Of course, before I ask you specifically
about J. Pal and what we're going to
learn out of Jackson Hole, I do have to
ask you uh about some of the allegations
surrounding Lisa Cook, the political
undertones uh that some people think
that there is a concerted effort to try
to reshape the Fed board and of course
the general idea here of what Fed
independence even means in this current
environment.
Yeah. So, I've obviously read the
reports. I don't have anything to
comment on there. Uh I do think the main
thing is it's critical for uh members of
the Fed to uh do their work without
regard to political considerations or
political influence and come to the best
judgments they can. And I'm hopeful that
will continue to be the case. I
I I am curious about just the general
process here because I mean there are a
lot of allegations and we know so little
publicly. uh there has to be an
investigation both by the Fed internally
and it looks like at this point maybe
potentially by the DOJ, but you were the
subject of allegations several years ago
when it came to trading. You decided to
step down in your words to avoid that
distraction only, you know, what was it
maybe about 3 years later to have the
Fed come out and say after doing an
investigation they found you actually
did nothing wrong. Do you regret
stepping down when you did? No, I made I
made the best decision that I thought
was the best interest of the
institution. Uh but but I think I'm I'm
sympathetic. The situation that you're
currently talking about has its own set
of facts and um and and I don't want to
comment or say anything uh about it. Uh
I think the people involved will uh will
do the best they can to deal with it.
And I think I'll leave it at that.
Thank you for sharing that, Robert. If
you believe that President Trump is
trying to secure a majority of the
Federal Reserve Board, the seven member
board, what would that really
accomplish? And I asked that, Robert,
because we know that the FOMC is more
than just the board itself, right? You
have uh Fed presidents who also vote on
the FOMC.
There are 12 votes in every meeting. Um
and uh they're the governors as well as
five of the presidents. And uh no one
person makes the decision. The chair
doesn't make the decision. He or she has
to form a consensus around the table.
And I think you've got an ethic at the
Fed which is very strong of looking at
all the available analysis, talking to
businesses, understanding all the
structural drivers in the economy and
trying to come to the very best judgment
uh that you can and then bring that to
the meeting and debate it out. And uh I
think it's very it's a it's a healthy
process and I'm very hopeful that that's
the process that will continue. And of
course, one of the things everyone will
be debating about is what the economic
data show about the state of the economy
and what's in store for the economy. As
a former Fed official, as a former
voting member of the FOMC, how would you
interpret the data that we've seen the
last two weeks? Uh, which includes
consumer and wholesale inflation
seemingly at odds. Uh, you have rising
jobless claims. You now have a rebound
in manufacturing, at least according to
surveys.
Yeah. So, here's the challenge for the
Fed. Uh on the one hand, we have a
relatively sluggish uh jobs market and
relatively sluggish GDP growth. We're at
full employment, but the reason we're at
full employment is because labor supply
has been decelerating. Hiring has been
very sluggish. And so, uh I think the
Fed probably would like not to see a
further weakening in the labor market.
That's on the one hand. On the other
hand, we're running inflation above
target. We've been running inflation
above target for the last three or four
years. It's been primarily services. Uh
this is before we even talk about
tariffs. Goods, ironically, have been
disinflating. We'll have to understand
how the tariffs flow through goods. And
what the Fed is trying to balance uh is
I think if if the job market were
stronger, I think it would be clear to
be more be patient and wait to see how
uh the inflation is going to unfold and
be more patient to see it trend further
down toward target. But I think with
this weakening the labor market, it's
it's going to push the Fed, I think, to
be more forwardleading and maybe do an
adjustment in September. But the caution
I would give if they do move in
September, uh I don't think that's the
start of a cycle. I think it's an
individual decision. Then they'll wipe
the slate clean and take the next six
weeks try to understand these
crossurrens again. And so I think
they'll shorten up the time frame and
take it one meeting at a time.
I am curious as to what you think that
debate's going to be like. We got the
FOMC minutes from the last meeting and
there was clear uh clear division there
as to what the Fed should do and when
they should start doing it, if at all.
And I assume that's going to intensify
by the time we get to midepptember uh
once we have now that we've had some
additional economic data. Uh having been
in that room and knowing how those
debates go out, does that debate is that
going to center around in your view much
more on the inflation side or do you
think it's going to lean a little bit
more on the labor market side of the
mandate?
So, while there's a lot of focus on
JPAL's speech tomorrow, uh the the
reality is we're going to get at least
one more inflation print and we're going
to get the jobs mark. We're going to get
the jobs numbers for August. And so,
that actually that jobs number for
August is going to be very telling and
will shape the debate. But, uh you're
either going to see a a jobs number that
shows a further weakening or continued
sluggishness. I think that would tilt
toward taking some action in the
September meeting or you may see
something stronger. But the debate is
going to be about the fact that we we
are at risk of not meeting either side
of our dual mandate. We're already above
target on inflation and and how how
serious is the threat that the job
market is going to weaken further.
That's what they're going to debate. And
the reason there's a disagreement is for
good reason. It's not clear. And I think
the fact that there's debate and
disagreement I think is a good thing. I
think there ought to be where there's
these type of crossurrens. So I think
that's a good thing that they'll be
disagreeing and debating.
When it comes to where the inflation
rate or where the inflation target
should be, there's been a lot of talk
about 2% or I guess now it's 2%ish. But
the idea that the economy has been
running relatively okay with at least
headline inflation in the 3% range, core
inflation in the high twos, is there an
argument to be made, Rob, that longer
term maybe we can live with a higher
target rate, a higher neutral rate?
Yeah, I don't I would argue against
that. And here's why. Um there are
approximately 80 million workers in this
country that make 50 or $55,000 a year
or less. Uh they've lost 25% plus
purchasing power over the last three or
four years. They are struggling to make
ends meet. If headline inflation is
three, headline inflation for them based
on share of wallet might be five or six
or seven. And so I actually think it's
very critical, particularly for low
moderate income workers, that the Fed
continue to work on getting the headline
inflation rate down to two and not be
satisfied with three.
Rob, I got to get your sense as well
about what we've learned from companies
this earning season, particularly of
late with the retailers reporting
results. We already know Nike, Sonos,
PNG have been mulling raising prices.
Walmart said as much as well that it
would have to at some point start
raising prices in the second half of the
year. Ditto for Home Depot as well. So
how do you fold that into the thinking
of inflation as uh we anticipate higher
prices due to higher costs from
presumably the tariffs.
So there there are four areas that are
going to impact on the tariffs. One is
can you we've got a world of
manufacturing over capacity which tells
you that uh companies here that are
buying from overseas may have more
leverage over suppliers. The dollar
although it's weakened this year the
dollar could strengthen. That'll take a
bite out of the tariffs. They companies
may take some of it out of margin and
yes they may put some in prices but you
got to remember the consumer uh h has
the ability to substitute. They can be
very price sensitive. Uh about 24 25% of
the US economy is goods. 75% is
services. Consumers can decide not to
buy a good and they can decide to go out
to dinner or do something else instead.
And so to the extent companies can pass
on tariffs to consumers is going to
depend a lot on their pricing power, how
strong demand is. And so there's a lot
of these things that companies I talked
to still are uncertain about. they're
feeling their way. They'll figure it out
and they'll make it work. Where I'm more
concerned is small businesses I talk to
who don't have these levers to pull. And
I think for them uh for many they're
they're they're actively debating
whether they can make it through the end
of the year because they don't have the
flexibility to manage tariffs the way
big companies do.
Yeah. They don't have as many options.
And I really appreciate you bringing
that up. I mean all of that adds up to a
very complicated economic picture where
the economic indicators that we rely on
and debate over don't always capture the
crossurrens and the nuances that are
taking place underneath. Um all this
anecdotal insight from companies
particularly small companies as you put
it around the country is incredibly
valuable. So and all of that is
encapsulated in something called the
beigebook. Do you feel like the
beigebook should be more valuable to the
FOMC than it has been up to this point?
I mean, I know that as a reporter, we
sometimes get the beige book and we kind
of look at it and say, "Oh, that's
backwards looking. It didn't really tell
us anything."
Yeah. The beige book for me is a
critical part of the process. There's a
whole there's a whole mosaic of things
you look at. You talk to businesses, you
look at data that is published, you look
at the beige book, you try to understand
structural drivers and macro factors.
But the beige book is very valuable.
It's one of the unique things that the
Fed is set up to do because it is
distributed all over the United States
and has relationships locally and we get
these survey results. It's very
informative, but it's a it's a piece of
the puzzle that's very helpful in
periods like this where you have a big
number of structural changes going on. I
think being closer to business that
includes the Beige book, it can be
talking to businesses. I think that
becomes more important because the data
again is backward-looking. It's
aggregated. It may be lagging. It gets
revised. And so I think you have to look
at the whole picture.
Yeah. And that's a good point and I
think a lot of people in the market have
been trying to do that even prior uh to
some of the recent developments. And it
gets to this idea as to whether you see
any opportunity to actually improve the
government, the official uh government
data, the collection of that data, the
timeliness of that data, and more
importantly, the accuracy of that data.
I mean, what can we do to actually
update that?
Well, so so there's been a lot of
discussion. Uh uh I I got a I think I've
mentioned you before I I remember I
learned when I first got to the Fed, the
first piece of advice I got is don't
over rely on anyone data print tends to
be backward looking. It's aggregated.
It's going to get revised. And so uh I
think we also are aware of postcoid the
survey response rates have declined. So
I think in this world of AI high
frequency data a lot of private sources
as well as public sources use of
technology I I think the BLS will be
well served and and I'm confident they
will do this to look at how to upgrade
uh the accuracy of their data. Even with
that, I would say the data is never
going to be perfect. And I think you're
always better off looking at the 3 to
six month trend, not overreacting to any
one data print. And I think that ethic
is always worth a reminder when you're
at the Fed.
I am curious. I mean, you sit in a very
unique position having of course worked
uh in the government at the Fed and
obviously a long career on Wall Street
and now back there as vice chairman of
Goldman Sachs. There is the idea that we
have to be as a market I say the Wii a
royal wei uh not necessarily relying on
that data but at least have some faith
in it in the data faith in the
independence of the fed faith in the
faith in the reliability of US
government economic data that faith is
being tested right now and I'm curious
if that worries you at all
uh it it it's always a concern it should
be a concern however
uh this is where I used to teach
leadership as you may know at Harvard
Business School for 10 years. This is
where people matter.
It's up to the people involved to adhere
to an ethic uh that they're going to
make decisions based on their best
available information without regard to
political influence or political
consideration. That ethic is very strong
today at the Fed. I'm very hopeful that
that ethic will continue and it'll be up
to the leaders of the Fed to make sure
of