Fed’s Waller on Labor Market, Rate Cuts, Inflation, Fed Chair

Summary

In this detailed conversation, a key figure discusses the current state of the U.S. labor market, inflation, and the potential impact of tariffs. While acknowledging some positive signs in corporate America, they express concerns about underlying private sector data and the risks of waiting too long to cut interest rates. They delve into the relationship between tariffs and inflation, arguing that tariff increases won’t have a lasting inflationary impact, but ongoing tariff hikes could cause more problems. The dialogue also touches on the Fed's internal dissent and the challenges of navigating political pressures while maintaining economic credibility.

Takeaways

• 😀 The labor market's private sector is struggling, with most employment growth coming from the public sector.
• 😀 CEOs are adopting a wait-and-see approach to hiring, neither firing nor hiring employees, contributing to stagnant private sector data.
• 😀 Immigration might not be a major driver of labor market changes, as immigrant workers are entering and exiting the workforce without significant impact on unemployment rates.
• 😀 A 10% tariff increase is unlikely to cause persistent inflation, as firms typically absorb some of the cost through their margins or pass it on to consumers in small increments.
• 😀 The Federal Reserve's commitment to rate cuts is uncertain, with some members advocating for cuts, while others stress the importance of discussing and debating before making decisions.
• 😀 Dissent within the Federal Reserve is considered healthy and necessary for diverse policy perspectives, but dissent should be based on clear economic arguments rather than routine opposition.
• 😀 The debate around rate cuts is linked to concerns about the labor market, with some arguing that waiting too long could harm the economy, as seen in the past when delays led to worse economic outcomes.
• 😀 Tariff increases, if not rolled out gradually, could lead to ongoing inflationary pressure, but this risk only arises if tariff hikes continue in rapid succession without stabilization.
• 😀 Inflation psychology could affect consumer behavior if tariffs are increased in multiple waves, as this may reinforce inflationary expectations over time.
• 😀 Despite concerns over market-based inflation expectations, data indicates that inflation remains anchored, suggesting that short-term price changes from tariffs do not lead to persistent inflation trends.

Q & A

Why does the speaker believe the labor market is not as strong as it seems?

The speaker points out that while headline labor market numbers appear strong, a significant portion of employment growth is in the public sector, not the private sector. This suggests the private sector is not performing as well as assumed.

What metaphor does the speaker use to describe the potential risks in the labor market?

The speaker compares the labor market to walking on a frozen lake: while it might seem safe, the cracks in the ice indicate imminent danger, signaling that it's better to prepare in advance rather than waiting for the collapse to happen.

How does the speaker describe corporate America's approach to hiring?

Corporate America is in a holding pattern, where companies are neither hiring nor firing but are just 'watching' the labor market without making significant moves.

How does immigration impact the U.S. labor market, according to the speaker?

The speaker suggests that immigration does not significantly affect the unemployment rate, as immigrants enter the labor force at the same rate as existing workers. Any labor force changes due to immigration are balanced out by workers leaving the workforce.

What is the speaker's stance on the potential negative effects of immigration on the labor market?

The speaker argues that immigration is not the source of labor market issues, noting that the unemployment rate for new college graduates is relatively high, indicating that job openings are not due to a lack of immigrant workers.

How does the speaker view the role of dissent in policymaking within the Federal Open Market Committee (FOMC)?

The speaker believes that dissent is an essential part of policymaking, as it promotes healthy debate and ensures that decisions are made based on solid economic arguments rather than groupthink. Dissent is encouraged when it is based on well-thought-out reasons.

What is the speaker's view on the timing of a potential rate cut?

The speaker argues that delaying a rate cut until September could be risky, as waiting too long might result in missing the opportunity to address economic issues in real time, potentially causing more harm.

How does the speaker interpret the potential impact of tariffs on inflation and the economy?

The speaker believes that the impact of tariffs on inflation is temporary. Economic theory suggests that tariffs are a one-time price effect, and the inflationary impact will fade over time as the market adjusts.

How does the speaker address concerns about rolling tariff increases?

The speaker acknowledges that continuous tariff increases could lead to persistent inflationary pressures. However, they argue that if the tariffs are kept at a consistent level, their impact will remain limited and temporary.

What does the speaker suggest about the relationship between monetary policy decisions and long-term interest rates?

The speaker notes that long-term interest rates can rise even if the Federal Reserve cuts short-term interest rates, especially if economic data shows stronger growth. This happened last year when long-term rates increased despite rate cuts, as the economy performed better than expected.