's numbers all the time, which tend to jump around and do tend to get revised.
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Kathleen Hays: So so is this going to be? Is this part, then, of the messaging from the fed going to be? And maybe that's kind of what we're hearing from Powell. But it's not necessarily at this point that we are worried about the economy and feel we have to be very stimulative.
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Kathleen Hays: but that we are this whole normalization argument. So, for example, if the next jobs report shows a
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Kathleen Hays: well, maybe jobs go up 150 or 190,000 right? And the unemployment rate maybe doesn't stay at 4.3. There's been questions around that, too. People are coming back into the workforce. Now, the participation rate didn't move that much in the the July report. But there's there's this sense that there's people who stayed on the sidelines. Now they're coming back and they're looking for jobs. So they're kind of as unemployed. Lots of migrants
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Kathleen Hays: haven't found a job yet looking for jobs. What if that goes lower again? Can the fed still say in September? Yes, we have to cut rates because we're the. It's time that inflation's low enough, and is, you think that's that's the model. That's the strategy.
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Jim Bullard | Daniels SB: Yeah, I think they have. They. The basic story that I've been telling, anyway, is that
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Jim Bullard | Daniels SB: there was a lot of disinflation in the second half of 2023, I think 7 reports in a row on inflation surprise to the downside.
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Jim Bullard | Daniels SB: and by the time you got to the end of the year in 2023.
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Jim Bullard | Daniels SB: Oh, my gosh! You know 200 basis points of disinflation that I mean, I just can't stress to you enough. It just does not happen in central banking. And that was you're talking about core inflation now. So you're not talking about commodity price movements and stuff like that. You're talking about core measures, inflation on an annual basis. They just don't move that quickly. So lots and lots of disinflation. I think when you got to the December meeting last year? The committee could hardly believe it's luck.
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Jim Bullard | Daniels SB: and they thought, well, so maybe some of this will get revised away. Maybe some of this, you know, this can't be true. And we did get in the 1st quarter of 2024 we got some unpleasant inflation reports. But still inflation was down at this low level. It didn't go back up to 5%. It just it just didn't
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Jim Bullard | Daniels SB: continue to fall as fast as it had in the second half, 2023, and so that got them into a waiting game
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Jim Bullard | Daniels SB: to see more evidence of disinflation. And now they've got the 2 reports that that have indicated that so. But this is a kind of a longish waiting game here, where you had to wait for quite a few reports.
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Jim Bullard | Daniels SB: But
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Jim Bullard | Daniels SB: having said all that.
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Jim Bullard | Daniels SB: the 200 basis points of inflation, reduction by all by itself, was enough to rationalize a lower policy rate, and so, if they could have found the right moment to do it, they would have been completely justified in saying, we're going to lower the policy rate, it'll still be restrictive, but it won't be as restrictive as before, and we'll still be putting downward pressure inflation. They could have made that argument. It had the data cooperate a little bit better than it than it did.
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Kathleen Hays: You know I spoke to John Taylor Taylor. Will John Taylor from Hoover, from Stanford University on Friday? So that'd be really interesting to hear what John Professor Taylor thinks about where the funds rate needs to get to and he said, 4%, maybe 4 and a half percent. And you, I think you said you thought.
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Kathleen Hays: are you thinking something more like 4 and 3 quarter? Yeah, it's you're still kind of in the range. I'm just curious how. What if if what John Taylor is looking at is what you're seeing too.
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Jim Bullard | Daniels SB: That
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Jim Bullard | Daniels SB: the 4% number would say 2% real rate and 2% inflation.
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Jim Bullard | Daniels SB: I don't think the real. I don't think you can say the real rates 2%.
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Jim Bullard | Daniels SB: So I've I'm at 3 and a half percent for the neutral policy rate.
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Jim Bullard | Daniels SB: And I've admitted I don't have a great theory about this, but
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Jim Bullard | Daniels SB: I think you know, the committee is down under 3%
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Jim Bullard | Daniels SB: but they've been taking theirs up gradually in the various dot plots. So
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Jim Bullard | Daniels SB: I, you know, even if you think it's 3 and a half percent, you know, you still got 200 basis points to go. That would take a year of 25 basis point moves.
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Jim Bullard | Daniels SB: Maybe you could get to neutral by the time by this time next year.
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Jim Bullard | Daniels SB: I I would say. That's the edge of neutral, as the committee sees it right now. 3 and a half percent, and some of them might see it as even lower than that.
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Jim Bullard | Daniels SB: So.
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Jim Bullard | Daniels SB: as a strictly speaking.
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Jim Bullard | Daniels SB: the committee would be putting downward pressure on inflation the whole time.
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Jim Bullard | Daniels SB: They wouldn't be, it wouldn't be as restrictive, but it would still be restrictive. The policy rate would be above their estimate of the
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Jim Bullard | Daniels SB: long run. Neutral policy rate.
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Kathleen Hays: Well, you know, John Taylor,
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Kathleen Hays: thinks it's very important, very important, to get all the way back to 2%. And you know this he, you know he he is
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Jim Bullard | Daniels SB: Inflation. Yeah, yeah.
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Kathleen Hays: Yeah. And and it's it's important for the world, right? But so I want to ask you, I want to put that on the table. Because how I asked about the job support. Oh, yeah, it was a little rate up. But we have to get to 2%. Okay, that is his focus. I think that's the message he wants to drive home. It's going on 41 months without meeting its inflation target. Okay? With inflation above the target. So
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Kathleen Hays: it how long can it go before its credibility is affected? Affected? And this or the the legitimacy of the fed having a 2% target. Because you know as well as I do are people saying, Oh, 2 and a half is fine. 3% is fine. If you get down to 2%. That's fine. Which camp are you in? How do you look at this.
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Jim Bullard | Daniels SB: No, I think that the fed established reestablished credibility in 2,022, with 4 75 basis point moves in a row unprecedented even in the Greenspan era
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Jim Bullard | Daniels SB: and and made quite clear that the 2% inflation target was non-negotiable, and that the committee was determined to get back to 2%, and that by acting quickly and establishing credibility you could do that without having a big recession. So all of that worked fantastically well.
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Jim Bullard | Daniels SB: and by moving aggressively in 2022 we got a lot of disinflation in 2023 without a recession. So works perfectly. Now the question, though, is as you approach 2%. Now, we've got core PC inflation, just 2.6% on a 12 month basis.
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Jim Bullard | Daniels SB: You really want to approach that 2% target asymptotically.
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Jim Bullard | Daniels SB: I think you do not want to overshoot the 2% target at this point, because that might create a whole dynamic around
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Jim Bullard | Daniels SB: the low inflation, low nominal interest rate era from 2,009 to 2019. Are we trying to shoot back and try to get back in that era. No, I don't think we're trying to do that. We're trying to approach the
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Jim Bullard | Daniels SB: Inflation target from above.
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Jim Bullard | Daniels SB: We certainly don't want inflation to go up from here, but a nice smooth
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Jim Bullard | Daniels SB: landing on inflation at 2%. I think that it is important in in John's sense. But I think also
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Jim Bullard | Daniels SB: the pace at which you do that, and the care around that, to make sure that you're not overshooting, I think, is important.
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Kathleen Hays: I wanna ask you about the Bank of Japan? They did another rate hike. Their 1st one came in April. It was the end of that era of, you know, extraordinary stimulus and and negative rates, and and all that that was so important during the the Kuroda era. Former Governor Kuroda is now Mizu Oweda, and under Mr. Oweda. They're making this transition away from that very small
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Kathleen Hays: rate hike in April, and then last week another rate hike, which was, people knew what they might do that. But the majority of economists were saying, probably not yet since then. You know the
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Kathleen Hays: The yen, which was too weak, has continued to strengthen quickly. That's unnerved. Some investors and even Japanese people, perhaps. And then we have this big sell off in stocks. Now the Nikkei had rallied had a huge rally. Right? So again.
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Kathleen Hays: you you talk about the stocks getting overvalued. Maybe those stocks were overvalued too. Well, how do you and you were just in Japan earlier this year. What? How are you assessing what's going on with the Boj in the in this big world of central banking, you know, the only one really of the major central banks is looking at hiking anymore. Everybody else is figuring out when and how much to cut.
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Jim Bullard | Daniels SB: Yeah, I was in Japan a few months ago, and when I was there was the 1st time that the yen was touching 1 60,
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Jim Bullard | Daniels SB: and it was a conference that went on. For several days I talked to people, or I heard people talk at the conference specifically about Fx.
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Jim Bullard | Daniels SB: But then also at dinners and other off off the main conference circuit. Just talking to lots of people. And the tone was interesting because
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Jim Bullard | Daniels SB: the tone was usually, when you go to Japan, they'll say, you know, weaker. Yen, they're pretty much favorably talking about that. You know, might change a little bit from time to time, but this time they were saying that the 1 60 was causing more problems than it was solving. And
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Jim Bullard | Daniels SB: They had a different people, had lots of arguments about why 1, 35, 1, 40 was the more natural level, and
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Jim Bullard | Daniels SB: the Boj seem to be on board with that. So I think this might be a turning point for Japan. The obviously, we've had several decades, and it was always about the exchange rate, it was always implicitly that the weaker is better. And here you got to a point where this was too much.
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Jim Bullard | Daniels SB: and attitudes had changed, and they wanted to go in a different direction, substantially in a different direction now a little bit. So I think that has maybe hit home here just in over the weekend and
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Jim Bullard | Daniels SB: the the people that had counted on the the sort of decades old policy
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Jim Bullard | Daniels SB: got burned a little bit on their carry trades maybe got burned a lot and had to
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Jim Bullard | Daniels SB: had to get out of those. And and so I think it is. Maybe a sea change in in Japan about?
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Jim Bullard | Daniels SB: You know, we're not going to permanently be at these 0 rates or negative rates that we've had for so long and that that there are limits to yen depreciation.
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Kathleen Hays: In those conversations. Did did people kind of look at
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Kathleen Hays: this this idea or or reality, that there's a new Japan right? There's a new era. There's the old under Crota era. And now there's inflation is going to be at or above 2% wages are going to continue to rise. There's a shortage of labor to a certain extent, and so that that cements that innovation, entrepreneurship, a lot of optimism. And then there's another camp that
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Kathleen Hays: is, is still maybe saying they're not so sure they're still doubtful or uncertain. And that's another aspect of the the kind of push pull right now for the Japanese economy and for Japanese policymakers.
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Jim Bullard | Daniels SB: Certainly when I was there a few months ago, there's a lot of optimism. Maybe not as much today but
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Jim Bullard | Daniels SB: like you say that Nikkei was up substantially. So, you know. Maybe it's not that surprising, and some of that has sold off
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Jim Bullard | Daniels SB: but there was a lot of optimism about,
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Jim Bullard | Daniels SB: you know, renewed vigor in Japan, and I think it was very tangible and very real. And there, you know, certainly examples. You can point to Japanese companies doing very well. So I think.
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Jim Bullard | Daniels SB: I think that's that's very
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Jim Bullard | Daniels SB: very much part of the story where the Boj felt more confident that they could have
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Jim Bullard | Daniels SB: stronger currency and do and still do very well.
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Kathleen Hays: So, Jim, I want to ask you a couple more. Us fed questions you mentioned dots and what might happen with them at the September meeting, and I think that's very important. The rate cut decision. How much? How big it is and the messaging around that. But the biggest messaging. The biggest forward guidance is going to be in the dots now. The dots got down closer to at the let's see, this is
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Kathleen Hays: The June dots right? Got closer to maybe just one this year, and 4 people in that dot range saw no cuts at all this year. So how what do you think the guidance is going to look like? If you were a dot, what would your dot look like.
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Jim Bullard | Daniels SB: One of the strange things about the dot plot is that the horizon shortens as you go through the year. So by the time you get to the September meeting, you're saying where you think things are gonna be only 90 or 120 days out. And so it becomes a short run forecast instead of a medium term forecast as it is in the beginning of the year, so
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Jim Bullard | Daniels SB: I think this is an awkward moment for the committee and for the dot plot. I think if you wanted to say that you wanted to take outsize action
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Jim Bullard | Daniels SB: at the September meeting, you would have to say that, you know I'm predicting no more growth for the rest of the year, or something like that.
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Jim Bullard | Daniels SB: or I'm predicting that unemployment is going to go up substantially by the end of the year, or something like that. And they're not. I don't think they're going to want to do that
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Jim Bullard | Daniels SB: and so I think it's I think it's gonna be awkward. And then the question also, I think of you know, the chair has said repeatedly, this year, we wanna see further progress on in inflation moving inflation toward our 2% target. So
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Jim Bullard | Daniels SB: are you gonna put in a dot that shows further progress
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Jim Bullard | Daniels SB: or not. And if you're not, then how are you gonna rationalize a rate cut
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Jim Bullard | Daniels SB: So
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Jim Bullard | Daniels SB: so I think it's tricky, those that wanted to say, well, I didn't. I didn't have any rate cuts in
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Jim Bullard | Daniels SB: because I thought inflation wasn't gonna come down now. They would have to say.
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Jim Bullard | Daniels SB: well, I now see that inflation is coming down. So I'm okay to put in a rate cut. So a lot of considerations here about what from different perspectives? How to read the recent data. And
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Jim Bullard | Daniels SB: if you are going to rationalize a rate cut through the dots, then how are you going to do that?
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Kathleen Hays: So jackson Hall, the Federal Reserve Bank of Kansas City's annual symposium, Jackson Lake Lodge. It's coming up. It's really just
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Kathleen Hays: about 2 and a half weeks till it starts over the years. Increasingly, that event has been a platform for the fed chair. If the Fed chair chooses to deliver an important message on policy, on on how.
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Kathleen Hays: how it's going to move ahead, and why? And it can be more specific. Ben Bernanke used it one year to signal. Qe more qe quantitative easing.
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Kathleen Hays: What?
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Kathleen Hays: If you had to guess what Jay Powell may focus on, or if you would advise him. Hey, you know, take this. Take this point to deliver this message. What what would you say? What what do you think he should do or could do?
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Jim Bullard | Daniels SB: What I think you should do is declare victory.
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Jim Bullard | Daniels SB: Because it has been a really successful policy over the last 2 years. 2 years ago at Jackson Hole was the one where he gave a 9 min speech.
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Jim Bullard | Daniels SB: and he just said, We're gonna get inflation back to 2% and don't doubt us, and
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Jim Bullard | Daniels SB: that was in the middle of these big rate hikes that we were doing
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Jim Bullard | Daniels SB: extremely effective.
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Jim Bullard | Daniels SB: I think there was another portion.
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Jim Bullard | Daniels SB: Rumor has it that there was another portion of the speech. He just cut it all out, I mean, you know, focused on the inflation. So there was really good move at that point.
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Jim Bullard | Daniels SB: And and like, as I've said several times here this this this worked it. Basically, it worked very well.
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Jim Bullard | Daniels SB: and you didn't get a recession. Now, there may be things that happen from here, because all kinds of shocks can occur, and
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Jim Bullard | Daniels SB: many things can happen. But you know, 2.6% inflation
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Jim Bullard | Daniels SB: most recent growth rate was 2.8% unemployment's 4.3%.
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Jim Bullard | Daniels SB: These are all steady state kinds of numbers.
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Jim Bullard | Daniels SB: you know, one thing you could say about a soft landing is, am I within a half a percentage point
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Jim Bullard | Daniels SB: on all my main indicators. And if you think growth, you know, long run growth is 2% for the Us.
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Jim Bullard | Daniels SB: I think you could argue that the underlying growth rate right now is between 2% and 2 and a half percent.
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Jim Bullard | Daniels SB: If you think the long run inflation rate should be 2%, at least, headline inflation is 2 and a half percent on a 12 month basis. Headline PC unemployment. Probably you could argue that we're within a half a percentage point of the natural rate of unemployment.
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Jim Bullard | Daniels SB: So you've got all these numbers are basically at the soft landing numbers. It's true that there's a lot of.
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Jim Bullard | Daniels SB: you know, lot of things have to be done from here, and yes, there are shocks, and many, many things could happen, but I would say
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Jim Bullard | Daniels SB: he should take a victory lap at this point. This is a super successful policy, and sets up a template for how this could be done in the future. If we get surprised by a big shock that causes a lot of inflation.
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Kathleen Hays: Well, I just have to say as the as the fella who pushed hard for those 75 basis point rate hikes, I think that you will go down and fed history as someone who was key to
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Kathleen Hays: To making this this all work.
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Jim Bullard | Daniels SB: Well, thank you, thank you. But Jay had to make the call. He's he's the leader. And and he did make the call, and it was you know, as you know, at the beginning, he was saying. Well, this will probably be pretty painful, or it could be pretty painful, but as it turned out, the credibility alone was enough to get the inflation rate way down.
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Kathleen Hays: Oh, God, I just may I have to ask him a question really quickly.
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Kathleen Hays: Svb.
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Kathleen Hays: The banking meltdown unprecedented speed of rate hikes. That was very difficult for many to absorb. Would you, if you had to do this over again? Is there something you would do to ease that modify that, would you say, hey.
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Kathleen Hays: we had to do the big rate hikes. But maybe we should have been looking closer at the discount window. Maybe these things that are an issue. Now about how that operated for the small and regional banks could be avoided in the future. If, having seen what we've seen, we know we're ready to do something different the next time.
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Jim Bullard | Daniels SB: Yeah, I think the Svb and related banks that situation was over interpreted by markets and
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Jim Bullard | Daniels SB: the markets put in a hundred percent probability of recession for the second half of 2023. It was an epic misprediction poor forecast, because.
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Jim Bullard | Daniels SB: the economy didn't go into recession in the second half of 2023, and in fact, it boomed during that period.
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Jim Bullard | Daniels SB: So I just think that the idea about extending sort of mid size. These mid size troubles at these mid size banks, which were quirky banks and had a lot of uninsured deposits. Most banks don't have that
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Jim Bullard | Daniels SB: but to extend that and say that that was gonna be enough to tip the Us. Economy into recession turned out to be exceptionally wrong, and the largest banks actually benefited, probably from the trouble set at regional. So
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Jim Bullard | Daniels SB: I do think, the community banking world and the regional banking world has had a tough year or more now since that. But the but they're they're pretty good managers on average across these banks, and and so many of them are doing fairly well at this point.
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Kathleen Hays: So Jim bore. Thank you so very much. What a what a great conversation! And always or or I should say often, this will happen. Something sort of epic is going on, and we've got an interview scheduled. So we lucked out again, or certainly I did. Thanks so much to you.
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Jim Bullard | Daniels SB: Alright, thanks thanks a lot, Kathleen. Great to great to talk to you today.
Kathleen Hays: Jim of course, is the former president of the Federal Reserve Bank of St. Louis. And he’s also Dean of Purdue’s School of Business.
Jo
Serving 15 years as the sitting president and chief executive officer of the Federal Reserve Bank of St. Louis, Bullard earned significant praise and accolades for his long-standing leadership and innovative thinking as part of the Federal Open Market Committee (FOMC) in guiding the direction of U.S. monetary policy. A noted economist and scholar, Bullard had been the longest-serving Federal Reserve Bank president in the country and ranked as the seventh-most influential economist in the world in 2014. His scholarly impact has been based on research-based thinking and intellectual openness to new theories and explanations. That allowed Bullard to be an early voice for economic change, helping the Federal Reserve deftly navigate complex economic landscapes such as the COVID-19 pandemic and the financial crisis during his tenure.
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