Fed Governor Christopher Waller with Bloomberg's Tom Keene at CFR (Full Q&A)
Summary
Fed Communication: The Fed's diverse public speaking is emphasized as a means to showcase differing policy opinions, countering criticisms of groupthink.
Labor Market Dynamics: Discussion on the current labor market highlights a unique situation of declining labor demand masked by reduced labor supply, affecting unemployment rate perceptions.
Interest Rate Policy: The concept of a neutral rate is explored, with the current restrictive monetary policy needing adjustments as inflation trends towards targets.
Economic Inequality: The disparity between high-income and low-income groups is noted, with the wealth effect influencing consumption patterns differently across demographics.
Quantitative Tightening: The Fed's balance sheet reduction is on track, aiming to maintain ample reserves while addressing distortions from past quantitative easing.
Technological Impact: AI's potential to disrupt labor markets is discussed, with the focus on whether it will cause structural or cyclical changes in employment demand.
Global Competitiveness: Challenges in U.S. manufacturing competitiveness are acknowledged, with tariffs not significantly altering the cost advantage of overseas production.
Fed Structure and Independence: The importance of the Fed's decentralized structure is highlighted, ensuring diverse regional representation in decision-making, and the value of dissent within the Fed is encouraged.
Transcript
There seems to be an excess of communication right now. Everyone is talking at the Fed within the administration. How do you interpret how everybody has to get out there and speak, Speak, speak? Well, one of the criticisms that's been leveled at the Fed for a long time is we engage in groupthink. Every policy decision is a 12 and nothing vote. There's no dissents. And that if you're all going to do exactly the same thing and think the same way. We don't need 19 of you. We need one. But what I always try to point out is it's through speeches and public speaking that everybody presents their views and you can go out listening and they're not the same. So all the public speaking, the speeches are the way for us to show our diversity of opinions about the direction of policy. This is a good thing. It's not a bad thing. Despite you say it's a cornucopia of noise. It's actually signaling where people stand when you come to the meeting. And I always try to stress this to people. We have to make a decision every six weeks. We do not get a kick the can down the road. And what that implies is that to get a reasonable, consistent opinion, we have to kind of compromise. You have to come to decision. And that's why our votes are often 12. Nothing. 11 to 1 is because we all understand we have to come compromise somewhat on our positions to have a clear, consistent policy setting for markets and the American people. Larry Meyer, Washington University, St Louis had a small book out of his time with Greenspan, a term at the Fed, and he was heated about the consensus vote, the need for consensus. Should we be more like the Bank of England, which seems like a fist fight every six weeks? Yeah, I'd like to avoid the fist fight every six weeks. But I mean, I personally think there's nothing wrong with dissent. It's a way to communicate differences in policy stances. You know, the whole complete consensus largely comes out of the Greenspan era, where it was like, if you have a 12 nothing vote, there's no doubt about what policy should be. Everybody agreed with the chair at that time, and that kind of tradition continued. Whereas the Bank of England has showed. There is no point of having 19 of us if we always do the same thing. So at that point, what's wrong with having a few to said? I don't actually. Personally, I dissented at the July meeting. I don't personally think that shows anything about loss of faith in the chair or not the right policy. But that's the whole point is to say, look, I'm on this committee to have my own independent view and make these points, and that's what people are doing. We welcome all of you again, particularly worldwide with Christopher Waller into this audience. Ed, can I call on you first for the first question in a bit? Oh, well, I'll let you come up. I think we need to hear from him. Give me a little time to think. He's got a little time to think about it. And, you know, maybe I don't want to get in the way of his good first question. I'm going to ask some questions about the speech. I got to keep the assembled press happy or they won't show up again. It Council on Foreign Relations. But I want to come out of this with a little bit more knowledge about who is Christopher Waller. We'll get to that in a minute. Number one question I get the unemployment rate's four point X percent is a 4.6% unemployment rate now the same as a four point X unemployment rate when you were at Washington State? No, I think this is where we're in this unusual situation where we have this kind of zero net immigration instead of roughly, say, 400,000 a year. Actually people leaving the country. And this is kind of I said this before, it's masking this decline in labor demand. So just think about if it's all immigration and you have a decline in labor supply, then the following things should happen. Employment will go down. Wages should be built up if you have a labor shortage. Vacancies should go up. Quit should go up. That's what you should see with a very tight labor market and declining labor supply. When did we see that? 2020 to 2021. That's what we saw. And that was a very tight labor market. If things are driven by a decline in labor demand, just kind of thinking about labor supply is concerned, you'll see jobs fall. There'll be downward pressure on wages. There'll be downward pressure on vacancies. Quits rates will fall. That sounds to me more like what we're seeing in the data. So all that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand. And I've seen some estimates that if you just kept the labor force participation rate where it was right here, unemployment would be 4.95%. Okay. That's an important touch point. I would suggest 5% is a much bigger number than 4.9%. Do you see an immediacy at the central bank and among the staff that the real unemployment rate is five ish and not 4.6%? Well, that's that's where you've got to take a position on. What do you think the labor supply is doing? Is it fine that it's 4.3? Because the fact that people leave or drop out of labor force, that's just a natural part of the economy and therefore 4.3 is exactly reflecting things. Or do you think like I do, which is like we're seeing falling labor demand, and if it wasn't for this decline in labor supply, we would be hurting and there'd be no doubt about cutting rates, absolutely no discussion about it. So that's where they were in this weird thing. We've never seen falling labor demand with a big fall in labor supply. At the same time, I at least not in my career that I can remember, and that speaks of the technology I'll get to that minute in the air. I think you mentioned 100 basis points for rate cuts. Five rate cuts maybe is modeled in. You have to see what happens out there. Quote, Despite more than three years of restrictive monetary policy, how many rate cuts do we need to get christopher Walla walla away from the dreaded r word restrictive? Well, I thought I said you have to kind of pick a new what you think is the neutral rate, which means you're either stimulating or contracting the economy. That's the simplest way I describe what the neutral rate is. I have. I just typically look at the CPI, the survey of economic projections, and the median is around 3%. So for the committee as a whole, if it's 3%. You know, you've still got 125 basis points to go to get to neutral if everything starts coming back closer to the target. And that's where I think things are going to go. But the challenges you allude to in your speech and I'm going to be aggressive, I think of John Edwards in two Americas. Basically, there's two hour starts out there right now. There's an hour start for the haves, including everyone on Park Avenue assembled. And there's an hour start for the have nots who are flat on their back, including farmers. And you're Dakotas? Yeah, there's two hour starts. How do you manage that forward in a divided America? Yeah. So that's actually an interesting way of thinking about I never have. But typically when people talk about our star, I mean, how many interest rates are there? It's not like there's one that there's just been unique. Our star. So I gave a speech last May 2024 on our story in Iceland, and I always have to look at it this way. For me, our star is a policy rate. I control reserves in the banking system. What's the closest substitute? Short term liquid government debt? So for me, that's the real R star that I should be attached, not the return on capital, not the return on I not the return on corporate debt, return on saved liquid government debt. That's the answer I look at. And that's driven by global demand for treasuries versus a global supply of treasuries. That's how I view our staff. I mean, your point is actually a very good one, that what's restricted, if you think about our stores being restrictive, it's more restrictive for some groups than it is for others. That's probably always true. It's not just now, but it seems to be very stark this time that upper income groups, everything's fine, wealth is booming, the stock market's booming. They've got no problem financing stuff. I hear this from retailers. We pass tariffs through to high income customers. They don't bat an eye about it because they can afford it. Low income households, they can't pass them through it. Don't walk out the door. So that's the tension. Again, one of these tensions that we have, kind of this dichotomy in the economy between the upper income groups, the lower income off the script of the speech, three esteemed market economists that I spoke to all said the same thing away from a typical monetary policy speech. They're looking at QE, the state of our monetary policy forward, and the Fed's unique balance sheet. Give us an update on where you stand with the Fed's balance sheet and quantitative, the end of quantitative tightening. Yeah, I mean, I think we're at the point where we run an ample reserves. I gave a speech in July on our balance sheet. We run an ample reserve to ensure that there's sufficient liquidity in the banking system, in the financial markets, that people don't have to, at the end of the day, go scrambling around looking for nickels and dimes in the couch to cover their reserve positions. That to me is idiocy. So you have ample reserves. The reserves are there. Nobody has to spend the whole evening looking for money under the cushions. We're about at that point. We have an excessively large balance sheet due to quantitative easing. We ended that. We've been on a quantitative tightening policy since May of 22, and we're basically back to where we think we should be just for AMP. All the QE stuff is taken out in terms of how much liquidity. It still has affected the composition of a balance sheet, which was part of my speech I gave in July. QE a really distorted the maturity structure of our balance sheet and then our next choice, even though we get the level right. Our next job is to try to get the composition right, and that'll take some time. I share the stage with Jason Furman up at Harvard Boring Kids and acting in basic Economics, and he had a brilliant tweet the other day. He said, We need to fold in the wealth effect into our consumption. You have brilliant consumption numbers in here of the haves, the upper desk. So they're trading one block over on Madison Avenue. Explain the wealth effect and how it boosts monthly consumption. You mentioned luxury travel and others. How wealth effect is America right now? Yeah. So, I mean, if you go back to some kind of some basic economic theory, one kind of rule of thumb is for every $1 of wealth, you get the real interest rate, say 3%, 2%. Your consumption should go up by 2 to 3% for every dollar in wealth you get. So like two or $0.03 for every dollar of wealth. That's what we mean by the wealth effect. Now those numbers also mean that wealth increase is permanent. It's not a one time. If it's just a one off, you're not going to change your entire consumption path. So this is always kind of the challenge with the wealth effect because it's not that big of a number in terms of a dollar increase. It's only like $0.03 of consumption. But that also has to be permanent. It's not like a one off and then comes back down. So wealth picks off and sometimes are smaller then. But the run we've had for the last few years, right, that's looking pretty permanent and pretty big. It's not just a $1 increase. I'm going to squeeze in a couple more questions here. This one's from the press. David Gura gave me this question over at Bloomberg News because he's vicious in his questions. Should we get rid of the dots? That's a good question. I mean, I personally have doubts about whether we should have the FCP at all, but I've been told that. What are you trying to hide? Then what? Why would you take them away? Why would you not be as transparent? What would happen if the dots went away? Well, you can be back to 2011, and then, you know, we would say now you could change the dots. I personally believe you should get rid of the calendar dating, get rid of the long run numbers and just say, look, what's the next optimal policy over the next six, 12, 18 months? That's as good as we can do. So then it's a rolling number and you get away from this crazy thing was like, Wow, there's three meetings left in the year. How many more rate cuts this year? Who cares? The media. We wouldn't have a job. So if I said okay at the September, he said, here's how many over the next six months, that's what the focus would be, not the end of the calendar year. So I would do that and then get away from the long run stuff. Just the best we can do is six, 12, maybe 18 months out. Any kind of forecasts. We're no, we don't have any genius insights or everybody else on Wall Street who does this. So that would be one of the critical things I would do is change the calendar dating and shorten the horizon that we actually do it. One of my hallmarks is who are these guys literally like Butch Cassidy. And so we're going to find out who Christopher Waller is. I mentioned the you were a accounting major and you got bored because the professor was putting. So you switch to economics. The Waller of 1991 is a spectacular 13 page paper. I think it is on prodigious game theory. And what he didn't know in 1991 is he would be describing the game theory of 2025. I'm not going to get you in trouble with the secretary of Treasury right now, but I'm going to review this. You said in 1991 off of James Baker's word bashing, where administrations bash the central bank and there's coercion involved. The title, the paper bashing and coercion. You sub out strong administrations and weak administrations. And no, I'm going to not ask you what this administration is, but I want to take it forward to the present day if we have bashing and coercion. And we have to be ex ante. We're trying to get out front of the debate. The Fed's trying to glean what's going on or we go true ex post literally in a Georgia school where we wait for the data to come in. How does the bashing and coercion affect the monetary challenge of ex ante versus ex post? Do we come more? Do we become more exposed with an administration going after a central bank? Well, like I said, I wrote this paper back because at the time there was a lot of discussion about central bank independence and institutional design. And the kind of presumption was once you pick the central banker, that's the policy. And every other external influence just kind of went away. And I was kind of look around going, That's not what I'm hearing. That's not what I'm seeing back in the eighties. Right. There was a lot of criticism. And so this idea of bankers was what the administration can push the Fed one way or the other by publicly criticizing the Fed. Now, when I wrote this paper in 1989, 1990, I didn't think I'd be the one receiving it 25 years, 30 years later. So when I reread the intro the other day, I was like, Wow, what was I thinking about? So, but I mean, that is kind of the situation. And it's not just the current administration. This has been done forever. I mean, George Bush, right? Greenspan, Burns and LBJ giving him costing in the election. Criticism had come out and this was the norm until basically Bob Rubin came along and then it was like, don't talk about the Fed. And that kind of became the rule through Syria, a sequence of administrations until President Trump came in and in 2018 started criticizing the Fed more publicly than had been done in a long. Does it change the behavior of a given central bank? If we have bashing, You're trying to get out front. The public, the media want you to be out front, omniscient, have a crystal ball, or do you have to slam back to a massively exposed data dependency because you're getting crushed by whatever the executive branches, whatever the nation is, you know? I mean, at the end of the day, and this is what I tell everybody, I just go to work and I try to do my job the best I can. That's all I can do. A lot of this is just out of my control. You know, whether the administration's views drive people to push one way or the other. And, you know, I can't speak for anybody else, but I just try to do the best job I can using the theory that I know the models in the economy that I use and the data that I use. So, you know, the call I made in June, which was I was saying the labor market is not as good as it looks, and I was accused of being political August 1st. That suddenly didn't look so political. The data came in exactly the way I said it was going to. So what? Sometimes it looks like people say, oh, they were interpreting this as purely a political position. Suddenly the data said, maybe it's not. Maybe it was actually the right call. And so that's how I kind of think of this. You can always look at something and interpret it as political when it's not. That's that's kind of a problem in what we decide and what we do. One more question. I'm going to go to the floor and also hold on, Zoom worldwide with the Council on Foreign Relations. I want to get this one question I have to ask. With your heritage of the Dakotas in the old Northwest, how bad is it for the farmers right now? Soybeans is a news, but French hill down in Arkansas is telling me, guess what? They're flat on their back. Report on that, please. Well, back in the first Trump administration, there was a. You know, tariffs on China and tariffs. China immediately responded by not buying U.S. soybeans. And I was at the Saint Louis Fed. Some of the biggest soybean producers were in our district. I heard this. We had barges of soybeans lined up on the Mississippi River that were never going anywhere. And they only had a certain shelf life before they rot. They're gone. So we saw this. China was I think don't quote me exactly, but this is in the ballpark. But China was sort of bought like 75% of U.S. soybeans. Even later when some of this came off, soybeans never recovered. If China was only buying white things again. Don't quote me on the exact number like 35%, and now it's back down to basically zero. So they've just shifted their entire supply chain to Brazil and South America, and they never came back. And so that's the one thing you want to be a little careful of, is just because the supply chain gets disrupted and then you reverse something doesn't necessarily mean it comes back. Once it's changed, it's changed. So, yeah, soybean farmers are typically getting hammered and I might not buy it. I've seen the new Foreign Affairs magazine. It is brilliant. Shannon O'Neil with a great article on supply lines, which to me is the discussion in Q1 next year. Edward Cox, please, sir, with our first question. Ed Cox can be for economic development of the Conference Board. Given Waller, your excellent presentation appreciated very much about the data, but there are several mega things out there for which the Fed is not responsible, though I am sure are in the background or part of your consideration. And that's the extraordinary deficits, fiscal deficits going forward and the value of the dollar. Would you explain how those might enter into your considerations as to what the what monetary policy should be and when? You know, we have a kind of a longstanding view that we don't, you know, praise or criticize fiscal policy, we take it as a given for doing our own job. But when you're running 6% deficits, 3% primary deficits, we know that that's just not sustainable in the long run. How long is the long run? I don't know the old joke. I'll be dead before you find out, but we just know it economically. You can't do it persistently. It's just not going to happen. So that has general concerns. The hour star speech I gave back in Iceland was if you think about. Our start government debt, which is the closest thing to should matter for me and reserves. It's a race between the growing demand for U.S. Treasury debt and a growing supply. For the last 40 years, demand has outstrip supply. And what does that mean? Prices go up. Yields go down. At some point, if that reverses and the supply starts exceeding demand, the only way you're going to get the markets in the world to hold that stuff is you lower the price, which means the yield is going to go up. So for me, having good stable fiscal policy is the best way to ensure that you don't have that happen. But again, this is not under my control. That's up to the, you know, Congress, White House to think about fiscal policy. That's it. That's just my view. QUESTIONER Sir. Marker's an adventurer and growth capital A. Yolanda Waller, you talked about A.I. and you said that you thought short term it could have some risks for the labor market. Long term, it was good for productivity, but a lot of forecasters are predicting that it will be negative or the labor market longer term, that it will reduce jobs. How does that impact monetary policy? How does it impact your dual mandate and how do you think about it generally? Right. So that's what we're saying. Is this a structural or a cyclical phenomenon with AIG? So if you think about labor, labor demand and employment just over time just grows with the economy. What I worry about is I being a structural there's this like this one time permanent drop in the level of demand. The question is, does it continue to grow at the same rate as before? In which case it's just a level effect employment growth and everything you'll continue on in the future? Or does it drop? And then it just stays flat. It not only drops in the level, but it has a lower growth rate of employment. I, as a policymaker, cannot do anything about that latter case if it's just the fact that there is this kind of cyclical movement in labor demand, that's what I'm designed to have some influence over. But if it's a sharp structural drop out, you know, lowering the Fed funds rate 50 basis points isn't going to isn't going to overcome that. And that's what we're trying to figure out is going to happen. Now, in the past, whenever we've seen technological change. I gave a speech yesterday on Amazon. You know, you see jobs going away, you know which ones are going to go away, but you never know what jobs are coming. And usually there's a kind of enough of a gap where there's the jobs are slowly going away. New ones are coming on. This time, what I worry about, it's so fast, it's happening so fast. And the jobs go way faster than we can figure out what the new jobs are. The new jobs will show up. I have no doubt about that. It's just the timing may be a little more disruptive than technology we've seen. Thank you for that question. I forgot to ask that. You saved me there with that question. Here's a footnote from the speech this morning. Technology that improves labor productivity leads firm to demand more labour, not less. A huge body of America doesn't agree with that. And to your point on innovation with the Nobel Prize, a celebration of the last 48 hours of Schumpeter and McGraw's prophet of innovation, this new innovation, the gains are going to go to a narrow group. Or do you think they will? This is attrition. They will diffuse out across America. Well, the history of technology is that they do diffuse. I mean, one of the things I pointed out speech yesterday, if you look back to Karl Marx's theory of capitalism machines, robots would replace labor to produce all the output. Everybody would lose their jobs, be unemployed. There would be this mass army of the unemployed. There would be a social revolution. Capitalism would die, and we'd have a socialist utopia. That doesn't happen. Right. I mean, when capital goes up, machines and technology go up, it makes labor more productive. And firms like productive workers. And that's why they want to hire them, because they don't want to keep their output constant. They want to produce more. And they need both of these things to produce more output. This is what we've seen in the history, certainly of the U.S. in the last 200 years. The capital stock in the U.S. is seven times larger than it was in 1950. In terms of machines, equipment, everything, the unemployment rate is exactly the same. So employment grows with technology. It's not it doesn't go negative with it. But to the president's point and arguably his election, a huge body of America feels let down. We had productivity, we had capital deepening of an extraordinary amount, and the jobs went to China. That's his theme with A.I.. Are we going to replicate that in some unknown way and the jobs are going to go to, you name the place. Well, even with the Chinese shark. Total employment in the U.S. has grown ever since the China shock. It hasn't gone negative or fallen. It's just go look at the employment rate. Go to Fred, my favorite data series, pull up employment. Look what it does. It just goes up. So, yes, there are reallocations. Jobs get lost and they go somewhere else or they get eliminated. But that's my point. New jobs, new things came up. People reskill, going to new areas. So when the China shock was hitting manufacturing, we had a whole I.T. software phone technology revolution, information technology that created thousands and millions of jobs. Is Fred an unfair advantage for the Saint Louis Fed? They wake up every day different than any other bank. Fred is one of the greatest gifts from the Federal Reserve to the planet. No, man, please. Hi. Ginger Cutler. I'm a term member at CFR. Well, ah, just what you just said about how unemployment is the same as it was in 1950 and the China shock didn't really necessarily affect employment. I, I guess I want to hearken back to what you said about where wealth is concentrated in the hands of Americans. Right. And how you said that what the bottom 60% of households own 15% of wealth and 45% of spending. I'm curious how that figures into what you just said about unemployment being the same as it was in 1950 and the China shock ultimately not really having an effect on the labor market. I'm curious how inequality factors into that. Yeah, so anyway, I was just trying to get at what employment you get sectoral shifts, some sector goes down, some other sector goes up. In my speech yesterday, I said, look, when automobiles came off, if you were making saddles or wagons, your jobs were going away. But those same skills got transferred over to privacy classes for cars making car seats, the same skills you just had to transfer. So those jobs went away, but other jobs came up and took their place. That's why you can't just look at one sector and say, Oh, that's going to kill the entire economy. I don't believe that's going to happen either. In terms of wealth and income inequality. This has been an issue in the U.S. for the last 40, 50 years. There's been a tremendous increase or reasonable increase in wealth inequality, income inequality. For me, as a policymaker, I have one instrument. I can't deal with inequality. It's really not in my toolkit. I can't say, here's an interest rate for this group, as Tom was saying. I can't say here's an interest rate without our star, and here's an interest rate with that. Our star. That's. That's not in my set. I have to look at the aggregate. It's really my only choice. Can I look at these discrepancies and think how I might want to lean one way or the other? Sure. Again, you know, we kind of got criticized for that before with our last framework that we were kind of leaning a particular way. It's it's there's nothing wrong with it. It's just we only have which is very little we can do about it. And that was my issue with our last framework. I could care about this, but there's very little I can do with it for particular groups. I think we have a question here in the digital world. We'll take the next question from Chris Thomas. Good morning, Governor Waller. Thank you for the time today. Ex intel ex McKinsey. Now I help global companies think about their global footprint and where they put advanced manufacturing facilities. And the constant refrain is that no matter how high the tariff, the U.S. is just completely uncompetitive. And now it's the most expensive place in the world to do business, especially if you're building something. To what extent is this matter for the growth and success of the U.S. economy? And is there anything that could be done about it? I've heard that even if it's a 100% tariff, it's still cheaper to manufacture in Taiwan or Vietnam or Japan or Korea or China than in the U.S.. Yeah. I mean, this is this is way outside my wheelhouse, I have to say. Know, trade policy, you know, particularly worrying about one sector over another, manufacturing versus others. This is just something I, I can't make those decisions on for the president got elected to do and he's following through on his promises. Whether you get stuff re on shoring or not? I don't know. We'll see. We did learn something with the pandemic that supply chains stretched across the globe are pretty fragile and there was a lot of emphasis on getting near shoring, maybe not onshore, near shoring. As a result, over time. You know, if tariffs were big enough, I'm pretty sure you'd bring your factory back. There is a price at which you will bring it back. It's not infinite. So that's what I don't know. We'll see how this all works out, whether there's a lot of incentives to bring stuff back or not, or whether the people that, you know, you bring these jobs back, whether people want to do them or not. I mean, in the U.S., we've moved into a much more of a service sector mentality. And the idea of screwing lug nuts on a tire for 8 hours a day is not something most Americans typically. I'm not going to ask you about bananas and tariffs. I don't think we're going bananas. So over here, please. I. Andrew watchers at Morgan Stanley. Governor Walter, thank you for your comments. I want to ask you to say a little bit more about what you are intending to convey with the phrase to a more neutral stance of policy. In a sense, if you're restrictive, just cutting ones is moving to a more neutral sense of policy, or is this describing sort of a process where over several meetings, the other idea of a range in mind that is more neutral and you're describing a process of moving towards that range? Yeah, I'd say it's the latter. It's really the process. So if you're at neutral and you think you're restrictive in your policy, it is set up here. What's going to cause you to bring it down? You think inflation is coming back to target? You think the labour market is either stable or weakening? You want to kind of bring it back towards neutral. It doesn't mean you go below and you want to stimulate the economy. Things would have to really get bad. We're not seeing that in the labour market that we want to go below neutral or I'm not saying and I can't speak for anybody else, but and the debate right now is about inflation. Inflation's running 3%. It's way over. Our target has been above target for five years. Four years. Why are you lowering rates? So you have to say what is the outlook for inflation? And that's what I argue, that any tariff effects are going to be temporary. You look, this is a classic line in central banking. You look through those things, you think about what is going to be inflation 12 months from now when the next one was. So that's what I'm doing. And in that world I see inflation coming back down to target. I see a softening labour market. So I want to bring things back to Target. I don't want to go below Target right now because inflation is above target. When Q&A, we go 2/10 of a percentage point. You were talking hole numbers up there. You say 2% is where the Fed is right now. What is the latest thinking you see around the raging debate? To take a Taylor rule, look at the output gap, look at NAIRU and all the rest of the mumbo jumbo and plug in a more normal 2.2 or 2.4 or 2.6% run rate versus the decades long hoped for 2%. Change the inflation target. Yeah. Yeah. I mean, there's always a good argument or debate about should you pick a point or pick a range. A lot of central banks, a world they run with the range. They don't seem to have big problems with that. You know, like the Bank of Canada has a range of 1 to 3%. So, you know, there's often a question of you're just as happy with 3% inflation as 1%. Should we be all should we want to? But they're not going to do crazy stuff to get it to do it. That's the key point. You'll get there. You'll take your time, which you're not going to do drastic policies to drive it to exactly two. I think two is a good thing. They are giving my spiel on what's the real value of having a 2% target with a particular price index. It hold you accountable. If I just said inflation in general somewhere between one and 3%. There's a lot of loose things that go on in there that I can always slippery slide say I'm. I did my job. What are you talking about that happened with the money growth targeting back in the early eighties and one was pretty good but M2 was lousy. But next month, M2 is. Remember how the world stopped? I think it was Thursday whenever it was 330 for M1. M2 is money growth. So I like 2% because holds me accountable. Okay, Now you want to hold me accountable because it's 2.2 instead of two. Come on. That's where range kind of helps. I always like to tease my. Friends and things. In the year 2000. If I had told you the Fed would keep inflation between one and 2% for a decade. Everybody in the year 2000. That is a phenomenal monetary policy success. But because it ran 1.7, we didn't hit two. It was a failure. Think about that. 1.7, not two, was a failure. But if I'd asked you before any specific 2% target, you said one or two. That's amazing. That is phenomenal. Manager. So that's the danger with the 2%. It's so precise. And if you don't hit it, you start saying you're failing and hitting your target. That's why I actually kind of, like, arranged myself. I want to talk one final question here for me about the culture and the fabric of America and our economics. There is such a conceit and bias and a distrust back to 1907 or even before, of three zip codes in Manhattan or maybe the corridor from Washington up to Boston. You represent a part of America. Some would say the backbone of America. From Bemidji, the Dakotas, Bemidji, all the way out to Washington State and then to Saint Louis. How would the Federal Reserve System change under a chairman Walter? Given that cultural geography versus everyday the East Coast certitude, it's the heritage of the modern economic Fed? Well, I mean, this is one of the brilliant aspects of the design of the Fed. I've studied the structure of the Fed for 40 years now. The whole idea was to say, look, you need some political accountability in D.C., but you want to have a lot of this outside of D.C.. That was the typical grassroots. Get people away from D.C.. Talk to the American public. I always say we're the one government agency that has contact with all parts of the US who are are our 12 districts. All the branches in those districts. Everybody can come talk to a president of the bank. They go out, they go out regularly, speak to the public. You can come time from you can have a conversation with somebody. I mean, the only other institutions that have that kind of contact are the IRS and the post office. We typically don't want to have them knocking on our door. So that's one of the big advantage of the Fed in our structure of having people on the outside. There has been debates forever of moving more political accountability to the Fed or moving it away. Sometimes people's views shift back and forth depending on what the situation is. But I believe the basic structure that we have is has served the country well by representing all the country. In the decision making process, just not a few handful of the weeds in Washington, Washington, D.C.. So that I think is important, I would say. Like I said, for me, one of the critical things I'd change the ACP. I would encourage that, since I'm not somebody who's afraid of like, oh, if you're dissenting against what I'm pushing, that lowers my confidence or could not be so much better. So by four votes, it'll be, you know, be I highly recommend lots of dissents. It'll make the Fed's show better. Well, I just think that's the whole point of it. That was the idea of the structure was you put 90 members, so you get this diversity of views from around the country coming in, different points of views. If everybody comes in, no matter what part of the country, no matter what the situation is, and you always say the same thing, we don't need it. You know, you just have four, three governors and that's it. If board, you're done with everything. Governor Walker, thank you for joining the Council on Foreign Relations.
Fed Governor Christopher Waller with Bloomberg's Tom Keene at CFR (Full Q&A)
Summary
Transcript
There seems to be an excess of communication right now. Everyone is talking at the Fed within the administration. How do you interpret how everybody has to get out there and speak, Speak, speak? Well, one of the criticisms that's been leveled at the Fed for a long time is we engage in groupthink. Every policy decision is a 12 and nothing vote. There's no dissents. And that if you're all going to do exactly the same thing and think the same way. We don't need 19 of you. We need one. But what I always try to point out is it's through speeches and public speaking that everybody presents their views and you can go out listening and they're not the same. So all the public speaking, the speeches are the way for us to show our diversity of opinions about the direction of policy. This is a good thing. It's not a bad thing. Despite you say it's a cornucopia of noise. It's actually signaling where people stand when you come to the meeting. And I always try to stress this to people. We have to make a decision every six weeks. We do not get a kick the can down the road. And what that implies is that to get a reasonable, consistent opinion, we have to kind of compromise. You have to come to decision. And that's why our votes are often 12. Nothing. 11 to 1 is because we all understand we have to come compromise somewhat on our positions to have a clear, consistent policy setting for markets and the American people. Larry Meyer, Washington University, St Louis had a small book out of his time with Greenspan, a term at the Fed, and he was heated about the consensus vote, the need for consensus. Should we be more like the Bank of England, which seems like a fist fight every six weeks? Yeah, I'd like to avoid the fist fight every six weeks. But I mean, I personally think there's nothing wrong with dissent. It's a way to communicate differences in policy stances. You know, the whole complete consensus largely comes out of the Greenspan era, where it was like, if you have a 12 nothing vote, there's no doubt about what policy should be. Everybody agreed with the chair at that time, and that kind of tradition continued. Whereas the Bank of England has showed. There is no point of having 19 of us if we always do the same thing. So at that point, what's wrong with having a few to said? I don't actually. Personally, I dissented at the July meeting. I don't personally think that shows anything about loss of faith in the chair or not the right policy. But that's the whole point is to say, look, I'm on this committee to have my own independent view and make these points, and that's what people are doing. We welcome all of you again, particularly worldwide with Christopher Waller into this audience. Ed, can I call on you first for the first question in a bit? Oh, well, I'll let you come up. I think we need to hear from him. Give me a little time to think. He's got a little time to think about it. And, you know, maybe I don't want to get in the way of his good first question. I'm going to ask some questions about the speech. I got to keep the assembled press happy or they won't show up again. It Council on Foreign Relations. But I want to come out of this with a little bit more knowledge about who is Christopher Waller. We'll get to that in a minute. Number one question I get the unemployment rate's four point X percent is a 4.6% unemployment rate now the same as a four point X unemployment rate when you were at Washington State? No, I think this is where we're in this unusual situation where we have this kind of zero net immigration instead of roughly, say, 400,000 a year. Actually people leaving the country. And this is kind of I said this before, it's masking this decline in labor demand. So just think about if it's all immigration and you have a decline in labor supply, then the following things should happen. Employment will go down. Wages should be built up if you have a labor shortage. Vacancies should go up. Quit should go up. That's what you should see with a very tight labor market and declining labor supply. When did we see that? 2020 to 2021. That's what we saw. And that was a very tight labor market. If things are driven by a decline in labor demand, just kind of thinking about labor supply is concerned, you'll see jobs fall. There'll be downward pressure on wages. There'll be downward pressure on vacancies. Quits rates will fall. That sounds to me more like what we're seeing in the data. So all that's happening with all the labor supply stuff is it's kind of masking the weakness of labor demand. And I've seen some estimates that if you just kept the labor force participation rate where it was right here, unemployment would be 4.95%. Okay. That's an important touch point. I would suggest 5% is a much bigger number than 4.9%. Do you see an immediacy at the central bank and among the staff that the real unemployment rate is five ish and not 4.6%? Well, that's that's where you've got to take a position on. What do you think the labor supply is doing? Is it fine that it's 4.3? Because the fact that people leave or drop out of labor force, that's just a natural part of the economy and therefore 4.3 is exactly reflecting things. Or do you think like I do, which is like we're seeing falling labor demand, and if it wasn't for this decline in labor supply, we would be hurting and there'd be no doubt about cutting rates, absolutely no discussion about it. So that's where they were in this weird thing. We've never seen falling labor demand with a big fall in labor supply. At the same time, I at least not in my career that I can remember, and that speaks of the technology I'll get to that minute in the air. I think you mentioned 100 basis points for rate cuts. Five rate cuts maybe is modeled in. You have to see what happens out there. Quote, Despite more than three years of restrictive monetary policy, how many rate cuts do we need to get christopher Walla walla away from the dreaded r word restrictive? Well, I thought I said you have to kind of pick a new what you think is the neutral rate, which means you're either stimulating or contracting the economy. That's the simplest way I describe what the neutral rate is. I have. I just typically look at the CPI, the survey of economic projections, and the median is around 3%. So for the committee as a whole, if it's 3%. You know, you've still got 125 basis points to go to get to neutral if everything starts coming back closer to the target. And that's where I think things are going to go. But the challenges you allude to in your speech and I'm going to be aggressive, I think of John Edwards in two Americas. Basically, there's two hour starts out there right now. There's an hour start for the haves, including everyone on Park Avenue assembled. And there's an hour start for the have nots who are flat on their back, including farmers. And you're Dakotas? Yeah, there's two hour starts. How do you manage that forward in a divided America? Yeah. So that's actually an interesting way of thinking about I never have. But typically when people talk about our star, I mean, how many interest rates are there? It's not like there's one that there's just been unique. Our star. So I gave a speech last May 2024 on our story in Iceland, and I always have to look at it this way. For me, our star is a policy rate. I control reserves in the banking system. What's the closest substitute? Short term liquid government debt? So for me, that's the real R star that I should be attached, not the return on capital, not the return on I not the return on corporate debt, return on saved liquid government debt. That's the answer I look at. And that's driven by global demand for treasuries versus a global supply of treasuries. That's how I view our staff. I mean, your point is actually a very good one, that what's restricted, if you think about our stores being restrictive, it's more restrictive for some groups than it is for others. That's probably always true. It's not just now, but it seems to be very stark this time that upper income groups, everything's fine, wealth is booming, the stock market's booming. They've got no problem financing stuff. I hear this from retailers. We pass tariffs through to high income customers. They don't bat an eye about it because they can afford it. Low income households, they can't pass them through it. Don't walk out the door. So that's the tension. Again, one of these tensions that we have, kind of this dichotomy in the economy between the upper income groups, the lower income off the script of the speech, three esteemed market economists that I spoke to all said the same thing away from a typical monetary policy speech. They're looking at QE, the state of our monetary policy forward, and the Fed's unique balance sheet. Give us an update on where you stand with the Fed's balance sheet and quantitative, the end of quantitative tightening. Yeah, I mean, I think we're at the point where we run an ample reserves. I gave a speech in July on our balance sheet. We run an ample reserve to ensure that there's sufficient liquidity in the banking system, in the financial markets, that people don't have to, at the end of the day, go scrambling around looking for nickels and dimes in the couch to cover their reserve positions. That to me is idiocy. So you have ample reserves. The reserves are there. Nobody has to spend the whole evening looking for money under the cushions. We're about at that point. We have an excessively large balance sheet due to quantitative easing. We ended that. We've been on a quantitative tightening policy since May of 22, and we're basically back to where we think we should be just for AMP. All the QE stuff is taken out in terms of how much liquidity. It still has affected the composition of a balance sheet, which was part of my speech I gave in July. QE a really distorted the maturity structure of our balance sheet and then our next choice, even though we get the level right. Our next job is to try to get the composition right, and that'll take some time. I share the stage with Jason Furman up at Harvard Boring Kids and acting in basic Economics, and he had a brilliant tweet the other day. He said, We need to fold in the wealth effect into our consumption. You have brilliant consumption numbers in here of the haves, the upper desk. So they're trading one block over on Madison Avenue. Explain the wealth effect and how it boosts monthly consumption. You mentioned luxury travel and others. How wealth effect is America right now? Yeah. So, I mean, if you go back to some kind of some basic economic theory, one kind of rule of thumb is for every $1 of wealth, you get the real interest rate, say 3%, 2%. Your consumption should go up by 2 to 3% for every dollar in wealth you get. So like two or $0.03 for every dollar of wealth. That's what we mean by the wealth effect. Now those numbers also mean that wealth increase is permanent. It's not a one time. If it's just a one off, you're not going to change your entire consumption path. So this is always kind of the challenge with the wealth effect because it's not that big of a number in terms of a dollar increase. It's only like $0.03 of consumption. But that also has to be permanent. It's not like a one off and then comes back down. So wealth picks off and sometimes are smaller then. But the run we've had for the last few years, right, that's looking pretty permanent and pretty big. It's not just a $1 increase. I'm going to squeeze in a couple more questions here. This one's from the press. David Gura gave me this question over at Bloomberg News because he's vicious in his questions. Should we get rid of the dots? That's a good question. I mean, I personally have doubts about whether we should have the FCP at all, but I've been told that. What are you trying to hide? Then what? Why would you take them away? Why would you not be as transparent? What would happen if the dots went away? Well, you can be back to 2011, and then, you know, we would say now you could change the dots. I personally believe you should get rid of the calendar dating, get rid of the long run numbers and just say, look, what's the next optimal policy over the next six, 12, 18 months? That's as good as we can do. So then it's a rolling number and you get away from this crazy thing was like, Wow, there's three meetings left in the year. How many more rate cuts this year? Who cares? The media. We wouldn't have a job. So if I said okay at the September, he said, here's how many over the next six months, that's what the focus would be, not the end of the calendar year. So I would do that and then get away from the long run stuff. Just the best we can do is six, 12, maybe 18 months out. Any kind of forecasts. We're no, we don't have any genius insights or everybody else on Wall Street who does this. So that would be one of the critical things I would do is change the calendar dating and shorten the horizon that we actually do it. One of my hallmarks is who are these guys literally like Butch Cassidy. And so we're going to find out who Christopher Waller is. I mentioned the you were a accounting major and you got bored because the professor was putting. So you switch to economics. The Waller of 1991 is a spectacular 13 page paper. I think it is on prodigious game theory. And what he didn't know in 1991 is he would be describing the game theory of 2025. I'm not going to get you in trouble with the secretary of Treasury right now, but I'm going to review this. You said in 1991 off of James Baker's word bashing, where administrations bash the central bank and there's coercion involved. The title, the paper bashing and coercion. You sub out strong administrations and weak administrations. And no, I'm going to not ask you what this administration is, but I want to take it forward to the present day if we have bashing and coercion. And we have to be ex ante. We're trying to get out front of the debate. The Fed's trying to glean what's going on or we go true ex post literally in a Georgia school where we wait for the data to come in. How does the bashing and coercion affect the monetary challenge of ex ante versus ex post? Do we come more? Do we become more exposed with an administration going after a central bank? Well, like I said, I wrote this paper back because at the time there was a lot of discussion about central bank independence and institutional design. And the kind of presumption was once you pick the central banker, that's the policy. And every other external influence just kind of went away. And I was kind of look around going, That's not what I'm hearing. That's not what I'm seeing back in the eighties. Right. There was a lot of criticism. And so this idea of bankers was what the administration can push the Fed one way or the other by publicly criticizing the Fed. Now, when I wrote this paper in 1989, 1990, I didn't think I'd be the one receiving it 25 years, 30 years later. So when I reread the intro the other day, I was like, Wow, what was I thinking about? So, but I mean, that is kind of the situation. And it's not just the current administration. This has been done forever. I mean, George Bush, right? Greenspan, Burns and LBJ giving him costing in the election. Criticism had come out and this was the norm until basically Bob Rubin came along and then it was like, don't talk about the Fed. And that kind of became the rule through Syria, a sequence of administrations until President Trump came in and in 2018 started criticizing the Fed more publicly than had been done in a long. Does it change the behavior of a given central bank? If we have bashing, You're trying to get out front. The public, the media want you to be out front, omniscient, have a crystal ball, or do you have to slam back to a massively exposed data dependency because you're getting crushed by whatever the executive branches, whatever the nation is, you know? I mean, at the end of the day, and this is what I tell everybody, I just go to work and I try to do my job the best I can. That's all I can do. A lot of this is just out of my control. You know, whether the administration's views drive people to push one way or the other. And, you know, I can't speak for anybody else, but I just try to do the best job I can using the theory that I know the models in the economy that I use and the data that I use. So, you know, the call I made in June, which was I was saying the labor market is not as good as it looks, and I was accused of being political August 1st. That suddenly didn't look so political. The data came in exactly the way I said it was going to. So what? Sometimes it looks like people say, oh, they were interpreting this as purely a political position. Suddenly the data said, maybe it's not. Maybe it was actually the right call. And so that's how I kind of think of this. You can always look at something and interpret it as political when it's not. That's that's kind of a problem in what we decide and what we do. One more question. I'm going to go to the floor and also hold on, Zoom worldwide with the Council on Foreign Relations. I want to get this one question I have to ask. With your heritage of the Dakotas in the old Northwest, how bad is it for the farmers right now? Soybeans is a news, but French hill down in Arkansas is telling me, guess what? They're flat on their back. Report on that, please. Well, back in the first Trump administration, there was a. You know, tariffs on China and tariffs. China immediately responded by not buying U.S. soybeans. And I was at the Saint Louis Fed. Some of the biggest soybean producers were in our district. I heard this. We had barges of soybeans lined up on the Mississippi River that were never going anywhere. And they only had a certain shelf life before they rot. They're gone. So we saw this. China was I think don't quote me exactly, but this is in the ballpark. But China was sort of bought like 75% of U.S. soybeans. Even later when some of this came off, soybeans never recovered. If China was only buying white things again. Don't quote me on the exact number like 35%, and now it's back down to basically zero. So they've just shifted their entire supply chain to Brazil and South America, and they never came back. And so that's the one thing you want to be a little careful of, is just because the supply chain gets disrupted and then you reverse something doesn't necessarily mean it comes back. Once it's changed, it's changed. So, yeah, soybean farmers are typically getting hammered and I might not buy it. I've seen the new Foreign Affairs magazine. It is brilliant. Shannon O'Neil with a great article on supply lines, which to me is the discussion in Q1 next year. Edward Cox, please, sir, with our first question. Ed Cox can be for economic development of the Conference Board. Given Waller, your excellent presentation appreciated very much about the data, but there are several mega things out there for which the Fed is not responsible, though I am sure are in the background or part of your consideration. And that's the extraordinary deficits, fiscal deficits going forward and the value of the dollar. Would you explain how those might enter into your considerations as to what the what monetary policy should be and when? You know, we have a kind of a longstanding view that we don't, you know, praise or criticize fiscal policy, we take it as a given for doing our own job. But when you're running 6% deficits, 3% primary deficits, we know that that's just not sustainable in the long run. How long is the long run? I don't know the old joke. I'll be dead before you find out, but we just know it economically. You can't do it persistently. It's just not going to happen. So that has general concerns. The hour star speech I gave back in Iceland was if you think about. Our start government debt, which is the closest thing to should matter for me and reserves. It's a race between the growing demand for U.S. Treasury debt and a growing supply. For the last 40 years, demand has outstrip supply. And what does that mean? Prices go up. Yields go down. At some point, if that reverses and the supply starts exceeding demand, the only way you're going to get the markets in the world to hold that stuff is you lower the price, which means the yield is going to go up. So for me, having good stable fiscal policy is the best way to ensure that you don't have that happen. But again, this is not under my control. That's up to the, you know, Congress, White House to think about fiscal policy. That's it. That's just my view. QUESTIONER Sir. Marker's an adventurer and growth capital A. Yolanda Waller, you talked about A.I. and you said that you thought short term it could have some risks for the labor market. Long term, it was good for productivity, but a lot of forecasters are predicting that it will be negative or the labor market longer term, that it will reduce jobs. How does that impact monetary policy? How does it impact your dual mandate and how do you think about it generally? Right. So that's what we're saying. Is this a structural or a cyclical phenomenon with AIG? So if you think about labor, labor demand and employment just over time just grows with the economy. What I worry about is I being a structural there's this like this one time permanent drop in the level of demand. The question is, does it continue to grow at the same rate as before? In which case it's just a level effect employment growth and everything you'll continue on in the future? Or does it drop? And then it just stays flat. It not only drops in the level, but it has a lower growth rate of employment. I, as a policymaker, cannot do anything about that latter case if it's just the fact that there is this kind of cyclical movement in labor demand, that's what I'm designed to have some influence over. But if it's a sharp structural drop out, you know, lowering the Fed funds rate 50 basis points isn't going to isn't going to overcome that. And that's what we're trying to figure out is going to happen. Now, in the past, whenever we've seen technological change. I gave a speech yesterday on Amazon. You know, you see jobs going away, you know which ones are going to go away, but you never know what jobs are coming. And usually there's a kind of enough of a gap where there's the jobs are slowly going away. New ones are coming on. This time, what I worry about, it's so fast, it's happening so fast. And the jobs go way faster than we can figure out what the new jobs are. The new jobs will show up. I have no doubt about that. It's just the timing may be a little more disruptive than technology we've seen. Thank you for that question. I forgot to ask that. You saved me there with that question. Here's a footnote from the speech this morning. Technology that improves labor productivity leads firm to demand more labour, not less. A huge body of America doesn't agree with that. And to your point on innovation with the Nobel Prize, a celebration of the last 48 hours of Schumpeter and McGraw's prophet of innovation, this new innovation, the gains are going to go to a narrow group. Or do you think they will? This is attrition. They will diffuse out across America. Well, the history of technology is that they do diffuse. I mean, one of the things I pointed out speech yesterday, if you look back to Karl Marx's theory of capitalism machines, robots would replace labor to produce all the output. Everybody would lose their jobs, be unemployed. There would be this mass army of the unemployed. There would be a social revolution. Capitalism would die, and we'd have a socialist utopia. That doesn't happen. Right. I mean, when capital goes up, machines and technology go up, it makes labor more productive. And firms like productive workers. And that's why they want to hire them, because they don't want to keep their output constant. They want to produce more. And they need both of these things to produce more output. This is what we've seen in the history, certainly of the U.S. in the last 200 years. The capital stock in the U.S. is seven times larger than it was in 1950. In terms of machines, equipment, everything, the unemployment rate is exactly the same. So employment grows with technology. It's not it doesn't go negative with it. But to the president's point and arguably his election, a huge body of America feels let down. We had productivity, we had capital deepening of an extraordinary amount, and the jobs went to China. That's his theme with A.I.. Are we going to replicate that in some unknown way and the jobs are going to go to, you name the place. Well, even with the Chinese shark. Total employment in the U.S. has grown ever since the China shock. It hasn't gone negative or fallen. It's just go look at the employment rate. Go to Fred, my favorite data series, pull up employment. Look what it does. It just goes up. So, yes, there are reallocations. Jobs get lost and they go somewhere else or they get eliminated. But that's my point. New jobs, new things came up. People reskill, going to new areas. So when the China shock was hitting manufacturing, we had a whole I.T. software phone technology revolution, information technology that created thousands and millions of jobs. Is Fred an unfair advantage for the Saint Louis Fed? They wake up every day different than any other bank. Fred is one of the greatest gifts from the Federal Reserve to the planet. No, man, please. Hi. Ginger Cutler. I'm a term member at CFR. Well, ah, just what you just said about how unemployment is the same as it was in 1950 and the China shock didn't really necessarily affect employment. I, I guess I want to hearken back to what you said about where wealth is concentrated in the hands of Americans. Right. And how you said that what the bottom 60% of households own 15% of wealth and 45% of spending. I'm curious how that figures into what you just said about unemployment being the same as it was in 1950 and the China shock ultimately not really having an effect on the labor market. I'm curious how inequality factors into that. Yeah, so anyway, I was just trying to get at what employment you get sectoral shifts, some sector goes down, some other sector goes up. In my speech yesterday, I said, look, when automobiles came off, if you were making saddles or wagons, your jobs were going away. But those same skills got transferred over to privacy classes for cars making car seats, the same skills you just had to transfer. So those jobs went away, but other jobs came up and took their place. That's why you can't just look at one sector and say, Oh, that's going to kill the entire economy. I don't believe that's going to happen either. In terms of wealth and income inequality. This has been an issue in the U.S. for the last 40, 50 years. There's been a tremendous increase or reasonable increase in wealth inequality, income inequality. For me, as a policymaker, I have one instrument. I can't deal with inequality. It's really not in my toolkit. I can't say, here's an interest rate for this group, as Tom was saying. I can't say here's an interest rate without our star, and here's an interest rate with that. Our star. That's. That's not in my set. I have to look at the aggregate. It's really my only choice. Can I look at these discrepancies and think how I might want to lean one way or the other? Sure. Again, you know, we kind of got criticized for that before with our last framework that we were kind of leaning a particular way. It's it's there's nothing wrong with it. It's just we only have which is very little we can do about it. And that was my issue with our last framework. I could care about this, but there's very little I can do with it for particular groups. I think we have a question here in the digital world. We'll take the next question from Chris Thomas. Good morning, Governor Waller. Thank you for the time today. Ex intel ex McKinsey. Now I help global companies think about their global footprint and where they put advanced manufacturing facilities. And the constant refrain is that no matter how high the tariff, the U.S. is just completely uncompetitive. And now it's the most expensive place in the world to do business, especially if you're building something. To what extent is this matter for the growth and success of the U.S. economy? And is there anything that could be done about it? I've heard that even if it's a 100% tariff, it's still cheaper to manufacture in Taiwan or Vietnam or Japan or Korea or China than in the U.S.. Yeah. I mean, this is this is way outside my wheelhouse, I have to say. Know, trade policy, you know, particularly worrying about one sector over another, manufacturing versus others. This is just something I, I can't make those decisions on for the president got elected to do and he's following through on his promises. Whether you get stuff re on shoring or not? I don't know. We'll see. We did learn something with the pandemic that supply chains stretched across the globe are pretty fragile and there was a lot of emphasis on getting near shoring, maybe not onshore, near shoring. As a result, over time. You know, if tariffs were big enough, I'm pretty sure you'd bring your factory back. There is a price at which you will bring it back. It's not infinite. So that's what I don't know. We'll see how this all works out, whether there's a lot of incentives to bring stuff back or not, or whether the people that, you know, you bring these jobs back, whether people want to do them or not. I mean, in the U.S., we've moved into a much more of a service sector mentality. And the idea of screwing lug nuts on a tire for 8 hours a day is not something most Americans typically. I'm not going to ask you about bananas and tariffs. I don't think we're going bananas. So over here, please. I. Andrew watchers at Morgan Stanley. Governor Walter, thank you for your comments. I want to ask you to say a little bit more about what you are intending to convey with the phrase to a more neutral stance of policy. In a sense, if you're restrictive, just cutting ones is moving to a more neutral sense of policy, or is this describing sort of a process where over several meetings, the other idea of a range in mind that is more neutral and you're describing a process of moving towards that range? Yeah, I'd say it's the latter. It's really the process. So if you're at neutral and you think you're restrictive in your policy, it is set up here. What's going to cause you to bring it down? You think inflation is coming back to target? You think the labour market is either stable or weakening? You want to kind of bring it back towards neutral. It doesn't mean you go below and you want to stimulate the economy. Things would have to really get bad. We're not seeing that in the labour market that we want to go below neutral or I'm not saying and I can't speak for anybody else, but and the debate right now is about inflation. Inflation's running 3%. It's way over. Our target has been above target for five years. Four years. Why are you lowering rates? So you have to say what is the outlook for inflation? And that's what I argue, that any tariff effects are going to be temporary. You look, this is a classic line in central banking. You look through those things, you think about what is going to be inflation 12 months from now when the next one was. So that's what I'm doing. And in that world I see inflation coming back down to target. I see a softening labour market. So I want to bring things back to Target. I don't want to go below Target right now because inflation is above target. When Q&A, we go 2/10 of a percentage point. You were talking hole numbers up there. You say 2% is where the Fed is right now. What is the latest thinking you see around the raging debate? To take a Taylor rule, look at the output gap, look at NAIRU and all the rest of the mumbo jumbo and plug in a more normal 2.2 or 2.4 or 2.6% run rate versus the decades long hoped for 2%. Change the inflation target. Yeah. Yeah. I mean, there's always a good argument or debate about should you pick a point or pick a range. A lot of central banks, a world they run with the range. They don't seem to have big problems with that. You know, like the Bank of Canada has a range of 1 to 3%. So, you know, there's often a question of you're just as happy with 3% inflation as 1%. Should we be all should we want to? But they're not going to do crazy stuff to get it to do it. That's the key point. You'll get there. You'll take your time, which you're not going to do drastic policies to drive it to exactly two. I think two is a good thing. They are giving my spiel on what's the real value of having a 2% target with a particular price index. It hold you accountable. If I just said inflation in general somewhere between one and 3%. There's a lot of loose things that go on in there that I can always slippery slide say I'm. I did my job. What are you talking about that happened with the money growth targeting back in the early eighties and one was pretty good but M2 was lousy. But next month, M2 is. Remember how the world stopped? I think it was Thursday whenever it was 330 for M1. M2 is money growth. So I like 2% because holds me accountable. Okay, Now you want to hold me accountable because it's 2.2 instead of two. Come on. That's where range kind of helps. I always like to tease my. Friends and things. In the year 2000. If I had told you the Fed would keep inflation between one and 2% for a decade. Everybody in the year 2000. That is a phenomenal monetary policy success. But because it ran 1.7, we didn't hit two. It was a failure. Think about that. 1.7, not two, was a failure. But if I'd asked you before any specific 2% target, you said one or two. That's amazing. That is phenomenal. Manager. So that's the danger with the 2%. It's so precise. And if you don't hit it, you start saying you're failing and hitting your target. That's why I actually kind of, like, arranged myself. I want to talk one final question here for me about the culture and the fabric of America and our economics. There is such a conceit and bias and a distrust back to 1907 or even before, of three zip codes in Manhattan or maybe the corridor from Washington up to Boston. You represent a part of America. Some would say the backbone of America. From Bemidji, the Dakotas, Bemidji, all the way out to Washington State and then to Saint Louis. How would the Federal Reserve System change under a chairman Walter? Given that cultural geography versus everyday the East Coast certitude, it's the heritage of the modern economic Fed? Well, I mean, this is one of the brilliant aspects of the design of the Fed. I've studied the structure of the Fed for 40 years now. The whole idea was to say, look, you need some political accountability in D.C., but you want to have a lot of this outside of D.C.. That was the typical grassroots. Get people away from D.C.. Talk to the American public. I always say we're the one government agency that has contact with all parts of the US who are are our 12 districts. All the branches in those districts. Everybody can come talk to a president of the bank. They go out, they go out regularly, speak to the public. You can come time from you can have a conversation with somebody. I mean, the only other institutions that have that kind of contact are the IRS and the post office. We typically don't want to have them knocking on our door. So that's one of the big advantage of the Fed in our structure of having people on the outside. There has been debates forever of moving more political accountability to the Fed or moving it away. Sometimes people's views shift back and forth depending on what the situation is. But I believe the basic structure that we have is has served the country well by representing all the country. In the decision making process, just not a few handful of the weeds in Washington, Washington, D.C.. So that I think is important, I would say. Like I said, for me, one of the critical things I'd change the ACP. I would encourage that, since I'm not somebody who's afraid of like, oh, if you're dissenting against what I'm pushing, that lowers my confidence or could not be so much better. So by four votes, it'll be, you know, be I highly recommend lots of dissents. It'll make the Fed's show better. Well, I just think that's the whole point of it. That was the idea of the structure was you put 90 members, so you get this diversity of views from around the country coming in, different points of views. If everybody comes in, no matter what part of the country, no matter what the situation is, and you always say the same thing, we don't need it. You know, you just have four, three governors and that's it. If board, you're done with everything. Governor Walker, thank you for joining the Council on Foreign Relations.