Kansas City's Fed President on What Everyone Will Be Talking About at Jackson Hole

27:10I think you're going to see a reskilling in a lot of these job areas as some of the jobs that can be done by a more artificial intelligence technology are going to shift to much more, let's say, intellectual or behavioral-based job skills going forward. So I think here again, I think that's the message I give to our business associates in the 10th district is tell us how you're reskilling your workforce, because I think that's where AI is going to really play a big role. You can't be static in the job you're doing. You have to reimagine that job with new technologies. You know, you mentioned markets earlier, and clearly there's a lot of enthusiasm about AI still in the markets.

27:57And that's one of the reasons we've seen stocks, you know, hovering around all time highs and credit spreads are now at what, like a 30 year low, basically. Talk to us about where you see rates at the moment in terms of their restrictiveness, because some of your fellow Fed presidents will say that they think rates are still restrictive. And then when I look at something like credit spreads at, you know, a three decade low, I think actually this doesn't look that restrictive to me. And with inflation still above target. How restrictive are rates at the moment? Yeah, it's a it's a great question.

28:36And I've been very public. I believe they're I would call them modestly restrictive. They're not overly restrictive. And I think that what we have to be careful of is kind of rebasing our decisioning on rates. And I think the markets do this because, look, I'm a former banker. Bankers and bank clients, they love low credit rates. They like lower rates because they can perform better on their capital base. So I understand that piece. But I think we talk about being range bound to a degree. I like to think about, you know, I love the 90s, right? So if you think about how hard the 80s were, as we emerged into the 90s, we had a technology surge.

29:17And if you watched or looked at the nature of the economy, it performed really well, but there were monetary policy became a bit of a wave. So you would start to make decisions where if you saw things happening in either your dual mandate, you're keeping stable prices and full employment, you would adjust that policy rate. And when things got maybe a little bit hotter and then as they cooled, you bring them down. But it was a nice range bound process. For me, the experience of the last, let's say, two or three shocks. So you had the 08 shock. You had the 2020 pandemic shock. You know, you're pushing rates down to de minimis levels.

30:00You probably don't want rates down there that low because if they're down there that low, you're trying to pick something off its back. And so you're trying to create a rate environment to create stimulus. So I think right now we seem to be in a really good place. And so, you know, it almost becomes more difficult in the debate on rates, whether they should be higher or lower when you're at the margin versus when you're trying to use monetary policy as more of a blunt force instrument to try to pound a high inflation rate down like we did in the 22-23 cycle. So it's actually going from kind of a blunt force tool to actually more surgical.

30:46And then the debate gets very interesting about where that you should turn those dials relative to the data that you're seeing. So it actually becomes more difficult when you get on the margin in that range bound area versus when you're trying to really sledge the economy on the inflation side down. So Tracy mentioned that estimating the neutral rate of interest is a sort of difficult concept in any period. But there is this view that the neutral rate of interest today in 2025 is significantly higher than it was in 2019. And probably some of the best evidence for that is the fact that even though the market is anticipating rate cuts in the short term over the next couple of years, that the long term rates still fairly elevated, curve steepened, higher rates for longer.

31:32What changed? What's the difference between 2025 and 2019 such that it looks like the neutral rate of interest is so much durably higher? Yeah, Joe, this is really interesting science. With the policy side of our mandate, we have some influence on the short end of the curve, right? So taking the long end, the whole concept of the long rate, it has what we call term premiums in it, right? And you have to kind of sub... Joe doesn't believe in the term premium, for the record. But I do, I do. I'm not sure. I don't know if I believe in it, but I think there are pieces of a long rate that have sections of it that the market is going to try to digest.

32:18Tracy thinks that I'm a complete crank, but every once in a while we get a guest who's like, you know, there's something to just, no, no, no. Every once we get a guest who will say, you know, it's a nuanced thing, which it is. We all agree. Keep going. Keep going. Okay. So, so, so what I, I try, what I'm trying to do with, let's say the concept of the long end of the curve is you've got issues of, okay, some of the market's going to say they're going to be influenced by the prospect of inflation because you have to build a price into the long rate for inflation. Some of them are going to say it's a demand and supply issue with the debt that's trying to be financed, both government and private debt.

32:56The nature of that long rate, there's pieces of it that are going to influence it. It's interesting. I talk about the Fed balance sheet quite a bit. It's hard to second guess what we did in the 08 and 2020 cycle with our balance sheet relative to trying to keep the long rate somewhat in submission. So actually the duration of our balance sheet is influencing the long rate to some extent, which I think is in a positive way. So when you think about it, the treasury duration is about four or five years. Our balance sheet's about a little over eight years in duration. So that's that quantitative twisting that people talk about.

33:40So we're actually influencing the long rate a little bit in our balance sheet in a positive way. But I think over time, as long as the market believes that debt can be financed and there's not a lot of inflation expectation, you're seeing the long end of the curve drift downward.

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34:55The point is, you're engaged with your investments, and public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously. Go to Public.com and earn an uncapped 1 % bonus when you transfer your portfolio.

35:56That's public.com. Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. So I'm going to go to what I think, you know, what is maybe the hot button topic of the moment. The formal theme of this year's Jackson Hole is, of course, about the labor market and various trends. The subtext theme, and I think this is going to be a lot of interest, is the attacks on the Fed and concerns about central bank independence.

36:36Just to your point about what's driving that long end of the curve, if there are concerns that the political will is no longer there to keep an independent central bank, if there are concerns that in the future that the Fed will more be at the beck and call of elected officials, could that also be a factor in driving up the long end of the curve as investors may rationally presume that a future Fed may not be as committed to stable prices as the current Fed? Wow, that's deep, Joe. Actually, there's such an onion in what you just - I know, I know, but I'm trying. So strip away all of my throat clearing, which I felt was necessary.

37:17If there is concern that there is no longer the political will to maintain an independent central bank, that there is concern that a future Fed may not be as committed to inflation fighting as it ought to be to keep that 2 % goal, could that be a factor driving up rates at the long end? Peel the onion for us. We have time. Okay. So the quick answer is, I don't know. I guess I wouldn't, I don't see or hear that. Acknowledge the debate, Joe. And I believe, look, our country's going to be 250 years old next year. It's still the great experiment. It's built on work and legislation. And what's fascinating to me is the issue of Fed independence, it's codified, right?

37:59So, you know, we have a mandate. It's legislative. That legislative authority can shift and change. But it's hard to argue the efficacy of the independence piece. I mean, I think there's a bit of perfection in me being able to go to a table with 18 other really committed and bright people to try to keep this economy on a level rail. You know, I talk to people about the economy being this big, very massive train, the largest, most powerful train, economic train in the world, 30 trillion dollars. And you've got administration and a Congress that really is running the train where the American people are riding on that train.

38:43Now, for the Fed, the Fed is not the train. The Fed is actually the rails. It simplifies to me to think about the two rails being stable prices and full employment. And for us, it helps us not to have to worry about the market or the politic of things to try to keep the rails steady and level so that train can go fast. And so the nature of what we do in those two rails and the decisioning we do is really more balancing than it is trying to shoot towards some predetermined place. We know 2 % is a good place to be for inflation. I think time has tested that. We know full employment is a really very positive friction to the stable price mandate.

39:37So kind of getting back to the independence thing, healthy friction in the conversation just makes the republic stronger, in my opinion. So I'm happy with the debate. I'm happy to express it. But frankly, it's it's less important that I express it as what you and your listeners believe that independence does to this to the decisioning of that massive economy. I think it works. I think you see other countries that disentangle it to the body politic. And I think it's very difficult to keep economies level set when you don't have that independence piece. Well, on this topic, let me ask, I guess, a blunter independence question, because Joe's right that this is, you know, this is the unofficial theme of the conference, I think.

40:27And you yourself have previously stressed the importance of Fed independence. So are there steps that the Fed should be taking in order to not necessarily improve its independence or even protect its independence, but to convince people like us and the markets that it is truly making decisions independently? So the proof is in the pudding about, you know, how is our policy action affecting the level setting of those rails? And so, look, we should be held to task that are we making decisions that are rationalized on sound data and that they are in compliance with the congressional mandates that we have.

41:11And so we are kind of duty bound to that framework. And so I would say there's a measure of perfection in the fact that even in the Fed structure where you've got seven board of governors and 12 reserve bank presidents, where the nature of just how those individuals are seated with, let's say, Senate confirmation, a White House nomination for the board of governors, and then the 12 reserve banks having their own in-market, in-district boards that really kind of act as a ballast to the whole independence architecture. So I actually think that the nature of how it was structured in 1913 is still effective today.

41:55We're just continuing to learn about how to make policy better relative to the cycles in the economy. Think about the 20s and 30s. Think about the 1970s and 80s cycle. We're still learning as a body to get this right because we've got this amazing economy, 30 trillion of 100 trillion. And if we're healthy, the globe can be healthy. And that's the way I see our role. And that's why I think independence matters. All right. I have another question that I forgot to ask Mary Daly. And I've been thinking about it and I was like, okay, now you're here. At the most recent Fed decision, there were two dissents, which is not crazy to have dissents happen, but they're like fairly rare, et cetera.

42:42Why are dissents rare? How would you articulate why dissents are rare? Because I think this again could be relevant in the future, depending on who the next Fed chair is. Are they rare because generally speaking, you and your colleagues roughly arrive at the same view of what's appropriate policy? Or are they rare because historically, when there is some marginal difference, the regional Fed presidents and the other governors tend to defer to the judgment of the chair? Yeah, I love that question. And so I'd maybe frame it in a couple of ways. One is, I think in a lot of ways, dissents are healthy.

43:21I think there are times when we get kind of criticized as being kind of fed speak, you know, that they're always aligned. That doesn't make sense. And by and large, like one, two is rare. Sometimes there's one frequently is there. So what's the reason why generally speaking, they are pretty rare? So here again, we're at the margin on things like the policy rate today. So the data could shift people's opinions one way or the other on the dual mandate relative to their vote on dissent or not. So I think the two dissents were fairly rational public statements about concern about the labor market and the labor force.

44:02There was great debate. And so you're trying to figure out where do you settle on the debate. The other influence really is the chair. I've worked with Jerome Powell for a couple of years now. He's a principled, he's committed. I think he appreciates in his background and experience trying to collaborate with people at the table to get a sense of where they are in their opinions of where the economy is and where the policy rate should be. and I've really enjoyed working with them and we don't always agree but the nature of once you get to the table you've got to make a decision and I think that you just have to have good data good background good discussions in your district about where do you think that the policy rate should go and I and so I think it really does it's healthy discussion and at times I suppose it's going to be a vote of dissent at a time or two, but we're in the margin play now relative to where that policy rate should be.

45:04Okay. So speaking of where the policy rate should go and healthy discussion, obviously there's a lot of stuff happening between now and the September meeting. We have the Jackson Hole Economic Symposium itself. We have a couple more big data points. What specific data or developments would signal to you that perhaps it is time to start, you know, really thinking or advocating for that rate cut. What are you watching out for? Yeah, so I'd be watching what a lot of us watch, you know, some of the inflation data, there's quite a bit of it going to come out in the next four or five weeks. Certainly, we're going to be very determined to network our inside the 10th district about what's happening inside labor and the workforce, just try to get a better beat on where unemployment is and supply and demand where that is.

45:54So I think those are the principal data points. Then I think that there's, that's what's beautiful about the Jackson Hole timing. I think there's going to be a lot of discussion, not just domestically, but internationally. I mean, we've got 150 people, experts in their own rights, central bankers, some of those most amazing economists on the globe, all four corners, just to get a calibration of where everybody is just globally. and I think we'll be able to emerge with solid decisioning in September. We'll see where that goes. Like I said, when I put everything in the basket, it just seems like we're in a pretty good place right now.

46:35But look, that data can shift and change. And we're in kind of, as I mentioned, kind of the nuance of the range of where we want to be with policy rate. And we'll see where it goes in September. My last question is, and it's basically just a restatement of Tracy's earlier question, but I'm still trying to wrap my head around this. Americans have experienced years of above target inflation. It's still running a little warm. As Tracy mentioned, stock markets are all-time high. Credit spreads very low. And again, inflation still warm. And you also say that you think the labor market is all right.

47:10It's fine. And that maybe businesses have a little confidence. Just articulate what is it therefore that's restrictive or even even modestly restrictive about the current stance? Well, so here, how do you demonstrate that it's restrictive? Yeah, yeah. So so look, there's a lot of market opinion about kind of the nature of where the policy rate is to say, let's say, where the two year treasury is. And just the, you know, Everybody has kind of, they go back to this whole neutral rate conversation, which I think has some value. I mean, the R-star process is of value. There's going to be some really interesting discussion on the Taylor rule.

47:51I mean, some of the Taylor rule data today would suggest that maybe rates ought to be a little higher. So I think we're going to really bear down on the nature of how restrictive things might be. But to your point, Joe, with all the data sets that you just espoused, along with the dual mandate data sets, it just seems like we're in a pretty good place. I don't think we should not talk about, would there be a scenario where rates could go higher on the policy side? The PPI was a bit eye-opening. We'll see where the CPE comes in later here in August and September. Not that necessarily it needs to go higher, but you have to be willing to anchor yourself inside those mandates.

48:42So if, in fact, you see something that needs more restriction, you shouldn't be unafraid to act. That's our job. So we'll see. But right now, it seems like we're in a good place. By the way, we brought that policy rate down 100 basis points since a year ago. So it's not like we haven't moved it. And the yield curve seems to be in a pretty good place, too. And so I don't know. I like what I'm seeing right now with a bit of caution on let's just keep our eye on this inflation number as they emerge. So I have one more question because I realize it would be bad if we had you on and we didn't ask you at least one banking question, given your previous career history.

49:29But the other forgotten theme of our macroeconomic policy moment is quantitative tightening, right? QT is still going on in the background. And recently we've seen use of the RRP, the repo facility, going to less than 50 billion. And so people are talking again about are we getting to a point where we are going to see bank reserves start to drop and maybe they will become scarce. I know the Fed has been watching this. Is funding on your radar at the moment? Is there a possibility that we do start to see some signs of additional stress in the funding market? OK, so I would say that right now there's a, I think, a general consensus that we are in an abundant reserves policy framework.

50:14But there's also debate on both the size of the Fed balance sheet and the size of the reserves in the system. There's actually very good debate relative to the cost or non-cost of ample or abundant reserves in the system. Does it create an inefficiency? Does it create too much of a footprint of the Fed into the markets? I will say that I'm encouraged that we're in a project now that's, I think, going to modernize the discount window process. So I think there's an opportunity where the Fed, as the nation's central bank, can make the activities inside the discount window much more fungible and much easier for banks to access.

50:57And I think you could start to see in future years where reserves and discount window have to react in a positive way, where you can actually see a smaller footprint of reserves, where banks are much more comfortable having the backstop and having a much, much easier way to access reserves through the discount window and other tools as a way to make the market comfortable that there's plenty of liquidity in the system. So I'm excited about that. It's very timely that we do that because here again, two years ago, we launched FedNow. So I think what's the other fascinating thing about the ecosystem of banking is we are moving to an instant payment economy.

51:42I mean, you're starting to see even businesses start to think about paying people every day, you know, and just the nature of how we move money instantly, seven days a week, 24 hours a day. The nature of that is really going to be a very interesting dynamic. And it's going to be necessary for the central bank to be accommodative to the immediacy of that money movement. And so I'm excited about some of the conversations we're having to make that, to make our system a money movement, movement, much more modern. All right. Well, Jeff, we're going to have to end it there. We could go on forever, but we'll save some of it for in person at Jackson Hole, I suppose.

52:24Oh, great. Thank you. I really look forward to that. Yeah. Thank you so much. Thank you so much for coming on and giving us a preview. And we'll see you in Wyoming. You're welcome. See you there.

52:45Joe, there was a lot to pick out of that conversation. And it was a really good preview of, I think, what's going to be like hot button topics at the event itself. But one sentence kind of jumped out at both of us, I think, which is the idea that, well, you know, there are scenarios where interest rates, you could argue interest rates should be higher here. That was a little bit interesting. And he phrased it in an interesting way. And I have to go back to the tape because it was like, I think, a double negative in there. But I mean, look, you said it. Stocks are record high. Credit spreads are record low.

53:16He characterized maybe we've already seen the worst of the labor market momentum for 2025 with the unemployment rate still in the low fours and inflation is still warm. Well, I know he also he pushed back on the specific use of economic reacceleration, that word. But it is true. We have seen in addition to some of the data like turning negative or showing a slowdown, we have seen some of the data start to tick up, at least compared to like recent months. So this is an interesting thing. We got that recent jobs report and you say, oh, we're like slowing down. But when we did our recent episode with Skanda, he made the good point like, well, actually, maybe that data was weak because that was the immediate post-tariff volatility and you slam the brakes on the hiring and so forth.

54:00And assuming that the uncertainty measures have come down, certainly since the middle of April, it is plausible that we've already seen the softest labor market in 2025. Anyway, lots of interesting there. And I think it's a really good theme. I mean, it's a good theme for this year's conference because it does feel like some of the things that are happening immediately right now also intersect with long term. Definitely. And so there's a lot of moving parts. It's one of those conference themes that is not just like theoretical, you know, 10 or 20 years in the distance. It's sort of like, it's very much now.

54:33And on that note, you know, we're going to have some good episodes that we record with people who are presenting papers on those topics. Yes, very excited. So listeners should be prepared for much Jackson Hole content to come. Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracey Alloway. You can follow me at Tracey Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armand, Dash O 'Bennett at Dashbot and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com slash Odd Lots for the daily newsletter and all of our episodes.

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