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00:00I want to get right to the some of the big questions that have been really spoke about constantly the last couple of weeks since the Fed meeting and one of them of course is the big shift in dots. And it wasn't just that the dot the consensus look at dots move from 2024 to 2023. It's the number of people who now say that could be a rate hike in 2022 all over a third of the members of the FOMC. Were you part of that shift. No I actually I didn't shift my dad at all. I tend to have a very optimistic outlook for the economy. And so things have been proceeding pretty much according to the way I thought they would. So I didn't feel any need to move my dots forward. But the other committee members have clearly taken notice of the improvement in the U.S. economy and felt that we're making much better progress towards achieving our dual mandate goals. So you're still looking for the first hike in 2024. I'm not going to tell you what date I have. I'll just do I ever get optimistic outlook. Okay. Well I think he could be in 2023. We're showing our chart now. But another question. What would you have to see to move it up to get it get in the camp. Now the minority but still a bigger group would say that first rate hike could come next year. Well I think we'd have to see very good improvement in the labor market. I mean GDP growth is back to trend which is what we wanted. Inflation is above our target which we wanted for a while. Inflation expectations seem to be anchored around our inflation target. So really the only remaining thing is the labor market hasn't quite come back. So unemployment's still much higher even though it's in good shape at five point eight percent relative to other recessions. You know we were at three point five percent unemployment in February of 2020. So we're still long way off of that. And we've still got a lot of people who aren't in the labor force somewhere in the neighborhood of seven to seven and a half million. So those will come back but didn't have to come back very quick. The unemployment rate would have to drop fairly substantially or inflation would have to really continue at a very high rate before we would take seriously a rate hike in 2022. I'm not ruling it out OK. I'm not ruling it out. You said you thought that inflation expectations are well anchored around that nobody wants to see above the target. However if you look at consumer based measures of inflation expectations they are way over you know averaging above 2 percent. What kind of numbers on inflation expectations would you have to see to say well gee yeah maybe I am going to get looking for the rate hike next year. Yeah I've long been a fan of market based expectations because in those cases when you're looking at tips for example you're putting your money on the table in terms of what you think inflation is going to do. When you look at this like the Michigan survey of consumers it's very highly correlated with the actual inflation rate. So if inflation's high today people move up their expectations for inflation five years out. There's just too much noise in the Michigan survey. For me personally now they do provide a signal that you have to pay attention to. So but at the end of the day I'd much prefer to look at the market based measures or inflation expectations. This was also the talk about tapering meeting. So is it time to start drawing up the plan for that. Do you see a situation where the taper could start this year. Well as we said that we wanted to see substantial progress and this year has been a surprise. We none of us back in December would've thought the economy would be where it is right now. So it has moved faster than we thought. We made better progress than we anticipated. So as Chair Paul said at the last meeting we're starting to talk about this. Now there's a lot of things that have to be decided in the process of making a tapering decision. When is the appropriate time to taper. What's the pace of tape and whether there's any particular sequence of tapering that we want to pursue. And there seems to be a wide range of opinions on how to do that. So these are the sorts of things we all have to figure out. But given the way that the economy has progressed I think everybody anticipates that tapering could move up earlier than when they originally thought. Whether that's this year we'll see. But it certainly could. What's driving the tapering decision right now are pushing you to this point. Is it that oh the economy's growing so fast we really don't need so much stimulus. Let's take some of those bond purchases out. Is it the fact that you may be wondering gee we we don't need to buy so many mortgage backed securities in such a hot hot housing market. Yes. So I would say the general view of war shouldn't speak for the commander but the economy has just done much better than we thought. The vaccines have been extremely successful in helping us bring when I think the pandemic is over and the crisis is over now we're dealing with the aftermath of the pandemic. So we're now in a different phase of of economic policy. And so it's appropriate to start thinking about pulling back on some of the stimulus in terms of MVS. I'm much more sympathetic to tapering MVS first before Treasury's first couple of reasons. One even though we're not intending MVS purchases to support the housing market directly they nevertheless are going to have an indirect effect on housing markets. And right now the housing markets are on fire. They don't need any other unnecessary support. So I would be all in favor of that. I also think from just a risk management perspective we should worry that if we are going to have some potential damage when then we should pull back just for the fact that we're doing that. Okay. And I think it's an easy sell to the public. You know the housing market's on fire. We should kind of think carefully about doing MVS purchases and if we were to taper those first. That wouldn't necessarily be a big issue or a big problem or you'd have a big problem. Communicate specifically. You're in favor of tapering CMBS first. I am. Yes I am. OK I'll ask you about jobs. How important to the decisions of removing stimulus starting to taper the first rate hike. How important is it that the unemployment rate is down to its previous lows. That the the level of jobs is back to where it was before the pandemic. And is it sort of different for tapering versus rate liftoff. Yeah the tapering we said we want to see substantial progress to our goals. He doesn't say achieve our goals whereas in terms of rate hikes we've tried to make it very clear that we want to see outcomes we want to see our goals achieved before we start considering any series of rate hikes. So those clearly have two different sets of metrics and it's important to keep that separate. Progress towards your goals is not equivalent to achieving your goals. So the tapering aspect definitely will come first. I think I myself would like to see tapering over before we considered raising rates. Therefore if you think you may have to raise rates in late 22 or early 20s 20 23 you pretty much want to get tapering done by the end of next year if possible. You know back in 2016 when you were director of research at the St. Louis Fed you and James Gimble came up with sort of the new paradigm. If I can just distill it down of the idea that this the U.S. economy is stuck in kind of a disinflationary low growth scenario until something forced it to shift regime. So is this are we seeing regime shift now potentially with record peacetime fiscal stimulus on top of extraordinary Fed stimulus is still there. Could this could this be what shifts it and maybe even shifts a lot of the way you're looking at the inflation framework. Well clearly when we were thinking along those lines we saw very low inflation very low productivity growth and very low growth rate of the economy. And we felt that was going to persist and push down real interest rates particularly the infamous our star in our policy rule such that there wasn't really any reason to be raising rates when the economy wasn't inflationary. It was an excessively hot. So why raise rates just to raise rates. That was kind of the view. The big difference now is inflation at least for the next few months is going to be running well over 3 percent. That's way above our target. Productivity has exploded in the last 12 months. I mean we're back to basically trend GDP growth was 7 million less workers. That's a tremendous increase in productivity. So more capital more automation but the existing ones are much more productive. Now whether that productivity boom continues or not is a big issue. Right now people are not necessarily thinking it will that it was a temporary thing. But if it were to continue then that would have implications for what we think our star is in our long run neutral rate. So do you think this could be a regime change. You keeping that. Do you see that possibility that you know again. I I. Yeah I'm keeping my eye. I'm keeping my options open. There's certainly more evidence of it now than there would have been two years ago. And quickly would that make a difference in how you look at the in the average inflation target framework. You might might need to change that a bit real quick. Not so much the inflation their average flexible or average inflation targeting. It would mainly affect what I think would be the level of our star our long run neutral policy rate. If this productivity were to continue we have a kind of a new decade of productivity growth then our star would rise and I would raise my longer term estimate of where the neutral policy rate is. That would be the biggest impact.

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Fed’s Waller: Tapering Could Move Up Earlier Than Originally Thought

Federal Reserve Governor Christopher Waller discusses the outlook for the U.S. economy and monetary policy. The Fed held interest rates near zero at its June 15-16 meeting and signaled it would probably keep them there until 2023 to help the economy recover from Covid-19. Waller speaks with Kathleen Hays on "Bloomberg Daybreak: Australia." (Source: Bloomberg)