SPECIAL WSJ’s Take On the Week: How This Fed Hawk Views the Economy, Inflation, AI and Jobs

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0:35Hey, listeners, Christopher here. We've got something special for you today. The latest episode of WSJ's Take on the Week. Our general colleague, Telus Demos, sat down with Beth Hammock. She's the president and chief executive of the Federal Reserve Bank of Cleveland, A bold name, if ever there was one. They had a fascinating conversation about jobs data, inflation, tariffs, the role of a Fed chair, and future interest rate cuts. We'll be back with an episode of Bold Names later this week. But until then, we hope you enjoy this conversation and check out more from WSJ's Take on the Week wherever you listen to podcasts.

1:22Welcome back to another episode of WSJ's Take on the Week. I'm Telus Demos. We finally got another batch of vital government economic data this past week, but what came out of it was a pretty mixed bunch of signals. You had the unemployment rate rising unexpectedly to its highest level since 2021, but the number of jobs created beat expectations. The consumer price index was a little lighter than people expected, Yet Wall Street investors are taking it with a grain of salt, as the journal put it in its coverage. Now it's the job of the Federal Reserve to sift through all of this noise and figure out what should happen next with interest rates.

2:01Should it cut again? Should it hold steady? Joining us now are two guests to discuss it. One is the Wall Street Journal's chief economics correspondent, Nick Timuros. Nick, welcome. Thanks for having me. And the other guest is Beth Hammock. She is a former top banker at Goldman Sachs and now is president of the Cleveland Fed. And next year, she will be a voter on the Fed's rate setting committee. Beth, welcome to the show. Thanks so much for having me. So, Beth, you are by reputation one of the Fed's hawks right now, meaning that you haven't supported recent rate cuts. And now we are recording this conversation just a few hours after the release of the November CPI report.

2:40What did you make of those numbers? Well, I don't make too much from any one individual report. We try to look at the whole constellation of the pictures that comes together. And it's great that we are getting that gold standard BLS data back again. But I expected it, and I think most participants expected that number to be a bit noisier given the government shutdown and given that they weren't able to be out there sampling a lot of data. So when I look at some of the estimates of how you might want to correct that number given that noise, it puts it closer to that 2.9, 3 % number that we've been running at for CPI for some time now.

3:15And so, of course, it's great to be getting this official data back. It's only one of the sources that I use when I think about how I should be directing monetary policy. Of course, I'm spending a lot of time out in the district meeting with businesses, talking with them to understand their perspective and looking at our forecast of where we think the economy is headed. I was at a dinner just last night with a group of CEOs who was talking about both on the labor side and the inflation side. And what I heard broadly was that employment is still, it's still hard to find workers. It's not nearly as difficult as it was a couple of years ago, but there are still struggles in pockets, particularly in the manufacturing sector and in the skilled trades.

3:54Those are two areas where I continue to hear troubles. On the pricing side, I do hear that businesses have done a lot of work to try to maintain their costs, and they've used technology of a variety of different sorts to try to help offset some of those pressures, but their input costs continue to go up. And that's something that they're feeling. And it may mean that they're going to be raising prices again in the first quarter of next year to help offset some of those input cost pressures that they felt. So while it's great to get this official BLS data back, I do take it with a grain of salt.

4:25And, of course, one individual report is never going to be transformative in terms of my thinking. It's just one piece of the puzzle. So, Beth, I get that you're taking the price data with a grain of salt. This week, we also got employment data. It showed that through November, the economy's adding jobs, particularly private sector employment, three-month average is up from where it had declined in the summer. But the unemployment rate has crept higher now with each month since the summer. We almost hit 4.6 % this week for November. What's your read on the labor market? The labor market has been gradually cooling.

5:03What I've seen is that we had a big shift over the late summer from the larger headline payroll numbers to these tens of thousands. I think we're running somewhere around a 60 ,000 average over the past several months. And again, this one individual report, I don't take too much of it. Of course, this was two reports that we got at once because of the government shutdown. And there was a big swing between October and November, given that the retirements for a number of those government workers showed up in that October data. And so I'm not taking too much from that. Again, what I'm trying to look at is the broader constellation, leaning on the stories that I'm hearing from people out in the district.

5:43I am hearing that recent college graduates are having a tougher time finding opportunities, and that's something that we're seeing show up in the numbers. And so it does look like, given the very significant shift that happened with the immigration flows, that it's possible that these lower levels, this 60 ,000, 30 to 60 ,000 kind of average job creation might be enough to keep a more stable unemployment rate. Just like the inflation numbers had some issues with sampling on the payroll side, we expect that there was probably some noise in terms of the groups that they went to for getting that data as well.

6:19And so that might have had some slight upward bias to it. But again, it's just one number. And I want to take some time. unfortunately, we have a lot of time before our next meeting to see how the broader picture comes in. Is there anything from the reports we got this week that would have changed anything you wrote down in those projections last week or that you would have shared around the table last week? Did these reports change your view of the economy compared to where we were just a week ago? It's a challenging time for monetary policy. We're being pressed on both sides of our mandate. I I think you've heard Chair Powell talk about there's no risk-free path.

6:53We are seeing a labor market that's been gradually cooling, but it doesn't seem to me that we have signs of a more material movement around the corner. I have pretty optimistic growth forecasts for next year, which align with a lot of street forecasts and other professional forecasters who are looking at next year and thinking that we could have north of 2 % GDP growth. So it's hard to reconcile that strong GDP growth with this cooling that we're seeing in the labor market. But it doesn't feel like we're at the precipice of some more material weakening that would be something I think that we would need to ease into.

7:25On the other side, we have seen inflation that's been missing our target for almost five years. We've been stuck around this close to 3 percent level for the better part of a year, 18 months. And we took some steps over the past quarter to reduce interest rates. We took 75 basis points off of the policy rate, which should help support that labor side of our mandate. But we do need to be mindful. I'm very focused on making sure that we can get inflation back to target. That is one of our primary objectives. And it's important that we complete the job. So I don't know if you thought about it like this when you were at Goldman, but the Fed thinks about setting interest rates relative to some estimated neutral level that neither restrains nor spurs the economy.

8:11And you've said that you think we might already be at that neutral level. Why do you think that, given that we've seen weakness in some of the rate-sensitive sectors of the economy? And are you worried that cutting rates below neutral here, that we might end up providing too much stimulus into the economy? So the neutral rate is unobservable. It's one of these tricky things for us as monetary policymakers, because you do want to have some sort of a North Star that you can judge policy against. But it's completely unobservable. So it's a purely theoretical construct. And the way that I think about it now, the way that I thought about it when I was in markets really comes from just seeing how the economy is performing.

8:56When I look broadly at what's going on in the economy, I do see a slightly cooling labor market. I see inflation that's too high. And I see pretty healthy growth numbers. When I look at financial conditions broadly, you've got equity prices that are pretty optimistic. We're trading at or near all-time highs. You've got bond yields, that, to my mind, are not particularly high. I grew up in the 90s when interest rates were between 3 % and 6%. So 4%, four and a quarter, 10-year notes is kind of a, to me, feels like a pretty neutral type level. You've got credit spreads that are reasonably tight. I don't hear from businesses when I'm out talking to them that the financial conditions or the availability of credit is restraining their ability to grow.

9:40And so to me, it seems that we're in that zip code of neutral. I have one of the higher estimates of neutral on the committee. And so to me, it feels like we're at maybe a little bit below my estimate of neutral. But I think policy is in a good place right now for us to take some time and see the impact of those three rate cuts that were made towards the end of last year, see how the economy performs in the first quarter. There'll be a lot of new variables coming to play. We have the recent fiscal bill that was passed over the summer. There'll be some positive boost, I think, happening in the economy coming from that.

10:11And it'll be important to see how the tariff story plays out. We'll be nearly a year on by the time we get to March. And so I think by springtime, if it really is a one-time price level shift, we should start seeing inflation coming back down again around that time towards the end of the first quarter. So I think it'll be pretty soon that we'll be able to see more how the economy is unfolding, and it'll give us some good insights as to whether we need to lean in more to that labor side, because that softening is continuing or whether inflation is really being persistent above our target. And that's where we need to focus more.

10:47We know that a lot of consumers certainly have felt the pinch of interest rates in what they pay on their credit cards. Certainly mortgage rates are too high for some people's liking. But you recently hosted a conference looking at financial stability and talked a lot about the rise of private credit. There's essentially a boom in lending going on in some parts of the financial markets. And I'm wondering how much that plays into your view on the looseness of overall financial conditions, even at these rate levels. Does that suggest a neutral level when you're seeing all these firms really grow their lending activities to quite unprecedented levels in some parts of the financial system?

11:29Well, the capital markets are very healthy. What I hear when I'm talking to investment banks or market professionals is that the capital markets are very robust right now, whether that's on the equity market, you're seeing IPOs come back, whether it's in debt financing, whether it's in private credit or other forms. I think there is good activity that's happening, and that's constructive. That means that businesses and households can borrow when they need to borrow. Mortgage rates is a tricky one. People focus very much on this. Obviously, that impacts your own pocketbook when you're making your mortgage payments.

11:59There are a lot of people out there that had these two and a half and 3 % mortgages that they took on during the pandemic, coming out of the pandemic. And with mortgage rates now around 6%, to some people, that feels high. But I talked to other people who got their first mortgage in the 80s or early 90s, and those had double digit percentages. And so really 6 % isn't all that high in the context. The other thing that I would caution on the mortgage rate side is that if you look at an environment that would get us back down to mortgage rates of two and a half or three percent, it's probably indicative of something really bad happening in the economy.

12:34We really only get rates down to zero percent when we have very significant issues that needs material easing to help offset it. And when you have rates that are that low, it will elevate housing prices as well. And so it's a complicated set of factors to consider. You know, there are some signals that in, you know, other parts of the Federal Reserve's responsibilities that there's, you know, a push toward, you know, lighter capital requirements or some deregulation on kind of banking requirements and things like that. Is that also sort of stimulative of, you know, lending and financial markets activity that would play into, you know, whether or not those rates are neutral?

13:16are neutral? It certainly could be. I mean, banks are one of the key vehicles for providing credit through the US economy. And so to the extent that their capital requirements or liquidity requirements are reduced, which hasn't happened just yet, but certainly is a topic of conversation that the vice chair for supervision has been thinking about, that could put more of an impetus into that lending to make it easier for businesses to find credit availability. I do think it's important, given where we are right now from a monetary policy perspective, from an overall economy perspective, this is a challenging time, right?

13:53We've got challenges on the labor side, we've got challenges on the inflation side. And so to me, it's important that we maintain a somewhat restrictive or neutral stance of policy so that we don't over stimulate the economy and potentially reinvigorate inflationary concerns. I don't think we're at a level right now that's at risk of doing that, but it's something that we should continue to watch closely. And I do think that the regulatory backdrop is certainly one of the factors that I put. It's hard to quantify, but it is something that I put into my framework as I think about where we are from an overall neutral perspective.

14:28Beth, it maybe didn't get as much attention, but the Fed last week said it would begin to allow its balance sheet to grow after having allowed it to passively contract for the last several years and through November. Now, some in the markets worry that bank reserves might have gotten too low, which could create undesirable pressures, funding pressures for financial institutions around certain payment dates. On the other hand, there are some leading voices, including the Treasury Secretary, who have argued that the Fed's balance sheet is still too large. Now, you bring a valuable perspective here because you worked at a bank funding the bank and you weren't at the Fed.

15:06You don't have the scars of 15 years of debates around how large a balance sheet you should have. So how do you see the pros and cons of the current monetary implementation regime? And do you think there should be a push to make the Fed's balance sheet smaller? Well, the action that was taken last week is really a technical adjustment. We've said, The Fed said back in 2019 that we wanted to operate in what we call an ample reserves framework, an ample reserves regime. That means that all the banks and financial institutions can have access to however many reserves they deem appropriate for them.

15:41And we're helping to set monetary policy. We're helping to govern interest rates based on administered rates rather than having to be in the market doing open market operations. We got to a level that was around ample. Ample is not one specific number. It's a range. We got in that zip code of Ample. And so it's appropriate that as the economy is going to grow, the balance sheet needs to grow alongside it. If you look at where the balance sheet is and you look at some of the key components, reserves is a very big one, a very big portion of it. The Treasury General account is another. And currency in circulation is the other.

16:14Currency in circulation now is around$2.4 trillion. And so it would be impossible to take our balance sheet below that unless we were destroying currency. And so to go back to a balance sheet that looked like something around 2007, where the balance sheet was, you know, much, much smaller, would require significantly less currency in circulation. It would require a different operating regime where banks were not as able to have reserves as freely. And I think there is real financial stability benefits in the banks being able to have reserves at the level that they deem appropriate. It allows for payments to move more fluidly throughout the day.

16:52And it doesn't put pressure on them to make last minute funding choices. So I think it is a service that is inexpensive for the Fed to provide reserves to the banks. And so it's appropriate for us to do that and keep in this ample reserves framework. You were in that seat at Goldman Sachs in the treasurer's role back in 2019, right? during what was, we call it now, I guess, the repo rate spike episode. And we just talked about it a couple weeks ago on this show with Bank of New York's Nate Werfel, who was at the New York Fed at the time. How much does that episode kind of live in your memory? Are there scars from that?

17:30And is that something that you think that the Fed should be really, really, you know, invested in avoiding again? Or do you think that, look, those things might happen, but ultimately there are bigger considerations? Well, I certainly remember it having been in the Treasury seat and having been a former money markets trader as well. So I do remember very vividly what happened in the markets around those days. And it was a disruption for a couple of days. It wasn't something on the order of magnitude of what happened in March of 2020. I was treasurer for that as well. And that felt much more significant and much more interconnected, much broader financial stability.

18:07What happened in September of 19, to me, felt like a technical issue. The good news is that we are a learning institution. We continue to evaluate and assess market dynamics and stay in touch with market participants. And so it's important that we continue to understand how the actions we take are impacting the markets broadly and making sure that policy is being implemented in the way we expect and want it to be. We're going to take a quick break. And when we come back, more questions for Beth Hammock of the Cleveland Fed.

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19:16Beth, you've been at the Fed for a year now. What have you learned about the job of being the Fed chair? And why does it matter who has that job? The Fed chair is an influential role. Like the chair of almost any committee, they're the leader. They're the person who helps set the tone, set the agenda, and determine the items that we're going to focus on. One of the things I love about being around the FOMC table is you have 19 participants with very different backgrounds, coming from very different walks of life, who are all bringing their intellect, their insights, their experiences to bear on behalf of the American public.

19:54And so it's a great environment for discussion, for debate, for healthy back and forth. And I think the chair sets the tone for what those conversations can look like. I have enormous respect for Chair Powell. I think he's done a great job at bringing the committee together, trying to set direction for us, but allowing everyone to have their perspectives and making sure that all those viewpoints are represented. A lot of conversation about the U.S. dollar lately has been around interest in the future of the Federal Reserve and its credibility and on continuing to fight inflation. People talk about de-dollarization as one outgrowth of that, a lot of investors investing abroad.

20:38Do you think that's a legitimate concern? Well, the independence of the Fed as it relates to monetary policy, I think, is of critical importance. There's a tremendous body of research that shows that independent central banks deliver better outcomes on both the employment and the inflation side over the medium to longer term. And so maintaining that independence to be able to deliver those outcomes to the public is really important. To me, having an independent Fed means that you will have more stable inflation. And having stable inflation, low stable inflation, allows businesses and households to plan for the future.

21:08And so it helps to be the basis and the foundation of a solid, healthy, growing labor market as well. And so to me, having that independence where I'm focused on the data, I'm focused on my forecasts, I'm focused on the balance of risks, and I'm focused on the stories that I'm hearing from around the district, that's what it means to have an independent central bank, that those are the factors I'm considering when setting policy, and I'm not thinking about short-term political pressures or other noise that might be happening outside the room. You know, the structure of the Fed's interesting because a lot of that independence comes from the 12 Reserve Bank and their presidents who are not appointed by anybody directly in Washington.

21:43There's been increased focus recently on the role of the Reserve Bank presidents. Now, you and almost all of your colleagues were reappointed earlier this month to new five-year terms, but Treasury Secretary Besant has argued recently that regional presidents should have roots in their district and should not be transplants from New York. You came to this job from New York, so he may have been talking about you. Does he have a point there? Should the people who have jobs like yours have some ties to their district? So it's important to remember that every Fed president is selected by a local board of directors that's made up of community members and leaders from that region, whether it's Lexington, Kentucky, Northeast Ohio, Cincinnati, Pittsburgh, West Virginia, around the district, that's where they come from.

22:38And so it's those leaders who select, they choose the person they want to lead their institution. It's, I think, important to be connected to your district. It's important to build relationships. And that's been something that's been really fun for me as I've relocated to Northeast Ohio. My husband actually grew up here. His family's here. So we have a lot of connections in the district already. But it's great to get out and get to meet businesses. There's nothing in the Federal Reserve Act that says where presidents need to come from. And I do think it's important that those boards have the ability to choose people that they feel can really represent their interests appropriately.

23:16I want to ask you about something that is certainly on the mind of investors right now as they think about 2026, and that's artificial intelligence. Certainly the markets are wrestling with how big companies and the US markets will deal with this transition. How much does AI and the impacts it might have on employment, on productivity, factor into the way you're thinking about what interest rates should be doing over the next couple of years? Yeah, it certainly is a topic of conversation that is impossible to ignore. Almost every meeting I have with a business leader comes to AI at some point in the discussion.

23:50And you're right, it is multifaceted. It's having impacts on the bond market in terms of the funding that's happening to build these data centers. It's having impacts in energy markets. We hear very often from leaders of energy companies that power generation is not going to be able to keep pace with the point of growth. And AI could have impacts on jobs. What I tend to hear most when I'm out with businesses is that it will be a complement to their workforce rather than a replacement. but of course it's going to vary depending on the industry that you're in and how it's being approached. And it is something that I want to watch closely.

24:26I don't see it showing up in the numbers yet. Some of our team at the Cleveland Fed have done some analysis to see, are we starting to see the impacts of AI in the labor market? And we don't see clear evidence of that yet, but it's always very hard to know when you're at the beginning of one of these stories what those impacts are going to look like. And so all of those will be big factors. And of course, the productivity story, which could have an impact on our star, on that neutral rate that we talked about earlier. That could be more upward biased if this is having more material productivity impact.