00:00:00
Dan Loney: Well, if you go back over the
last 15 to 20 years, there
00:00:02
certainly have been a heightened
focus on the area of finance,
00:00:06
with obviously a lot of the
coverage that is now out there
00:00:10
in the media world, but also the
focus on the decisions being
00:00:14
made that can have an impact on
our economy. But what does that
00:00:18
mean for us right now,
especially in a timeframe where
00:00:21
we've been coming out of the
pandemic, and now we're also
00:00:25
dealing with inflation? Pleasure
to be joined right now by
00:00:28
Loretta Mester, who is the
former President of the
00:00:31
Cleveland Federal Reserve Bank.
She is now an Adjunct Professor
00:00:34
of Finance here at the Wharton
School. Loretta, great to have
00:00:37
you with us today. Thanks for your time.
Loretta Mester: Thanks for having me
00:00:40
on. - Thank you. I guess let's
start with your view of where
00:00:44
this economy kind of stands at
the moment. - Yeah.
00:00:47
Well, you know, what's
interesting about the economy is
00:00:49
that, if you think back to
the beginning of the year, the
00:00:52
economy really started on a
really strong note. You know,
00:00:55
businesses were very optimistic.
They were really looking forward
00:00:59
to do regulation, because they
viewed that as being a way that
00:01:02
they'd be able to innovate more
and really engage in M&A
00:01:05
activity and, you know,
expand more easily than they've
00:01:09
been able to do in the recent
past. And then they were also
00:01:12
expecting this extension of
tax cuts, which they were going
00:01:17
to expire at the end of this
year, and even further cuts. But
00:01:20
then things have really changed
in recent months. So if you
00:01:23
think about what's
happening now, you know,
00:01:26
sentiment among businesses and
consumers has really plummeted.
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And it's interesting, because if
you look at the hard data on
00:01:34
growth and employment, they're
still holding up pretty well,
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but people have just become much
more fearful about how the
00:01:41
economy is going to fare later
in the year. And as you and your
00:01:45
listeners know, the source of
that concern are the uncertainty
00:01:49
caused by the tariffs, and you
know, the fact that they were on
00:01:53
again, off again, and everyone's
waiting for this week, later this
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week on Wednesday, to find out
more definitive information. The
00:02:02
prospects of a global trade war.
Because it's not only what we do
00:02:05
on tariffs, it's what other
countries do in response to
00:02:08
those tariffs. And another
thing that adds to that is
00:02:12
what's happening with Doge and
the cuts in the federal
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government. And I think it may
not be about the cuts, per se,
00:02:19
but the way they're being
implemented has given some
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people some constant -- you know,
getting nervous about things.
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- So I think it's interesting,
because, you know, in the
00:02:29
process of talking about the
markets that we have done on our
00:02:32
shows here, the common theme is
the markets don't like
00:02:36
uncertainty. Well, from the
Federal Reserve perspective, I
00:02:40
think it's safe to say that the
Fed probably does not like
00:02:43
uncertainty with a lot of these
policy decisions as well.
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- Well, I mean, nobody really
likes uncertainty. We all would
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like to know what's coming. And
you know, you talk to businesses
00:02:55
today and talk to them
about the last time we had
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tariffs in 2018 and 2019, and
they would tell me, "Look, just
00:03:02
tell me what the rules of the
game are. I'm confident I can
00:03:05
handle whatever the policy is,
but if I don't know what the
00:03:08
rules of the game are, it's hard
to play the game." And I hear the
00:03:12
same thing now when I talk to
business people. They're all
00:03:14
like, you know, "I'm pretty
confident in my business, and
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I'm pretty confident and I can
navigate, but I don't know what
00:03:21
I have to navigate." And I think
that's part of the problem, is
00:03:24
that, you know, we all
have to make decisions under
00:03:28
uncertainty, but this has been
particularly uncertain because
00:03:31
it hasn't been stable, right?
One day, it's one thing, it
00:03:34
seems like the next day, it's
something else. And that makes
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it really hard for businesses to
plan. However, I do think that
00:03:43
this uncertainty is not going to
be resolved. You know, Wednesday
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is going to come, but there's
still going to be uncertainty
00:03:48
around things. And I think
businesses and policy makers at
00:03:53
the Fed and, you know, other
policy makers are going to
00:03:55
really just going to have to
navigate uncertainty and be able
00:03:58
to deal with it. And personally,
my own view is that some of the
00:04:01
businesses are going to
basically conclude, "Well, I have
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to make some decisions here. I
can't just wait forever." And I
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think they will end up making
some investments, but they'll be
00:04:12
shorter term investments. They
won't want to go long, given
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that things could change, you
know, where they think
00:04:19
one thing and then it turns out
that something else is
00:04:22
happening. So I think we'll see
it affecting the economy, no
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doubt. We're already starting to
see that uncertainty affect
00:04:28
decision making. But we'll have
to wait a little bit longer to
00:04:32
see how it actually impacts
hiring decisions, investment
00:04:36
decisions. It's a
downside risk to the economy, no
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doubt. - Does this start
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then to bring back the
potential, or at least it's
00:04:45
being thrown out there maybe a
little bit more, around the idea
00:04:49
of a potential recession at some
point down the road? - Well,
00:04:52
certainly the risk of recession
has gone up. I mean, if you look
00:04:56
at all these private sector
forecasts, they've all put a
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higher weight on the possibility
of recession. It's not the base
00:05:03
case. You know, nobody's
really projecting that there'll
00:05:07
be a recession. I don't think
it's the base case. But
00:05:10
remember, at the beginning of
the year, that wasn't even in
00:05:13
anybody's vocabulary, even
though, at any point in time,
00:05:16
it's like a quarter percent
chance. You know, a quarter, 25 percent
00:05:19
chance you'll have a recession
just because the economy runs in
00:05:22
cycles. Now, those percentages
are up to like, you know,
00:05:26
depending on which one you're
looking at, 30 percent, 40 percent,
00:05:30
even 50, little under 50 percent in
most forecasts. So it's on
00:05:34
people's minds now. And it's
even worse than just recession
00:05:39
recession, it's like a recession
caused by uncertainty. And then,
00:05:44
coupled with that, there's
upside risk to inflation. So you
00:05:48
get this bad situation,
especially from the Fed's point
00:05:52
of view, where you could have
growth slowing, you know, labor
00:05:57
market weakening, and at the
same time, inflation not coming
00:06:02
down and maybe even going up. So
that's a bad situation for the
00:06:07
Federal Reserve, because, of
course, it has a dual mandate of
00:06:10
maximum employment and price
stability, and you'd have sort
00:06:13
of those working against one
another. - So
00:06:17
then that brings into the
question, once again, about the
00:06:19
potential of rate cuts at some
point this year. I think a lot
00:06:23
of the expectation has been
maybe two, maybe one around June
00:06:26
and one later in the year. Where
is your thinking on that
00:06:30
potential right now? And maybe
to a degree that's still a
00:06:32
little bit up in the air,
depending on what happens here.
00:06:35
- Well, obviously the policy is
going to depend on not only what
00:06:39
happens, but also the outlook
for the economy, because, as you
00:06:42
know, the Fed policy doesn't
affect the economy right away,
00:06:48
it has some lag in it. So
they're going to have to be
00:06:50
looking out and sort of making
their best estimates about, you
00:06:54
know, where the economy is
going. But look, there's two
00:06:56
scenarios that would call for
further reductions in the
00:07:02
interest rate this year, right?
So the first one is what I call
00:07:06
benign scenario, which is the,
you know, sort of stubborn
00:07:11
inflation numbers we've seen at
the beginning of the year turn
00:07:14
out to be sort of either
seasonal or just, you know, not
00:07:18
really lasting, and we get
inflation moving back down
00:07:22
again, and it turns out the
tariffs are like one-off changes
00:07:25
in the price level, and they
don't become inflationary. And
00:07:28
so the Fed could, in that
scenario, return to its policy
00:07:34
that it was doing in the middle
of last year, which was
00:07:36
beginning to bring the rate down
from restrictive levels to more
00:07:39
normal levels. But the other way
that the Fed will be, you know,
00:07:45
putting rate cuts back on would
be a less happy scenario, which
00:07:50
is basically the economy is
beginning to slow quite a bit.
00:07:55
And, you know, they have to sort
of make that balance between
00:07:58
inflation and maximum
employment, and they see that
00:08:02
the economy is weakening enough
that it begins to have to do
00:08:06
those rate cuts to really
support the economy. And that
00:08:11
one is becoming more likely in
forecasts, that the Fed is going
00:08:15
to have to take some action,
because we're going to see the
00:08:17
unemployment rate go up, labor
markets weaken, growth slow
00:08:22
down, and so they're going to be
cutting. Now, whether they -- I
00:08:25
doubt -- I don't see that
things could change so quickly
00:08:29
that they would want to
start that in June, but it could
00:08:33
happen. And, you know, they're
going to be forward looking, and
00:08:37
they're going to want to look at
the balance. I think a better
00:08:39
strategy would actually be,
given that we've seen inflation
00:08:43
readings being elevated, and
we've even seen increases in
00:08:47
inflation expectations, which
are not welcome at all, would be
00:08:52
to be on hold at the current
level for long enough that you
00:08:56
could actually make sure that
those inflation expectations
00:08:59
really are well anchored. And
then if you do see the economy
00:09:04
and evidence that the labor
market is weakening, then being
00:09:08
more willing to cut at a faster
pace than they typically are
00:09:13
willing to do. Because that way
you're sort of doing the balance
00:09:17
between inflation, which, you
know, they've made all this
00:09:21
progress on inflation, bringing
it down. It's not back to two percent
00:09:24
where they need it to be. You
wouldn't want to give that up. At
00:09:28
the same time, they have to take
into account that there's a dual
00:09:31
mandate, and the, you
know, employment side of the
00:09:35
economy is very important. So
it's a hard balancing act. And
00:09:39
you know, not everyone on that
committee is going to have the
00:09:42
same view of how to balance
those two goals. And so
00:09:47
that's what's going to be, you
know, what the chair, Chair
00:09:50
Powell, is going to have to do,
is really gather all the
00:09:53
information he can from around
the country, and that's what the
00:09:56
Fed presidents do, they bring
that to the meeting, and then
00:09:59
come up with the best path
forward that tries to balance
00:10:04
those risks, hearing different
views on different sides of the
00:10:08
table. And that'll be, I think,
the challenge for the Fed and
00:10:11
for the chair. - Loretta,
00:10:13
great to have you with us today.
Thanks very much for your time
00:10:15
and your insight. All the best.
- Thanks, you too. - Thank you,
00:10:19
Loretta Mester, former
Cleveland Federal Reserve
00:10:22
President and now an Adjunct
Professor of finance here at the
00:10:25
Wharton School.
