Chapter 1: What is the main topic discussed in this episode?
Hello and welcome. This is The Michelle Hussein Show. I'm Michelle Hussein. I speak with people like Elon Musk. I think I've done enough. And Shonda Rhimes. That's so cute. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.
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You certainly ask interesting questions.
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We welcome our Bloomberg TV and radio audience worldwide. I'm Matt Miller alongside Danny Berger. Joining us now is Federal Reserve Governor Stephen Myron here at the desk. We're honored to have you here along with Michael McKee, our international economics and policy correspondent. Mike, take it away.
Well, good morning, Steve. Thank you for joining us on this non-Jobs Day, Jobs Day. We get no government primary economic data because of the shutdown right now. So let me start by asking, if that continues, as a member of the Open Market Committee, would you feel comfortable voting for a significant cut in interest rates if you don't have data on employment and on inflation?
Good morning, and thanks for having me. Look, I think it's important to recognize, first of all, that as you're pointing out, access to high-quality data is of utmost importance when making monetary policy decisions. However, it's also the case that we don't make monetary policy decisions every day. The FOMC meets to vote once every six weeks or so.
Now, I think that's a bit longer than most shutdowns have historically lasted, so I'm hopeful that we'll get the data by the time we actually have to make the decision.
Well, despite what the president says, as you well know, inflation is rising. Food prices are up. Gasoline prices higher than when he took office. Those are the prices that Americans notice and hate. So isn't it a risk to cut rates significantly in an... regime where inflation is rising?
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Chapter 2: What are Stephen Miran's initial thoughts on the current state of inflation?
And that's why it gets the largest weight in the inflation indices. And my expectation is that we've just experienced the biggest population shocks to both the upside and the downside in my lifetime and I think in most people's lifetimes. And to me, it would be very surprising if that left no lingering trace on the price of shelter.
And so I am expecting a significant disinflation to the services component of the inflation disease driven by shelter, which is affected to an extent by changes in population growth.
Well, we were talking before we came on about your view of our start, the neutral rate. We've got inflation running at basically 3%. You've got unemployment at 4.3%, which is historically very low. The Atlanta Fed says we're growing 3.8% or grew 3.8% in the third quarter. There's no economic model that I know of that would get you to a near zero neutral rate with those kind of conditions.
Yeah, so first of all, I have seen some folks argue that they think that my conception of the neutral rate is zero. That's not the case. I think that's a misreading of the speech. If you read the speech carefully, you'll notice that I do a weighted average of a model-implied ex-ante and a market-implied ex-ante rate, and it gets to about a half.
And that's consistent with the dot that I put down on the statement on the summary of economic projections.
And so I basically thought, you know, sort of going into things last year, there were all these policies that were pushing our star higher, like the highest population growth we'd seen in decades, the largest fiscal, you know, sustainable fiscal deficits we'd seen, sustained fiscal deficits we'd seen in a really long time. Those are pushing our star higher.
So last year, I really thought it was at the top of the range of where everyone else on the committee thought it was. And I think it's now come down this year to the bottom end of the range of where everyone else thinks it is.
But you can't model that. What do you mean I can't model that? The models, if you put in the numbers that we have right now, it wouldn't spit out near zero or half a percent. Oh, real rate.
Well, no, but what I've done is modeled my expectations for inflation based on the changes that I see happening from housing, as we talked about a moment ago. I've modeled out changes to the output gap that I expect to see from policies that expand the supply side of the economy and therefore expand potential output faster than they would expand actual output.
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Chapter 3: How does housing cost impact inflation according to Miran?
People don't reset their leases every day. They reset every year, every couple of years. And so that means that a change in market rents takes time to feed through to when it's experienced by households. When you look at the data, it seems to me that that catch-up period is done, which means that I expect shelter rents to come down, CPI rents to come down, bringing shelter inflation down.
The second thing is the immigration shock that we talked about. My view is that immigration was pushing rents up in previous years. And now that shock has not only gone to zero, I think it's actually reversed. I think we have negative net migration when it comes to the United States this year, right? So my view is driven by two things.
Services are the more persistent and sticky part of inflation. Services are driven in large part by housing. And I expect housing inflation to come down through those channels. If something were to happen that were to tell me that that channel is invalidated, that there's some shock that's going to be pushing rents materially higher,
The benign inflation forecast that I have would have to be adjusted as a result. All else equal, right? If nothing else were to change to offset that. But to me, that's the core of my inflation view. And I would want to see something come along and tell me that that channel is wrong and that I'm thinking about it the wrong way.
I want to ask you about something in your speech that has confused a lot of people, including me. You argue that tax cuts are going to help lower the deficit by increasing economic activity. And at the same time, you argue that tariffs, which are taxes on the American people, are going to lower the deficit.
You have one way raising taxes and the other cutting taxes at the same time lowering the deficit. How does that work?
Yeah, so it's important when you think about economics to think about the elasticity of supply and demand. And when you cut taxes on American production, whether that's labor or whether it's corporate income, you want to think about the elasticity of supply of those activity. And is it going to lead to additional labor supply? Is it going to lead to additional investment?
And so that's the way that cutting taxes can actually generate economic growth in the United States. When you think about tariffs, again, you think about the elasticity of demand and supply, and in this case, American consumers and firms are the demand, and foreign producers are the supply.
Now, the economic evidence is overwhelmingly that the elasticity of the demand in imports is much higher than the elasticity of the supply. Put another way, foreign producers are inelastic. You've got a factory in China or somewhere else, and it's stuck in China or wherever it is. It's installed capital. It's inelastic. Whereas American importers can alter their demand patterns.
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Chapter 4: What is Stephen Miran's perspective on the neutral interest rate?
Now the evidence is overwhelmingly that the farm producers are the more inelastic party because the factory is stuck in place, it can't move, whereas import demand can substitute across borders. So it is the case that the negative effects of any tariff fall on the more inelastic party, which is overwhelmingly the exporter and not the importer.
And so as a result, the positive effects of tax cuts in the United States get felt by production, and they increase economic growth, whereas the negative effects of raising revenue from tariffs get borne by the exporting country.
Well, we haven't seen any evidence in import prices that that's happening.
Well, you know, import prices, as you're pointing, dollar-denominated import prices, as you're pointing out, have been relatively flat. However, in people, I think you're alluding to an argument that people make, which is that you would see import prices decline if foreigners were reducing their selling prices. Is that the argument you're referring to? Yes.
To me, that logic doesn't follow for two reasons. One, there's an implicit all else equal clause that's not being stated, and all else is not equal because we also had to move down in the dollar this year, which ought to increase import prices by a comparable amount.
And so the fact that import prices look relatively flat could just be the increase in import prices from the weaker dollar just offsetting the decrease in dollar prices from the incidence of the tariff being borne by the exporter. The other reason why it doesn't really make sense to me is because I think that a lot of the importers of record are ultimately U.S. subsidiaries of foreign companies.
And so you've got a Japanese or German exporter selling to the United States, but the exports are bought by U.S. subsidiary of them. So Mitsubishi Japan or whoever is selling to Mitsubishi U.S. or whoever, right? And then if this is the case, then what winds up happening is that the incidence ends up falling on the importer of record without necessarily pushing a decline down in import prices.
And so I'm not exactly sure on the magnitude of this channel yet. It's something that I'm looking into, but it is a possible disruptor of that argument. But in any case, for sure what we're seeing is not a broad-based increase in consumer inflation as a result of tariffs.
Governor, I wanna ask about a piece that Mark Summerlin wrote in the Wall Street Journal today. He, previously of the NEC, under the Bush administration, basically says that the Fed suffers from the same kind of bias inherent in media or academia.
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