Inflation: A View from the FOMC

- US inflation rates have exceeded the Fed's 2% target for nearly five years. Yet the FOMC has cut the Fed funds rate five times in the past 14 months, including another cut in late October. Was that a mistake? What's the thinking? I ask an FOMC member on today's show. Welcome to Economics Applied. My name is Steven Davis. I'm a senior fellow at the Hoover Institution, which sponsors this podcast. Joining me today is Jeff Schmidt, president and CEO of the Federal Reserve Bank of Kansas City. He also sits on the Federal Open Market Committee, FOMC, for short, which sets us monetary policy. Welcome, Jeff. It's great to see you again.

- Likewise Steve. And it's great to be here. Thanks for the invite.

- Well, thanks for being here as well. You know, we last spoke in August at the Jackson Hole Economic Policy Symposium, which takes place at Jackson Lake Lodge, Wyoming. Surely one of the most spectacularly beautiful places on earth is, is hosting that, that event, the toughest part of your job?

- Well, you know, the first quick story is when I got the job, I think it was August 21st, 2023, and the board said, the first thing you gotta do in three days is go out and help host it. So that was pretty daunting. 'cause here, as you, as you, you know, I'm, I'm not a professional fed. Yeah. I didn't, I I came from the outside, so I,

- Yeah,

- I was, I followed the Jackson Hole event very religiously. But to go out there and really hosted it was amazing. But, you know, after 48 years, Steve, we, the team's got a, got a downward well, and, and it's, it, it was, I I think this year was one of the best ever. I, I was really proud of the, the, the institution, how it delivered.

- Yeah. Well, well I, I enjoyed it. And I want to note that you sent me this autograph, laminated unc circulated dollar bill, appreciation for my contributions.

- You're quite welcome. Yeah.

- And you know,

- I love doing that.

- First I was really excited, but then I was thinking, you know, the dollar doesn't go as far as it used to and maybe, maybe my contributions weren't so valuable.

- Yeah, hang on to it. It's UNC circulated, so it's worth something.

- It is worth something. No, seriously, it was a very nice touch, so thank you for that.

- You are welcome.

- So, so, alright. Last week in Denver you gave a speech titled Maintaining the Balance in Monetary Policy and you expressed the view, and I'm gonna quote here that inflation is too high and the labor market, though cooling remains largely in balance. And I, I wanna first ask you just, can you explain to us how you reached those two judgements, the part about inflation and the part about the labor market?

- Sure, you bet. Well, so first of all it's, it's a, it's a real challenge, as you know, with the shutdown that's now thankfully been resolved that, that the data streams that we you would normally get were impaired. And, and so, but you know, there, there has been a lot of commentary about that impairment. And I, and I'll, I'll make a couple comments before I go specifically into what we're seeing on the data side. I think one of the, maybe the geniuses of the structure of the Federal Reserve system was to create the 12 reserve bank system, which really allows us to kind of regionalize the things that are happening in this, you know, $30 trillion economy. And what it did do, the shutdown for us is it, it actually reinforced and actually strengthened the muscle we have relative to the information flows that we get within districts. So, you know, we've got a half a million square miles, we cover seven states, but we, we, over the decades, we created this architecture of network that really starts with the board in Kansas City. But then we have respective boards in Denver, Oklahoma City, and Omaha. Those funnel up the information on what's happening in the economies in, in both states and communities in the region. And then we have another set of four advisory councils that are maybe more economic specific, be it, be it community specific, be it agricultural, be it energy related like we, the conference we had last year. And, and it allows you to really pull up what's happening in the 10th district. And then I think a, as you look at all 12 banks, you're familiar with the beige book. I think I, my sense in in the last FOMC is that everybody really strengthened their network of information flow, specifically with regard to the inflation data that we get inside our districts, but also the labor data that's inside the district. So that being said, I think we worked our economists under Joe Gruber a a little bit harder in this last cycle. And, and I, I think this is kind of what we found, and actually you, you, I think you in interviewed Professor Golden, a couple things that came outta Jackson Hole for me was really a a a new sense of macro demographics and what are hap what's happening relative to, let's say fertility rates or migration of labor between states. Those were two of the more important papers I think that I've seen in a long time. But given that I, my opinion at this stage is that we haven't finished the fight on the inflation front. In fact, I think there's pretty strong information that would suggest that while we seem to have gotten that the inflation number down into the mid-low twos, it's, it's really reversed itself back into the, to the, I think the, probably the mid to low threes. The concern for me specifically about the inflation numbers is that it's actually the basket of what's going up has gotten larger, most specifically with goods inflation. You know, we were starting to see some improvement on the services side that that was pulling that, that inflation number toward two. But on the good side, we've seen kind of a, a reversal actually have seen some goods increases goods, price increases that we haven't seen, frankly, for decades that have kind of reversed themselves. So, so I, you know, look, I I have a, a a belief that inflation in, in its macro sense is a, is an economic thief. And I think it's a, a specifically a, a felon for the, for the lower half of the economic and financial strata of our country. So we're into this four or five years, we've gotta finish the job. And then when, when I look at the labor force, I see something from a macro standpoint standpoint that's from my, from my use is much more structural than cyclical. So by that, I mean I look at maybe three elements that are influencing the labor market in a big way right now. One is just demographic shift. I mean, people my age, I'm a baby boomer, we're leaving the workforce in numbers we've never seen before. I think the last number I looked at was somewhere around 4 million a year leaving the workforce through 2027. Now that's on average over 300,000 jobs per month on average. Then you layer in the immigration, new immigration policies that's probably influencing the number between one and 2 million a year.

- Yeah. And that's been very abrupt that change. It's very

- Abr. Yeah. Right. And, and and then the third thing I think that's happening that we're hearing just almost continually, I mean, everybody wants to talk about ai, but I think that there's a, there's a pausing going on inside the, the marketplace, especially with inside, let's say manufacturing financial s some pretty sizable industries where they're trying to reconcile what they can operationalize on the AI side before they hire. So it, it, you kind of get into this no hire, no fire kind of pausing, but, but frankly I, I think we see that somewhat reversing itself into the first two or three quarters, 2026. So when you put all that into the pile, while we're, you know, you see kinda one-offs as far as layoffs and that type of thing, that cooling effect, I'm just not seeing anything that's gonna really trend our unemployment numbers up over the next few quarters in a significant way.

- Okay. So I'm, I'm gonna come back later to the government shutdown and the increased challenges that presented to you that you already raised it, it's an important issue and I wanted to ask you about it, but let's, let's, let's, let's stick with kind of the current monetary policy thinking. So, and, and here I I should know you dissented at the last meeting, right?

- I did. - Where, where, and so you were not in favor of a 25 basis point cut in the Fed funds rate. So just note that. So my next set of questions is partly not so much about your thinking, 'cause my thinking and your thinking, I think you're closer than my thinking and the median FOMC members. So, but let me put a little bit more of it out there and you can help us understand not just your own thinking, but the FOMC thinking. So I already alluded to the fact that, you know, we've had, it's by the fed's preferred measure, 19 consecutive quarters, almost five years with inflation above the fed's, 2% target. And yet the Fed, the FOMC has seemed fit to cut the fed funds rate by 150 basis points over the last 14 months. It kind of makes you think, what's the logic behind these decisions? And when I ask that question, they're two facts that are on my mind. The first one I just mentioned, the 19 state straight quarters of above target inflation. The second one you alluded to earlier, but I'll just put is the, the public hates inflation. So that's, that's, it's just a fact. We've, we've been reminded of that in rather visible ways. So, so why in the face of this has the Fed been cutting its policy rate and by quite a bit over the past year or so?

- Well, so let me reflect a little bit on maybe the 2024 cycle. 'cause I think there was, there was a realization that we were making pretty good progress into the last couple quarters of, of 24 toward the 2% mandated number. And, and I think we also got some interesting data on labor at that time. We had been kind of in that three and a half to 3.6% unemployment number. It started to trend up and it, it eventually kind of trended up toward about that one to four, to 4.1. And I think, you know, there was action at that time to try to, everybody, well, I shouldn't say everybody. I think in my, in my particular case, I wasn't a voting member, but I I, I do remember that I believe that maybe the, the, the policy rate was a little on the restrictive side. And as we were starting to see maybe a little bit more action into that kind of low forward number, it made sense to me to try to create a little bit more bal rebalancing into the policy rate side because of those factors. Then we kinda went into the first couple quarters of 2025 and we, we were seeing further improvement in, in, in the, in the inflation numbers. But then, then there, there, I think it was probably sometime in the mid to late summer that, that there was some trending that we were seeing on the inflation side while, while we were arguably at still full employment. I mean, if, if you believe that the low to mid fours is full employment, which I do believe that then, then you really needed to take a strong look at where the inflation numbers were trending. And then by the time, so in the September cycle, I I, I voted for a 25 basis, but I was part of that vote.

- Okay. - I believe that that was a little bit of an, I think the chair called it an insurance cut relative to what we were seeing in the labor market numbers pre, pre shut down. So some of those numbers were somewhat compelling and then we started digging a lot deeper into the macro side of what was happening in the labor force and really started to get very specific with our regional contacts about what is happening in your labor pools. And that's kinda when I decided, look, I'm fine with the insurance side of the September cut, but at this stage I think, I think po the policy rate, I'm not sure what it's restricting Steve at this stage. I mean, capital and credit flows seem to be pretty robust. If, if if full employment is still in that mid to, to low fours, then that, I think we've gotta really wake up to this whole inflation number that seems to be trending on the upside. And, and I, and I, and I believe to your point, I believe that the American public expects us to, to really keep rebalancing this dual mandate. And, and for me the, the risk side is, is on the inflation number.

- Right. And you, you also made the point in your speech, and I'm sure this was quite deliberate, that kind of from a financial conditions perspective, things don't look tight. Equity market valuations near all time highs, high yield bond issuance near all time highs, credit spreads across, you know, different different bond qualities and credit quality are are small. All of this stuff suggests financial conditions are on the e relatively easy side.

- Yeah.

- So, so in addition to all the things you've said though, there's something else that would, would weigh in my thinking if I were in your shoes on the FOMC, which is the following, it's first thing, I don't think we have a great handle as professional economists or central bank experts on what it takes to de anchor inflation expectations. We know that we have lots of reasons to think that there's huge benefits that flow from having firmly anchored inflation expectations near the central bank's target. We don't really understand the dynamics very well by, by which you achieve that or lose it. We know we, the the the way we achieved it last time was awfully expensive. Yeah. Back in the early 1980s, right? Yeah. Well if I was sitting in your shoes, I'd be thinking, well, you know what, the Fed had huge credibility before the pandemic struck. It lost a lot of credibility because of the 2122 inflation surge. Both, both because of the inflation surge itself and because the Fed was kind of slow to recognize what was really going on. And so I'd be thinking, well, you know what, let's, let's make sure we don't make that mistake again. I'm basically saying I see the risks as somewhat asymmetric between failing to, to promptly recognize when the labor market is cooling too much and failing to head off another and many inflation surge that wouldn't, that would make me pretty cautious on the inflation side. And I just, does that argument not have much resonance?

- No, no. I, i look, I've been at this two and a half years now and I'm, I'm still learning, but, but I, I do have an appreciation for Jay Powell's sense of, you know, this whole soft landing concept. So, so, you know, look it, it's great sport to, to look back and say, we missed an opportunity to, to let's say get after it faster in that 2122 cycle. You know, I, you could also go back into even the 2020 and the 2008 cycle and make this a similar commentary about what we were doing and when we did it. But that said, I think the fact that we did, we were as aggressive, you know, raising rates over 500 basis points like we did. And then, and then the, once we saw what was happening, which I think was pretty, with a lot of precedent, you know, the, the whole supply cycle issue that created that surge in inflation was kind of that post pandemic. And I don't think any of us really knew exactly what economically things were, how things were gonna play themselves out kind of post 2020. But, but what I think we did was, and our doing is, is is there a way, 'cause I'm, I'm pretty sure historically and you would be able to tell me this, is there a way to actually get us down to that 2% mandated number without breaking the economy into a recession or, or some other, you know, crisis. So I, I think we do have a credibility issue if we don't continue to try to push this number down because I, you know, there, there's some, while there are some positive signs when you kind of break the macro down to some micros, like for instance, you know, we see some positive signs on rent inflation and, and some positive signs on the housing and some, some, you know, increases in supply side in certain industries. But we hear a lot on the insurance side, we see a lot, we hear a lot on healthcare. There, there we, there's still some real stickiness in some of these inflation numbers that we just kind of, kind of have to keep fighting on a macro basis. But I think, I think your, your point's well taken. We, I think if we believe and we use the, the, that employ that full employment number as an anchor in that, let's say four to 4.5% range, I think we gotta continue to, to fight ourselves down to that 2% number and that, and that's where I believe we should be with the policy rate.

- Yeah. So a few things. First, you're right that once the Fed did switch to a, a more a restrictive monetary policy stance in reaction to the 2122 inflation, it did so quite aggressively though. Yeah, definitely agree with that. And you know, the, the point of my comment wasn't so much to criticize the Fed. I've done that in other occasions, but I won't do that. That's not my point here. My point here is simply to recognize the legacy that comes out of that is very different than the legacy that the Fed was operating with in, in, you know, in the, in throughout the 2000 tens and so on. There, there, there was a very, so that that's, that's the thing that I, I don't quite see factoring into FOMC decisions as much as I would have wanted to. And it speaks to your point about how it really is urgent to, to be on the path of getting back to the, something closer to the 2% target because that is for better or worse, that is what people now

- Yeah.

- Fix on as, as the sign of achieving the fed's so-called price stability, the, the price stability part of its mandate.

- Yeah. And, and by the way, I, I subscribe to the concept of a neutral rate. I, I think that that, that makes a lot of sense. I, I've had speeches in the past that that would argue that maybe the neutral rate in its old theoretical form might be a bit higher than we would've otherwise thought, let's say with writings on our star and things like that. But, but I, so I, I I believe that there's an equilibrium in these things that we need to consider. The other part of it is, you know, we, we we're very hard anchored on the dual mandate with full employment and price stability. Then you've got kind of, you know, the third leg that I would say would be economic growth, you know, and how, how is the, the, the policy rate affecting that I think we have to kind of keep our eye on that is, that's been a little choppy, but it's been pretty robust here in the last quarter. We'll see what the fourth quarter does. But well,

- To our earlier discussion about financial conditions, it's, it's hard to make the case that monetary, restrictive monetary policy is impeding economic growth at this point, as I think it's hard to make that case.

- Yeah. The other thing that I try to do in some of these, these venues, Steve, is, is try to, I'm a visual learner, so I, I talk a little bit about, you know, we, there's been lots of discussion about Fed independence and, and the nature of what the Fed does as it relates to the other branches of government. Let me make a couple comments about equilibrium. So the way I look at this is, is, you know, every, every administration that comes in and congress really, they, they own the, the engine of a train and, and they, I, if, if I was part of that ownership group, I would wanna run the train as fast as possible. I think growth does have a lot of good spinoffs for the American economy. The American people are, are really in the cars. They're along for the ride. And, and, but we're not the car, we're not the engine or the car. We're the, we're the two rails. So, you know, keeping those rails in some balance is, the way I look at my job at the Fed is, you know, if you get one two outta whack, then, then the train is at risk at derailing and you don't want that to happen. So I think it's actually a good thing that we're, let's say part of the system, but we're not the train and, and what we're trying to do is just try to keep some sense of, of that train going as fast as it can relative to those two rails being somewhat in balance. And, and that's kinda the way I look at this thing when I think about inflation just seems to be the rail that seems to be out of, out of, out of balance today as we go forward into the new year.

- I think that's, well put, the, the, the central bank is not the engine of prosperity in the economy that has to do with a lot of other policies and except in the public sector, but a lot and private sector activity. And it's possible for the central bank to mess up the railroad train. Okay.

- Oh totally. Yeah.

- That we know that. But

- Yeah, - But if, if you want the train to move smoothly and quickly, there's other parts of government that need and policy that need, that need reform much more than anything in the central bank. So it's, it's worth keeping that in mind. And I, I agree a hundred percent.

- The other, the other thing that's a little off topic, but it's, I had an epiphany this last six or eight weeks with the shutdown is around the whole idea of independence is, you know, throughout that whole six or eight weeks, you know, we still move five to $6 trillion of payments a a day. And so that, that, that argues another reason that it's probably good with the Fed overseeing payments, the payment system that, that we didn't, there was no disruption in that flow. And, and that flow's important to the train, right?

- Yeah, it is. You're right. Okay. It's

- Really the

- Fuel haven't contemplated that argument before, but it's a subtle argument for why you wanna keep the fed somewhat independent from the rest of the government. I I get it. Yeah. The payment system, there's, there's another way to, the payment system is sort of like the oil lubricant in your engine, you know? Totally. Oh yeah. It doesn't matter until it matters and then you're really, you're really in bad shape that messes up. So okay. Point taken about the role of the payment system, although there's, there's many ways to design a payment system. Yeah. But, but you definitely want your payment system to function through thick and thin. That's for sure. So let, lemme go back to this issue about the other aspect of the shutdown that you mentioned earlier, which is some key economic indicators. Statistics and reports were not available during the shutdown, including perhaps most notably for you, the October edition of the employment situation report, which is compiled compiles statistics from the household survey and the establishment survey, the current employment statistics. And it's our chief source of information at the national level about unemployment employment and labor force participation and, and a great DL So that was unavailable to you.

- Yeah. - And I wanna get your thinking on how much that impaired the ability of the, of you and your Fed colleagues to assess the economy in, in real time. And I wanna set this up carefully 'cause so gimme another 20 seconds here or so. So I'm gonna stipulate that the federal government statistics remain the absolute gold standard and the essential benchmark for where the economy is over time on the employment side and in and, and inflation measures and so on. Okay, let's stipulate that. So by, in terms of the employment side, for what I mean by that, for example, on the establishment surveys we get once a year we get benchmark where those, those survey data are benchmarked to comprehensive universe, administrative records dataset. Those are absolutely vital. There's no private sector, there's no outside the government party that could reproduce that. What's much less clear to be is whether in the, in, in, in today's information environment where we have many, many sources of information. You described some that flow up through the regional federal reserve banks, but there's many others. And including in my own small way, I, I contribute to this through various surveys and eco the economic policy uncertainty indexes and so on. But there's mi there's hundreds of these things now. So it's not clear to me that the, the world will end if the employment situation report comes out a week or two later than it does now. So we get smaller revisions down the road, which we've learned are politically costly. It's not even clear to me that it's so important that it come out within a few weeks as long as we get very solid gold standard numbers because a lot of the other in-between stuff can be filled in from other sources. And I wanna get your sense of like, I know I'm putting you on the spot here a little bit 'cause you don't want to tell the bbl s folks that if we don't get your data for 10 weeks instead of four weeks, it's okay, but how, how important is it really?

- Well, so I, I'd almost love to turn that back and have you answer it. 'cause you're, you're a great researcher, you're, you're steeped in the sciences of these things. But, but here's, here's what I think is hap has happened over, you know, a, a, a fairly long period of time and I think that a lot of the reserve banks have, have done a nice job at this is, you know, look, the we, we w we want and we can't wait to get the BLS pipeline back and running. Well I, that, that's an element of what's what we need, but I I think a lot of things that we do are end up being kind of validations of things that we're, that we're doing on our own. Let, let's take say for instance at the Kansas City Fed, we have what's called a labor markets condition index. So what we'll put, like a lot of great economists do, we'll put a lot of, I think in this case probably 27 different factors into a basket measurement to try to figure out more, more the trending. I mean, so we all know as an analyst you've gotta look at what is the level compared to what we're trying to do and, and how is it trending. And I think there's a lot of really good, really good research and indexes that have been developed over the years that actually when you put 'em all together, give you a sense of what is the, the overall condition of the labor market. I mean, you know, it, you know, you've got it what 160 or 170 million people that are working at something every day in the us What, what's ha you know, take taken let's say private sector data along with public sector data and trying to figure out where is that moving? And, and I, from my standpoint, what what we've done is we've gotten a little bit deeper in our own basket of numbers that we can develop in our district. And then, then, then we will collaborate with the other 11 districts and see what they're doing and then try to get a a, a sense of confidence and trend line of what's happening in that macro side of that 160 million workers. And, and I think that at the end of the day, what, what BLS will drive to us will be really important data points that I think will either validate or argue against what we're thinking that labor market is doing at any given moment. And so IIII hope that kind of answers your question. 'cause I think, like I said earlier, our muscle had to get better when we didn't have the BLS pipe running.

- Right?

- But, but let me make a postscript to that, that I think is important. I think the, what I'm seeing relative to agencies like the BLS is there's a new conversation going on about are we, are we getting the data that we want and are we using innovative tools to get it more real time? So, you know, are the old ways of surveying and emailing, is that the way that we should be doing it? And I'm also kind of excited about what things like artificial intelligence or other tools can do to actually modernize the data that we get in a real time sense and try to reduce the, the, the a adjustments that we end up having to suffer through as we look at these things on a hindsight basis. So I'm actually a little bit excited that there's more talk about how do we get more innovative with some of these data points.

- Yeah. So few things there. It's, I I guess the way I think of it as a researcher, and I'm genuinely struggling with in thinking about the balance here, but a few things are obvious. One I already alluded to, which is that the information environment beyond what the government statistical agencies provide has exploded. And that's been especially true in the wake of the pandemic, but it had begun long before then. So there's, and you know, this is in, in line with what you said is, you know, your, your muscle within the, within the Federal reserve system at the regional banks has strengthened. That's one example, but there are many other examples out there. And so we need to rethink what's the most useful role for the public statistical agencies given all the new sources of information outside, including some of which can be brought in through public private partnerships. Some of this already happens as I understand it. So the current employment statistics, you can, rather than getting survey data, you can feed in some administrative record sources, which cuts down on the survey response burden. Probably cuts down on errors too once the system's in place. Those things should be, should we should continue to pursue. In the backdrop of this discussion that you and I are having, we should make it explicit. There's been an across the board decline in survey response rates for government surveys in the United States and really around the world. And, and that has presented serious challenges to the statistical agencies in the way they've traditionally collected data. So they need to look to alternative innovative methods that rely less heavily on these traditional survey instruments. So there's definitely room here for something of a rethink in how we produce economic statistics and a rethink of what's the right mix of public sector sector statistics and private sector sources. So yeah, that's, that's ongoing And, and, and there, there are reasons to be excited about that, but, but we do need to get on that, on that path in a big way in my view.

- Yeah. Yeah. And I think that the other side of this as we go into the new year, you know, kind of taking this whole AI and robotics conversation that's very active is, is is, I mean, and we're doing this at the, at our Federal reserve as we speak. I mean we, we committed to a 10% reduction in force here a few months ago and what over the next couple of years. And, but what that, what that in sparked was a conversation of the, the turnover of our team, the demographics of our team and, and is is that actually an opportunity to look at AI and how we re-skill our workforce into the future? So I, I know I I go, you know, especially in Washington, the question becomes is AI gonna replace workforce? Actually, I don't believe it is. I think it's just gonna give us a, an opportunity to say, what are you doing that this can do? And then how, how can we re-skill you to another place that actually leverages your brain power more? And I, and I think that's, I think that's actually happening inside the labor structures and I think we're gonna merge the next couple years as we move through kind of the, this retirement bubble that, that's occurring in on the baby boomer side and and really gonna emerge on the other side of it with really actually needing AI tools to supplement the, the, what I would consider the new workforce post, post baby boomer demographic.

- Yeah. And, and just to underscore that point, that's even more true if we continue on the kind of restrictive immigration policy Yeah. That we have moved towards, toward in the very last part of the Biden administration and, and very aggressively in the Trump administration. I mean,

- Yeah, - Our, our our net immigration figures now are much lower than they were for, for in the, in previous years and previous decades.

- Yeah.

- So

- Yeah, we're gonna, we need to, we need to, I mean, we talk about the, this all the time. The, the, the Fed, the Fed has gone over the last 50 years from fairly heavy operational, you know, check clearing and cash distribution to a very intellectual business. And so for us, talent and technology is gonna win the day relative to what the Fed delivers. And, and we're, we we're gonna have to cherry pick talent from all over the globe to, to make that happen and, and to, and to, you know, continue to be the leader, the economic leader on in the world.

- Yeah. Well I'm, I'm very much on board with you there. That's been a, a recurring top theme on various episodes of this podcast, the importance of immigrants and, and talented people coming into the United States throughout our history. It's part of our, it's part of the secret sauce of our success. But let me, I wanna turn to, I got one more topic I want to ask you about, if I may, 'cause I'd be kind of remiss if I didn't in this current environment, I wanna get your thinking of how US tariff policy factors into decision making by you and by your FOMC members.

- Yeah, well, so, so certainly it's a, it's a fiscal element that creates an action or reaction. And here again, I I, I'm not an economist. I, I, and I'm not a scholar. I look at this a little bit more from a practical standpoint. I'm a, I'm a banker and former regulator and I always have to kind of be careful and, and really think about something like a tariff in a more macro versus micro. 'cause you can micro, you can microeconomic a tariff all day long. But from a macro standpoint, for me, it, it really is part of a, a massive stew. I mean, you got a $30 trillion economy, 30% of the, the Globe's production and, and look, a tariff is gonna create a behavioral action or reaction across border and, and trying to actually track what that behavior is, whether it be I'm gonna take a margin hit or I'm gonna take a a, a lower price or I'm gonna pass it through, i, it, it's chasing ghosts in, in, in a lot of ways for me. So what I try to think about is it, for me, it's much more of a behavioral risk that what we'll hear from people is like, look, I can, I, I'm not affected by terrorists, but I can use it as a bit of a smokescreen to raise prices. So for me, it's much more dangerous if we don't take or keep our eye on that more macro inflation number and, and the nature of where it's coming from. Like for instance, take healthcare. I don't think healthcare in a big way is probably affected by tariffs, but there's so much inflation action still in healthcare that we gotta be aware of that, that i, I think it's, it, it creates behavioral things that actually risk us de anchoring from our 2% mission. And so it's just another element of the stew for me that, that you gotta keep your eye on more than macro indicators that are, that are pushing inflation upward.

- Okay. So keep your eye on the ball.

- Yeah, the big ball.

- Yeah, the big ball.

- Yeah. Yeah.

- Okay. So yeah, that's, that's pretty sensible from an operational point of view. I guess the thing that I would add to what you said, it's, it's, there's been a lot of gyrations of tariffs under the current administration, but also nobody really knows where they're going

- Yeah.

- Where they're gonna end up. We have a big Supreme Court decision coming up, which may, depending on how that case, the IEPA case, depending on how it goes, could basically, you know, throw out most of the Trump tariffs on a revenue basis. We'll see. But this is just, you know, you're, the stew is like, we don't even know what's going into the stew and coming outta the stew. So,

- And well, and we, we went, you know, the, I think the more, the late second and then through the third quarter we were very active traveling and the businesses that you would, you would believe would be most affected by tariffs. You know, you hear a lot about small medium businesses and how they buy a lot of product from overseas, but even some really massive retailers, it seemed to me like they had actually had their, their, their plan pretty much baked through, through this coming holiday cycle. So, so I think what we're gonna watch really closely are some of the inflation numbers in the second, first and second quarter of 26. Because if, if people were gonna, if businesses were gonna start to raise prices in, in any measured form, especially on the, on the good side, I, I think you might see it more in the first or second quarter of next year. Okay. I'm hope, and I'm hopeful that, that you don't see it. I, I'm hopeful that, that you get enough kind of supply adjustment going into the new year that maybe that they won't be so aggressive to, to change and raise prices. That that kind of, I think that that behavior might be modified relative to what we end up seeing as a GDP growth growth in the fourth quarter.

- Okay. Very good. I'll just note for our listeners that we've talked a lot about tariffs on other episodes of this podcast. We'll, we'll include links to those episodes on the webpage for this episode. So there's a lot, we, there's a lot to do there, but we've covered a lot already. So I'm gonna let you get back to your real job now and thanks so much for taking the time, Jeff. It's been a real pleasure.

- Well, pleasure's mine, Steve, to all your listeners, we're approaching Thanksgiving. We're very grateful. We're, we're a Fed that's mission focused and, and I, we really appreciate these interactions to further our cause to try to help the American people understand what's going on. And tha thanks to you, they, they, they're a lot smarter today than they were last year. So thanks for all you do.

- Well, thank you. That's a, that's a very gracious and wonderful note on which to end and to the American people and so on. So thanks a lot Jeff. All care. You, you too. Bye-Bye.