Yelena Shuletyeva has been a devoted watcher of the Federal Reserve and its policy changes over the past 20 years, previously as an economist at BNP Paribas and Bloomberg LP. is now now putting all of her experience and analytical capabilities to work as a Senior US Economist for The Conference Board Economy, Strategy & Finance Center.
As she takes over as president of the New York Association for Business Economics, she also has the good fortune and responsibility to interview Federal Reserve Board Governor Chris Waller at a special luncheon today in New York, and ask the key questions he needs to answer ahead of two potential monetary policy drivers: the June Consumer Price Report and the first semi-annual report to Congress that Kevin Warsh will deliver on Tuesday and Wednesday.
Governor Waller’s speech is seen by many as a much more hawkish one than he as delivered until recently and Yelena also sees a shift in that direction.
“Earlier this month, he already said that he thought that the balance of risks for monetary policy completely flipped,’ she says. “And I think today he reiterated that exact thing that for him, the balance of risks has flipped from thinking about the labor market to thinking about inflation and how much riskier high inflation has become”
Yelena interprets Waller’s concern as not just about headline inflation, but about its broadening impact. “It’s really about how much of it is feeding into core. And I think that is exactly the issue - how broad inflation is.”
”So, if it was just for the headline, which we expect to go down in the CPI data, that’s one thing, but it’s really how much of this broadening into a different set of prices is happening. And that’s what he’s worried about.”
“After today’s...event at the New York chapter for business Economics, I think he’s just probably moving in the direction of a hike,” Yelena says. “If inflation is really hot, then, you know, he’s going to move in the direction of the hikes. And we could see essentially some others from the group who were on hold at the previous meeting could also move in that direction.”
So dive in and hear why Yelena sees the number of times Waller repeated the words “core CPI” as an indicator of the weight he is putting on this number.
“He did say that I’m watching a lot of different indicators. But he clearly...how many times he said core CPI?, at least five I believe. And that’s probably one big indicator that he’s watching. And that’s probably what will make a difference for him for the upcoming meeting.”
Spoiler alert: me and my team went back and tallied the number of times Waller said that, and guess what? He mentioned the core referring to the CPI 19 times in his speech.
Yelena says Waller sees risks as flipped 00:00:37:19
What an amazing start for the New York chapter for business economics. Right. So we were thinking we’re going to start in September and here we go. It’s July and this is the first meeting of the new year. And we were so happy to have Governor Waller joining us. Earlier this month, he already said that he thought that the balance of risks for monetary policy completely flipped. And I’m quoting him. And I think today he reiterated that exact thing that for him, the balance of risks has flipped from thinking about the labor market to thinking about inflation and how much riskier high inflation has become.
Core CPI is in the spot-light 00:01:49:20
So I think that is probably the most important takeaway from the speech. So right in the beginning of the speech, he went on and talked about CPI and core CPI and how that matters a lot, and that’s how much he’s watching those data. So I think he’s really worried about, you know, how inflation will impact economic outlook going forward.
Key Issue; Is inflation broadening 00:02:36:20
So it’s a series of events, right? So like first it was terrifying. Then, you know, now this geopolitical developments and it’s really about how much of it is feeding into core. And I think that is exactly the issue how broad inflation is. So, if it was just for the headline, which we expect to go down in the CPI data, that that’s one thing, but it’s really how, how much of this broadening into a different set of prices is happening. And that’s what he’s worried about.
Time to shift to inflation 00:03:42:09 -
I mean, it’s really about the Fed and its inflation target. They have been above the inflation target for such a long time. And previously he mentioned like he was really worried about the labor market. But now that he sees the labor market has stabilized, he can focus more on the other side the inflation mandate of the monetary policy mandate.
Policy on hold but for how long? 00:04:44:18
Governor Warsh thought was still or a hold at the previous meeting. I wonder if he’s moving into a hike direction. And after today’s meeting, you know, event at the New York chapter for business Economics, I think he’s just probably moving in the direction of a hike.
Rtae hike or not? Data will determine the next move 00:05:14:10
I think, you know, it will really depend on the data on CPI data. But I think what Governor Waller said, if inflation is really hot, then, you know, he’s going to move in the direction of hikes. And we could see essentially some others from the group who were on hold at the previous meeting could also move in that direction.
Focus has shifted away from the labor market 00:05:55:06
The unemployment rate is right. So he reiterated it like so many times, like how stable the labor market is. And that’s why I am worried about, you know, the risks to the labor market. I try to ask him, so what would make you, you know, and flip your expectations about the labor market? And I really didn’t get a clear answer to that.
But there is still a risk to the labor market 00:06:19:11
And I think that, you know, there is a risk to the labor market. Even so, now it’s very stable. So what if companies start laying off people because they don’t have that capability of freezing hirings anymore, because they’re have been doing it for such a long time. So the next step for the companies, if something happens is to lay off people. So I’m not quite sure I got that answer.
Uncertainty and no clarity 00:06:50:12
So, a shock - something, you know, bad happening. And, we don’t we still don’t know what the outcome of the war in the Middle East is. Right? So, as we speak, the event is unfolding, the events are unfolding still. And, you know, there’s really very little clarity on that front.
Not all guidance is creed equal 00:07:42:23
So I think Governor Waller was really excellent on that particular point. So it looks like all the communication from the Fed is moving away from forward guidance. And even though he defended forward guidance for, you know, the times of crisis and things like that earlier, you know, he was very clear that there is a clear distinction between the two.
Without guidance scenarios could be useful 00:08:10:00
So yes, maybe for guidance is gone for now. Probably not the best time right now to use that. But reaction function, he totally agrees that you have to be clear and you have to be telling the markets, what are you what you are thinking about the economy. So the way to think about it, he said, is in terms of scenarios. So, if this is what I see in the data, this is what I’m going to do. If that’s the opposite, this is what I’m going to do. So clear scenarios, outlining scenarios and following through on them. So that’s what probably would make the best case for policymakers in terms of explaining to the markets, explaining market participants what to expect.
The core CPI is the word and the focus 00:09:45:02
CPI data, I think, you know, he was pushed. There were a couple of questions. What other data are you watching for inflation. And he did say that I’m watching a lot of different indicators. But he clearly - I don’t know how many times - were you counting? …how many times he said core CPI at least five < <insert- he used ‘core’ 19 times in the speech>> I believe. And that’s probably one big indicator that he’s watching. And that’s probably what will make a difference for him for the upcoming meeting.
Core readings are not more important; their signal is more stable 00:10:30:23
So core means that that excludes food and energy. And these are the most important things for most people. Right. So we need to eat and we need to drive to work. So why is the Fed looking at core? CPI is because of how volatile these prices are. And it really gives them a better signal of what to expect going forward in terms of the underlying inflation. That’s it. That is really all about it. So that’s why policymakers like to talk about core.
What are the core dynamics? 00:11:04:15
Oh it’s really you know, an interesting question because, you know, a lot of this energy shocks could really reverberate through the economy. Think about packaging for food. It’s not just food. Right. Or, you know, prices to deliver the food that, you know, those prices really going into the price of food. But it’s a lot of different things. Think about services. You run a medical business, for example. So, you have a price. You have to buy supplies for your business, like gloves or whatever else you need. So, if those become more expensive, you as a service company will have to raise your price and so on and so forth. So here it’s really the duration of the shock that matters.
The shock effect is significant 00:11:56:08
And the longer it takes the higher the probability that you, as a service company or as a producer will have to raise those prices and see those secondary effects. So am I worried about inflation? I am worried about inflation. So because, you know, the the shock is really, you know, reaching this length at which we could start seeing those effects come in.
A lot seems to rest on this one month’s reading 00:12:34:14
That’s what he said, right? So if the reading comes in hot, that’s, you know, one thing. And that’s probably what will flip the coin for him. Right. But if it’s on a cooler side, you will need a little bit more evidence that that is the case. That was something very interesting in this speech.
Dots and SEPS and task forces to sort them out 00:14:07:23
He kind of likes to de-emphasize the dots, I think. Right. So we and we all pay attention to that. When you know the summary of economic projections comes out we all look at that. So maybe it’s a really good thing to de-emphasize the importance of dots this way. But yeah, we’ll see. We have a task force for that.
Warsh Testimonies ahead 00:14:59:19
So it’s a really tough question. So and again, I think as it always is, it’s more it’s going to be more about the questions rather than answers. How much can he say. Having said that, well, I’m not going to tell you anything in terms of the forward guidance. Right. So it’s going to be a lot of questions from the representatives and from the senators.
The testimonies are to be watched closely 00:15:25:06
And a lot of, you know, storytelling and trying to make a point, okay, I don’t expect that much in terms of the answers, quite frankly. So probably reiterate the same message, really, the market participants will be watching whether his views on inflation expectations shifted following the CPI report on Tuesday. You know, think about the Sintra conference, right. Even the smallest comment about inflation expectations really got markets attention. So anything he says on inflation will be absolutely key. And I don’t know if if he’s going to give us any clues, any clue about what to expect at the July meeting.
Probably not much to be learned from the testimonies 00:16:51:02
I mean, he will talk…he’s an absolute professional. And he knows these things inside and out. And he will absolutely handle it really professionally and well. But in terms of how much information we can gather from the hearing, I don’t think we will really.
Yelena Shulyatyeva
Senior US Economist
The Conference Board
Yelena Shulyatyeva, CFA is a Senior US Economist for The Conference Board Economy, Strategy & Finance Center, where she focuses on analyzing macroeconomic developments in order to better understand the implications for the broader economy and monetary policy. As part of a team of economists, she produces in-depth analysis of macroeconomic data and trends for the community of C-suite executives providing the insights to help companies make effective strategic decisions to accelerate growth.
Yelena brings twenty years of experience as a U.S. economist at BNP Paribas and Bloomberg L.P. where she provided clients with forecasts and analysis of macroeconomic and financial developments. She regularly appears on business television & radio, and is frequently quoted in media.
Yelena is a member of the Board of Directors of Money Marketeers of NYU and the New York Association for Business Economics (NYABE).
Yelena holds a CFA designation as well as Masters Degrees in Finance & Investments and Economics.
