Chapter 1: What is the main topic discussed in this episode?
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Welcome to Open Interest on Bloomberg TV and Bloomberg Intelligence on Bloomberg Radio. To our viewers and listeners around the world, I'm Michael McKee, international economics and policy correspondent. And joining me this morning is Alberto Mussolini. He is the president of the St. Louis Fed. Thank you for coming. coming in this morning here in Washington.
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Chapter 2: What insights does Alberto Musalem provide about the current US economy?
For me, it's about the outlook that I happen to have and the balance of risk that I happen to have with the information that I currently have. So... Going back to your first part of the question, in the past year, the real federal funds rate has declined by 250 basis points.
Of that, 150 basis points have been reductions in the nominal interest rate to provide insurance to the labor market and to get ahead. of any deterioration in it and to keep the labor market around full employment. And about 100 basis points of the decline in the real federal funds rate has been looking through the rise in expected inflation, mostly due to tariffs.
So that's how I think about monetary policy right now.
Well, to the extent that they know, what are companies telling you about monetary policy? Do they say that we're going to have to raise prices or cut employees if you don't cut interest rates?
Not necessarily. I don't hear that from companies. Companies often are more concerned about non-interest costs that are increasing. For example, I mentioned insurance, but raw material costs and other costs. to produce things all the way from building homes to producing manufactured goods.
And so I hear more about that than about interest costs being something that needs to be passed on to consumers. So it's very important that we continue to focus on bringing inflation back down towards 2%.
Well, we hear a lot from your colleagues. We heard from Chair Powell about the risk of cutting too fast versus the risk of not cutting soon enough. What about the risk to credibility if you cut, but then inflation doesn't go down and you have to start thinking about raising rates again?
As Chair Powell said, there's no risk-free path. And, you know, if we focus too much on the labor market and then cut too aggressively, we're going to have an undesired outcome on the inflation side. If we focus too much on the inflation side and labor market deteriorates, we're going to have an undesired outcome. And so right now what our strategy is,
monetary policy strategy document says is that when you have some tension between your two goals, you have to follow a balanced approach, which is to steer monetary policy to attend to both goals. Well, which way would you steer it in December based on what you know now? I think, again, it's very important that we tread with caution here.
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Chapter 3: How is the labor market performing according to Musalem?
Monetary policy, in my estimation, is somewhere between modestly restrictive and neutral. closer to neutral. If you look at the real federal funds rate, it now is around 1%, and 1% happens to be the long-run neutral rate in real terms for the federal funds rate of the entire committee, the median, I should say, of the entire committee.
So, I think we need to continue to lean against inflation to make sure we bring inflation back down towards our 2% target while providing some insurance to the labor market. One thing I hear often when I visit with folks in my district is that... People are having more month than money, increasingly, number one.
Number two, I hear that folks are increasingly going to food pantries, including middle income folks. And I hear that aid institutions are increasingly getting requests for utility assistance, probably related to higher electricity and energy prices. I should say electricity prices.
So those three things tell me that it's really important that we bring inflation back towards 2% to allow households to catch up with their real incomes.
We've only got about 30 seconds left. Markets are up this morning. They're cheered by the possibility of a shutdown deal. But when the sun comes up in the east, they've been going up cheerfully lately. Are you worried about the level of asset prices?
Financial conditions are very accommodative of economic activity and of employment conditions. The Fed, the board, just released this financial stability report where it says that asset valuations are notable. And it's not our job to opine on particular valuations of markets. But if you look at that report, it suggests that house prices seem elevated relative to historical standards.
Stock prices seem elevated. And to me, it's just the flip side of accommodative financial conditions.
Alberto Musalem, thank you very much for joining us this morning, the president of the St. Louis Fed.
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