Chapter 1: What is the main topic discussed in this episode?
Hello, I'm Joel Weber. And I'm Eric Balchunas. We're the hosts of the Trillions podcast from Bloomberg, a deep dive into all things ETFs and investing. Eric, what's so amazing about ETFs? It's never a dull moment.
They track everything under the sun, four new ETFs launch a day, and they take in $4 billion every day. So it's where all the money's flowing to and a lot of the innovation is happening. I call it the Silicon Valley of the investing world.
As you can hear, Eric's passionate about them. My role is to try and keep him in check and make all of this a little bit more understandable for the rest of us. Not always easy, but always worth a listen.
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The Fed Governor Stephen Maron joins us now for more. Governor Maron, good morning. Good morning. Thanks for having me. It's good to see you, as always, sir. So let's spend some time. How did you approach the committee meeting just last week, and what was the argument for 50 basis points?
So I approached it the same way I approached the first one, which is that I think that the Fed is too restrictive. I think that neutral is quite a ways below where current policy is. And given my rather more sanguine outlook on inflation than some of the other members of the committee, I don't see a reason for keeping policy as restrictive for a long period of time as we are.
The longer you keep policy restrictive, the more you run the risk that monetary policy itself causes a downturn in the economy.
What's interesting about last week, as you know, is the dissent cut both ways. We also had this argument from President Smith of Kansas City Fed, who put out a long statement. I've cherry-picked a quote, forgive me. I see the status of policy as being only modestly restrictive. Financial market conditions appear to be easy across many metrics.
When you heard that kind of argument, what was the counterpoint to what he's seeing in markets?
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Chapter 2: What insights does Stephen Miran provide about the recent Fed decision?
And it's not that these things don't matter, but it's that they're only part of the picture. And if you look at financial conditions that affect housing, I think they're quite tighter. You look at financial conditions that are affecting parts of the private credit market. that also looks tighter.
And I wonder if what we're seeing now in some of the distresses that you see in private markets means that financial conditions have actually been tighter, but it's been masked by the fact that we don't get marks for those on a regular basis.
So, Governor, I think I want to give you some time. I think we should give you some time on a central argument of yours that this year you believe policy is actually passively tightened through 2025.
Chapter 3: How does Stephen Miran explain the rationale for a 50 basis point cut?
I don't think that's an argument I've heard many people make. Can you just spend some time fleshing that out? What do you mean by that?
Sure. So my perspective is that there's been a number of shocks that have hit the economy, driven in large part by economic policy, not from the Fed, from outside of the Fed, that pushed neutral rates higher last year and lower this year. And so I think if you look where my neutral rate is, it's not that I'm out of bounds for where the rest of the committee is on neutral.
It's just that I flipped from having one of the highest neutral rates last year to now one of the lowest neutral rates. And that's driven by things like population growth. It's driven by things like fiscal deficits. And if you think about population growth, that's normally considered to be one of the biggest drivers of neutral rates.
And it's part of the reason why people think that neutral usually moves very, very slowly, because population growth changes only very, very slowly as new technologies and cultural trends drive people to have fewer kids over time. But we experienced in the last few years 30 years worth of population growth change in only three years.
When you look at the rate of population growth, it changed more in the last three years than it did in the previous 30 years in both directions. It round tripped completely. And so if the drivers of changes in the neutral rate accelerate over time, it would only make sense to me that the neutral rate itself would change more rapidly over time as well.
And so that's pushed neutral higher last year and lower this year, which means that policy is passively tightened. Because what matters for the stance of policy is where you are relative to the neutral rate. And if neutral is here and policy is up here, you're very tight. If neutral is here and policy is down here, you're very loose.
But if you stay where you are and then neutral goes down, you've passively tightened because the neutral rate has shifted.
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Chapter 4: What are the implications of a restrictive monetary policy on the economy?
And so policy has grown tighter over the course of the year. Now, it's not the case that you would expect to see a significant downturn in the economy immediately as a result of that, because monetary policy works with lags. It hits the economy with long and variable lags, as we all know.
But if you maintain that very restrictive stance of policy for a long period of time, you really increase the chances that those lags come to manifest and that monetary policy then itself induces a downturn in the economy. Why wasn't your dissent bigger? You were talking about a 50 basis point cut that you would have preferred to see in the September meeting.
Why didn't you go for a 75 basis point cut descent last month? Of course. So look, I think that we're a fair way from neutral. And I think that we could get there a bit faster. I could imagine getting there in a series of 50 clips. I don't think it's the case that we need to get there and more than that, because I don't think the economy is dysfunctional right now.
I don't think that financial markets are dysfunctional right now. I don't think we need to move even faster than that for those reasons. If I did, then I would have no problem voting for bigger cuts. But I think sort of getting there in 50s instead of 25s is fine.
So you would be open to dissenting again for a 50 basis point cut if the rest of the committee wasn't around for that next month or in December, rather? Yeah, well, I don't want to commit to that because a lot can happen between now and the next meeting.
We're getting a lot of data, I hope, between now and then, not only data about the near term, but data about the recent past as well that we don't have. So things could change. But if things play out according to my forecast, then yes, I would. Governor, do you think your advocacy for a 50 base cut is hardening the opposition to cuts at all?
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Chapter 5: How do financial market conditions influence the Fed's decision-making?
I don't think so. I think everybody is doing their own analysis of the economy and inflation in the labor market and financial markets, too, and coming to a conclusion. And I don't think anybody is necessarily changing their mind to not support a cut just because I want to cut more.
Is there a lot of discussion at the Fed about the fact that you're all doing your own analysis, but what data are you all using if we're still in the middle of a government shutdown, 34 days today? Yeah, so there's a lot of talk about that. Let me say a couple of things about that.
First of all, it's my perspective that being excessively data dependent makes you backward looking because the data are always backward looking because of collection lags, because the amount of time that you're doing comparisons over. And given monetary policy takes lags to hit the economy, you want to be forward looking. So you want to make policy based on your forecast.
Now, there are times when you might not have a lot of confidence in your forecast, and so you need to be data dependent. But you should be data dependent only to the extent that you don't have confidence in your forecast. My perspective is that we know the size of the shocks that have hit the economy this year. Things like population growth, that's a known quantity.
We know what it does to the economy. We know what it does to neutral. We know the size of that. It's not a mystery. So therefore, I have a lot of confidence in my forecast. And therefore, to the extent that we would get data that would make me change my forecast, I would then change my policy outlook.
So the question is, am I missing data because of the government shutdown that would lead me to change my forecast? And given so much of my forecast for inflation depends on the housing market, I would assume that I would see that in the reporting that Bloomberg and others do, even if I'm not getting data in the short term. Now, something like that lasts a couple of months.
Can I continue to have this degree of confidence if we go six months without data? Absolutely not. So I do think this is something people are attentive to. And there's also alternative data, as you guys are aware. I find the alternative data on inflation to be not super useful. I do find it to be more useful on the labor market.
And when you sort of look at alternative data on the labor market, you see data that's consistent with continual ebbing of demand, which again is a signal that policy is too tight.
If the decline in hiring was a result of negative supply shocks from immigration, you would see higher wages and you would see firms and people answering surveys in a way that indicated that jobs were plentiful or it was difficult to find workers from the firm perspective.
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