February 11, 2025 • 31 mins
Jon Hartley and Federal Reserve Governor Adriana Kugler discuss the stance of monetary policy, the Federal Reserve balance sheet, the natural rate of interest (r-star), inflation, labor markets, productivity, entrepreneurship, the US economy, and the recent growth in Miami.
Recorded on February 7, 2025.
ABOUT THE SPEAKERS:
Dr. Adriana D. Kugler took office as a member of the Board of Governors of the Federal Reserve System on September 13, 2023, to fill an unexpired term ending January 31, 2026.
Prior to her appointment on the Board, Dr. Kugler served as the U.S. Executive Director at the World Bank Group. She is on leave from Georgetown University where she is a professor of Public Policy and Economics and was vice provost for faculty.
Previously, she served as chief economist at the U.S. Department of Labor from 2011 to 2013. Dr. Kugler was also a research associate of the National Bureau of Economic Research and of the Center for the Study of Poverty and Inequality at Stanford University.
Dr. Kugler's other professional appointments include being the elected chair of the Business and Economics Statistics Section of the American Statistical Association. She was also a member of the Board on Science, Technology, and Economic Policy of the National Academies of Sciences and served on the Technical Advisory Committee of the Bureau of Labor Statistics.
Dr. Kugler received a BA in economics and political science from McGill University and a PhD in economics from the University of California, Berkeley.
Jon Hartley is the host of the Capitalism and Freedom in the 21st Century Podcast at the Hoover Institution and an economics PhD Candidate at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently an Affiliated Scholar at the Mercatus Center, a Senior Fellow at the Foundation for Research on Equal Opportunity (FREOPP), and a Senior Fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists, and serves as chair of the Economic Club of Miami.
Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, IMF, Committee on Capital Markets Regulation, US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada.
Jon has also been a regular economics contributor for National Review Online, Forbes, and The Huffington Post and has contributed to The Wall Street Journal, The New York Times, USA Today,
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Jon Hartley (00:09):
And for those who don't know me, I'm Jon Hartley,
I'm the founding chair ofthe Economic Club of Miami here.
There's a few of my co founderswho are here as well, and
we have our executive director,Francisco Gonzalez,
who's put in a tremendous amountof effort today for today's event.
So really grateful forall their work on this.
(00:29):
And by way of background, an economist,
I host a podcast atthe Hoover Institution, the Capitalism and
Freedom in the 21st Century podcast,and do a lot of economic stuff.
And very looking forward totoday's conversation and very much
honored to have distinguished membersfrom the Federal Reserve here today.
(00:51):
It's my distinct privilege to introduceto you Governor Adriana Kugler.
Dr. Kugler took office as a member ofthe Federal Reserve Board of governors in
2023 to fill an unexpired term in 2026.
Prior to her appointment on the board, Dr.
Kugler served as the US Executive Directorat the World Bank Group.
(01:13):
She's also on leave from GeorgetownUniversity where she's a professor of
public policy and economics andwas the Vice Provost for Faculty.
Previously, she served as Chief economistat the US department of labor from
2011 to 2013.
Dr. Kugler is also a research associateat the NBR and the Center for
the Study of Poverty andInequality at Stanford University.
Dr. Kugler's other professionalactivities also include being the chair
(01:36):
of the Business Economics StatisticsSection of the of the American Statistical
association.
Who's also a member ofthe Board on Science,
Technology, and Economic Policy atthe National Academy of Science.
And served on Technical Advisory Committeeat the Bureau of Labor Statistics.
Dr Kugler also receiveda BA in Economics and
Political Science from McGill University.
I grew up in Toronto, so it's wonderfulto have a fellow Canadian connection
(01:58):
there and also a PhD in economics fromthe University of California, Berkeley.
I'm a Stanford Economics PhD.
There's sort of a famous rivalrybetween the school, two schools, but
we won't hold that against her.
But without any further ado,I wanna welcome
to Governor Kueger to the stage topresent some remarks that she's prepared.
And then we're going to doa fireside chat afterward.
Thank you so much.
(02:18):
Please give a round of applause.
>> [APPLAUSE]>> Jon Hartley: This is a live recording
of an episode of the Capitalism andFreedom in the 21st Century podcast,
which I, Jon Hartley,am the host of at the Hoover Institution.
It's the official podcast at the HooverInstitution Economic Policy Working Group.
(02:39):
Really, really excited to havethis conversation with you,
Governor Kugler and ask you somequestions, starting with monetary policy.
So the Fed funds targetranges between 4.25 and
4.5% after some cuts.
What do you consider to be the appropriatestance of monetary policy rates?
>> Adriana Kluger (03:03):
So there's some magic number.
There is no specific numberthat we're looking for.
We look at the totality of the data andwe also definitely look at trends.
That for me is really important.
We don't overreact to any particularnumber or any specific number.
(03:24):
We look at the totality of the data andthe trends and how the economy is moving.
And the other thing thatwe look is at forecasts and
any risk that may be coming our way.
So given that, as I mentioned,
2024 ended at a very solid place and
(03:45):
2025 is also startingat a very good place,
the economy in 2024 expanded at a rate
of 2.5% compared to 3.2% in 2023.
So a little slower, but
it's still the highest growth rateamong any advanced economies.
(04:08):
So economic activityremains very resilient.
Now let's turn to the labor market.
As I said, we got data this morning andwe receive good news.
The labor market is healthy, it's stable.
For some time the labor markethad been cooling gradually.
(04:29):
Unemployment increasedfrom 3.4% in April 2023
to about 4.2% sometime inthe fall of last year.
But what we have seen is that theunemployment rate has hovered around 4%,
4.2%.
It remains stable.
Also something that we see is thatthere's still hiring going on even
(04:53):
though the hiring rate has goneback to pre pandemic levels and
layoffs remain subdued.
So that that gives us hope thatthere is a balanced labor market,
as I mentioned in the remarks,that is neither weakening nor overheated.
The labor market is stable, which gives usa little bit of time to make decisions.
(05:15):
By the same token,I have to say in the past few months we
have seen the inflationrate moving sideways.
It has firmed a little bit.
So we were paying attention to that.
If we look at the overall inflation,whether it's headline or
(05:35):
whether it's score, it has moved sideways.
Specific components have made progress.
So I want to acknowledgethe progress that we have made.
For example, in terms of the housinginflation component component,
in terms of services inflation,which had been persistent for some time,
but at the same time non marketservices inflation has increased due
(05:57):
to portfolio management categories andthings of this sort.
And then we are making less progressin terms of goods inflation,
which has usually kept a lidon inflation as a whole.
So that's holding us a little bitat the same level without allowing
us to make progress because we're not yetat the 2% level.
(06:20):
That means it makes sense to hold ourfederal funds rate where it is now.
And the final issue is, as I mentioned,
we have uncertainty coming ahead interms of new policies that may be put
into place in terms of some policies thathave already been put into place, but
that we're not sure how they willshape up once they're implemented.
(06:42):
So I think the cautious and
the prudent step is to hold the federalfunds rate where it is for some time,
given that combination of factors,given that the economy is solid,
given the fact that we haven'tachieved our 2% target.
and given the fact that wemay have uncertainties and
(07:03):
other factors that may bepushing up the inflation or
maybe reducing output andgrowth into the future.
>> Jon Hartley (07:11):
So my next question was gonna be on inflation.
And so there's been some.
The Fed's engaged in a few cuts andit's now halted,
sort of with the latest inflationarygoing a little bit sideways.
As you say, year over year inflation's now3%, core inflation's a bit higher, 3.2%.
And what do you think inflationneeds to be before thinking
(07:33):
about any further accommodation orrate cuts?
>> Adriana Kluger (07:36):
So, again, I'm not one that has a magic number in mind, right?
I will keep looking at the trends.
I will keep looking at where the economyis going and at the risks ahead.
Now, you're right.
We have made tremendous progress sincethe height of inflation in 2022,
in the middle of 2022,when headline inflation was 7.2%.
(07:59):
It is now Now 2.6%.
If you look at core inflation,
it has halved from 5.6% in 22 to 2.8%.
But in recent months we move sideways.
It's really firm.
So we want to make sure thatwe continue to make progress.
This talks to the trends issue, right?
(08:20):
That we continue to make progress andcontinue to slow down
inflation to feel comfortablewith also changing rates farther.
That's not where we are right now.
I am concerned about goodsinflation increasing a bed
from minus 0.6% lastyear to now minus 0.1.
(08:42):
So we're not getting as muchhelp from goods inflation.
Again, this non market component ofservices inflation is not helping us
either.
But the better of goodnews is housing inflation,
which had been very persistent, it wasat around 5% at the beginning of 24,
came down in the fourth quarter to 4.7%.
(09:04):
The services component ex housingcomponent of inflation has come
down to 3.2% at the end of lastyear after being at around 4%.
So there is some progress in somecomponents, I would say, but I am paying
attention to why these other componentsare kind of moving backwards now.
>> Jon Hartley (09:24):
And it's a great point.
Inflation was at this basicallypeak of many decades and
we've come a long wayin the past few years.
I wanna talk a little bitabout the balance sheet.
The Fed's balance sheet today is closerto about $7 trillion from its peak of $9
trillion just a few years agoin the post pandemic period.
(09:45):
How do you think aboutthe Fed's balance sheet and
where should it be if you think thatthere should be some terminal level?
>> Adriana Kluger (09:52):
So as you will remember, during the last two recessions,
the 2008, 2020 recessions, we,and I wasn't there at the time,
but I have to say the Feddeployed balance sheet tools to
help make progress on revitalizingthe economy at the time.
And I think that served economy well.
(10:16):
In March 2022, the Fed then decided to
start reducing the sizeof the balance sheet.
And that has been happening ever since.
And I would say that what the Fed,what we aim for
is to reduce the balance sheetto a point that serves us in
(10:36):
terms of our effective functioning andmonetary policy.
Given what is now an ampleregime system that we have now,
we're paying close attention to anyindicators of the conditions in money
markets because what we want to see isthat we're somewhat above this ample level
(10:56):
to feel comfortable with stopping thisreduction in the balance sheet size.
And we don't have any specific date.
We're watching very closely, but we,
we don't have a date in mindas to when that may happen.
We're just continuingto watch very closely.
>> Jon Hartley (11:13):
So as a nerdy economist, I love asking questions about R Star.
R star it's this level of the interestrate that's neither inflationary nor
disinflationary andthere's all these different estimates for
it out there in the literature.
We have model driven estimates fromLabbock Williams which is R Star
(11:35):
kind of falling furthersince the pandemic.
And also surveys out now from the NewYork Fed which ask questions of market
participants and their forecasts for wherethe, where the, where they would think
the short term rate will be in the longrun, effectively asking about R star.
That median estimate orforecast from the New York Fed survey of
professional forecasters has actually beenrising quite a bit since the pandemic.
(11:59):
And other measures showR Star rising as well.
The median forecast beingaround 3% from that survey.
Lawback Williams is I thinkcloser to below 2% now.
Do you have a particular estimateyou like to use for R Star?
>> Adriana Kluger (12:13):
So I use a wide range of models to inform my opinions about our
star, but I also look ateconomic conditions generally.
I also look at the financialconditions index to see the level of
restrictiveness of our policyrates as they start for those.
(12:34):
And I know there are a few studentshere who wonder what these R Star
is,is the neutral rate of the interestrate is basically the interest
rate that will keep us at 2% withoutthe labor market either weakening or
overheating and without any shocks.
So it's a theoretical concept becausewe're gonna continue to have shocks,
(12:58):
believe me.
So it's kind of a long termconcept where we would like to be,
but it's a theoretical concept.
So that's why we have these models.
And I rely on a variety of models.
I definitely look atthe Lobach Williams estimates,
which is a semi structural model as wellas many other semi structural models.
(13:18):
There are the reduced form models.
There is a number of them, Negro et al.
And Liebherg and Matthews.
There are quite a few of them.
So they have a range of estimates.
But besides looking at these estimates,
something that I pay a lot of attentionto is the determinants of R Star.
Why that neutral orlong term interest rate may go up or down.
(13:44):
So the reason why I do that is becauseI wanna be paying attention to whether
these determinants or factors that affectR Star are permanent or temporary.
And so that will make a big difference.
And so one of the things that I andmany others pay attention to,
including Constance here,who's nodding and
(14:05):
going, of course,is government debt, right?
So government debt has been going up.
And this government debt meansthat we need to issue and
supply more US treasuries.
And that increases RStar.
So I think that's here to stay forsome time.
That's pushing up R Star, for sure.
(14:26):
The other thing is what I talkedabout in my speech, productivity.
So productivity also pushes up RStar.
So as, as you have seen,I'm a productivity optimist.
But there are others that are not as much.
And time will tell, as I said, right?
We'll have to see if that remainsthat will push up our start.
(14:46):
There are many other factors thatcould push our start down, in fact.
So one of them is the agingof the population, which is
happening across the world, not onlyhere in the US but all across the world.
When the population ages, people savemore and they invest in safe assets.
So there is greater demand forthings such as US Securities.
(15:09):
That pushes down our star.
Other things that may push down our staris international demand for US Treasuries.
And that has been going up for some time.
As you know,there are many countries around the world,
including Latin America,which deregulated financial markets.
Financial flows have increased.
(15:29):
That would push up Star.
That would push down our star.
Also because there is greater demand forUS treasury.
So there's a combination of factors.
If you ask me,I would say our star has gone up some,
but not as some others predict.
I think there is some momentum, butI would say there are other factors that
(15:51):
are keeping it down still at a level notas far from from what it used to be.
So I'm paying attention to thatbecause As we move on towards
normalizing our federal funds rate,
we need to pay attention to when we stop,we need to be close to that rSTAR.
So we're not quite there yet,but we all pay attention to that.
(16:15):
And my colleague, President Bostic,who's here from Atlanta,
pays close attention to that as well.
We are all definitely keeping a close eyeon RSAR and we all have our estimates.
>> Jon Hartley (16:28):
I think you're in good company with rSTAR thinking that rSTAR may
be on the rise.
I love the fact that the New York Fed,along with the bank of Canada,
bank of England, European Central bank,they now put out these surveys
asking professionals abouttheir estimates of RSR.
So not only do you get to and obviouslythey look at these models as well, but
(16:50):
you also get some information in termsof what people are thinking about RSR.
I have a whole paper on this.
I'm very invested in survey estimatesof the natural rate of interest for
full disclosure.
But I do think it's kind ofa methodological step forward because
sometimes these models canbe very structural and
very complicated to understand.
And at least being a sort of empiricalreason person, I appreciate sometimes just
(17:12):
asking people what they think rather thanhaving to go into a very deep model.
I want to talk a little.
>> Adriana Kluger (17:17):
That's really true,
I have to say I do like lookingat the surveys as well.
And there's survey based models, right?
Which use the survey data toinform where rSTAR is too.
So thank you for mentioning that.
>> Jon Hartley (17:30):
Exactly and they can still coexist with model based estimates.
And I think those model based estimatesmaybe inform those survey estimates.
Yeah, I think it's a really understated,underappreciated development.
I think that's continuing tocome out of central banks.
The New York Fed actually hasbeen doing this for 10 years,
whereas the bank of Canada,European Central bank and ECB and
(17:52):
also the Reserve bank of Australia havebeen doing it for just a couple years now.
But they're following your lead,you being the Fed.
I want to talk a little bitabout the labor market.
You star a little bit.
You are a very decorated labor economist.
How do you think aboutslack in the economy?
(18:13):
You star full employment wheredo you think we are today versus
say full employment orlatest unemployment reads at 4%.
>> Adriana Kluger (18:23):
Yeah the typical way to measure slack is by looking
at the unemployment gap or the output gap.
So the gap between actual unemployment andwhat we call the Nairo,
the natural rate of unemployment orthe output gap,
which is the gap between the totaloutput in economy and potential output.
(18:47):
And those are usually they'reestimates created by the CBO,
by the Congressional Budget Office, but
we certainly come up withour estimates of those gaps.
Now, I have to say, during the pandemicand post pandemic period, and
especially during the postpandemic period and
this inflationary period thatwe have been living through.
(19:09):
We definitely realized that therewere some other measures of slack
which were better.
So one that I pay a whole lot of attentionto is the vacancies to unemployment ratio.
So number of vacanciescreated by employers and
businesses over the total numberof people looking for jobs.
(19:29):
It gives you a better sense of that gapbetween the total jobs available and
the total number of people looking forjobs.
That VU ratio has moved tremendouslyover the past few years.
It was 1.2 prior to the pandemic.
It reached 2 in May of 2022,and now it's back.
(19:53):
The numbers just came outthis morning to 1.1 again.
So it's almost 1 to 1.
So that tells you something about how theeconomy is in much better balance, right?
In terms of labor supply beingbalanced with labor demand
other things I pay attention to are flows.
So the hiring rate,the layoff rate that I mentioned before.
>> Jon Hartley (20:16):
The jolts data.
>> Adriana Kluger (20:18):
Yes, exactly, the jolts data from the Labor Department.
So I used to be chief economistat the Labor Department.
So this was where I spent mostof my time on days 247 looking
at the labor data, andthat includes the jolts data.
So the hiring rate is now belowwhat it was pre pandemic.
(20:40):
The layoff rate surprisinglyhas been subdued.
It had been going up fora while now it's leveled off again, but
it's remained subdued given the timewe're living through, right?
So there has been a reduction in demandfor workers, but that has come through
reduced hirings and not necessarilythrough people being laid off.
(21:04):
And that's good news.
That's a good situation to be in becausepeople are not desperate losing their
jobs, right?
It's not the 22 million that I mentionedbefore back during the pandemic.
So that's good news.
One other measure, which, again,this shows you how nerdy I am.
So I love that you are also like that.
(21:27):
Is this measure of quits?
The quit rate is one of those things thatI paid so much attention when I was chief
economist because it tells you aboutopportunities in the labor market,
even for those who are already employed.
So you all remember the timeof the Great Resignation.
So during the Great Resignation,people were leaving looking for
(21:48):
jobs elsewhere because there wasan abundance of demand for labor.
So that gives you an idea of how tightthe labor market was at the time.
And there is even the wage premium forquitters, for workers, right?
How much more their wages are when theyleave a job and jump to another job.
(22:09):
That tells you how tightthe labor market is.
That has all gone backto pre pandemic levels.
So that tells you once again thatthe labor market is at a good place.
It's healthy, it's resilient, butit's well balanced at this point.
It's neither weakening we saw theunemployment rate tick down this morning.
(22:32):
But it's not overheated the wayit was certainly a few years ago,
which was causing a lot of trouble aswell for businesses in terms of having
shortages of workers, pushing up wagesto a level that was not sustainable.
So I would say the labor marketis sitting at a good place.
(22:53):
It's stable, it's healthy,and it's resilient.
>> Jon Hartley (22:57):
No, absolutely and it's fascinating too,
just how much has changedin the past six months.
There's so much worry aboutthe unemployment rate moving up.
It triggered some of these variousmeasures like the SAHM rule and
some of these other measures.
But, yeah, it seems like we'rein a much better place now.
And I think to your point, it can't beoverstated how big a shift is going
(23:19):
from having two job vacancies forevery unemployed worker to simply one.
Yeah.I mean, that was just a massive shift.
And I think vacancies, the beveragecurve is something that people, I think,
are starting to paya little more attention to.
So I think that's terrific.
I want to ask you just a little bitabout the Fed's framework review.
(23:41):
I'm curious, what do you think aboutthe upcoming Fed framework review and
what do you think it shouldaddress in your mind?
>> Adriana Kluger (23:47):
Yes, so we literally just started talking about these with
Rafael and my other colleaguesin our last FOMC meeting.
And I have to say.
That one thing that I support and
approve unequivocally iskeeping our 2% target for
(24:08):
inflation in terms of somany other parts of the framework.
I'm entering this processwith a very open mind and
we're going to have a whole lot ofdiscussion, analysis papers and
reviews that we will be doingin the next many months.
So that's what we're doing now.
(24:29):
I do have to say, andthis has been told by others and
it's well known that the lastreview was heavily influenced by
the period between the last tworecessions, between 2008 and 2020.
So much of that review ofthe framework at the time focus
(24:51):
on the zero lower bound, right?
On that ability to maneuver potentiallyif we were hit by a new recession,
given that we were very closeto the zero lower bound, or
it was influenced by an inflation whichwas running persistently below 2%.
(25:12):
And how to get that up, given thatwe had a flat Phillips curve, right?
We thought there wasa flat Phillips curve.
So a lot of those things is what wewere seeing in the last framework.
In my mind, the next frameworkneeds to fold in what we
have learned from this last period.
(25:33):
We learned that we couldn'ttake stable prices for granted.
Certainly, we had to deal with these verytight labor markets and wage inflation
as well is price inflation that hit levelsthat we hadn't seen in many decades.
So I think we need to fold inthe lessons from the pandemic,
but also the lessons from the postpandemic period together.
(25:57):
Again, we shouldn't forget about thatperiod between the last two recessions,
2008, 2020, with persistently lowinflation, we should consider as
many possible situations that could affectus moving forward to learn from them.
And then the other thing as I mentionedthat we have learned is that I think we
(26:20):
can count on many different measures thatwe didn't use to count on to understand
the level of tightness and slack inthe labor market or in the goods market.
So many other things that could beincorporated as well moving forward.
So again, entering with an open mind,
happy to learn from my wisecolleagues around the table and
(26:44):
certainly very committedto keeping our 2% target.
>> Jon Hartley (26:49):
Well, I think that's several excellent points.
Certainly, I think the last frameworkreview flexible average inflation target
was very influenced by the past 10 yearsof very low inflation, zero lower bound.
And certainly, I think it totallymakes sense that the next framework
review incorporates the eventsof the past few years.
And I think over all this time Icouldn't agree with you more that just
(27:13):
inflation targeting issort of the central thing,
I think, to celebrate andto certainly keep in the framework.
It's been around since the 90s, formally,
was put in with Ben Bernanke.
And I think just in terms of anchoringlong run inflation expectations has been
(27:34):
hugely, hugely successful.
Last question.
The first Hispanic governorof the Federal Reserve Board.
What does Miami mean to you?
And I know you have some family here.
>> Adriana Kluger (27:46):
Yeah, in fact, I have some family sitting here with me.
And so for me, certainly Miami first and
foremost means family.
As I said,I've been coming to Miami since the 1980s.
My late grandmother used to be here,so I was always visiting.
(28:08):
We have four generationsof family members, right?
My great uncle, my great grandmother.
Now we've moved to three generations.
The last two generations have allbeen born here in the US and so
for me, it means family andit means opportunities.
I feel so very honored to bethe first Hispanic person,
(28:32):
man or woman,to serve in the Federal Reserve Board.
I take ncure.
I take this role with so much humility and
with the responsibility of feelingthat I can represent everybody,
all Americans across the country withthe work that I do at the board.
(28:57):
So how did I ended up here at the board?
Right?I came because I'm an expert in labor
markets.
I'm an expert in price andproductivity dynamics.
And that's how I ended up coming tothe board, contributing that expertise.
But I also bring that perspectiveof somebody who's a Latina,
(29:17):
who's a woman,who's a daughter of immigrants.
And that perspective comes across when.
When I make my decisions and I chooseto focus on certain issues that are.
No, are very important formany Americans across the country.
So one thing that I spend a lot of timeon is not only talking to my family here
(29:39):
in Florida and across the country,but also talking to all Americans and
meeting with communitiesacross the country.
Because I think aside from the data andyou saw, I'm a data geek and
I love this stuff.
I also love talking to people and findingout about their economic realities and
(30:00):
understanding how they're seeing theeconomy and them telling me in real time.
And that's the difference betweenlooking at the lag data that we get and
kind of understandingthe realities today and
how they're seeing thingscoming up tomorrow, right?
So I would say that that's critical for
me, that I represent well allAmericans across the country.
(30:25):
And because I'm an expert on labormarkets and business dynamics,
being in Miami, you saw it in my speech,is just a real lab and an opportunity
to explore these issues in an environmentthat is very dynamic and very vibrant.
So I'm so excited to be back in Miami,as I said, not only to see my family,
(30:47):
we're having a huge picnic with about100 family members, four generations.
And I'm very excited to get together andhear from them and
hear how they're seeing the economy.
Definitely, but also to understandhow people see our future.
>> Jon Hartley (31:07):
I couldn't agree with you more.
There's millions of people underlyingall these data points, and
I think that that can't be forgotten and.
And should be remembered.
Well, I want to really thank you forall your wonderful government service and
thank you for this wonderful conversation.
Thank you so much, Governor Kubler.
>> Adriana Kluger (31:24):
Thank you, Jon.
[MUSIC]
[MUSIC]
>> Jon Hartley (00:09):
And for those who don't know me, I'm Jon Hartley,
I'm the founding chair ofthe Economic Club of Miami here.
There's a few of my co founderswho are here as well, and
we have our executive director,Francisco Gonzalez,
who's put in a tremendous amountof effort today for today's event.
So really grateful forall their work on this.
(00:29):
And by way of background, an economist,
I host a podcast atthe Hoover Institution, the Capitalism and
Freedom in the 21st Century podcast,and do a lot of economic stuff.
And very looking forward totoday's conversation and very much
honored to have distinguished membersfrom the Federal Reserve here today.
(00:51):
It's my distinct privilege to introduceto you Governor Adriana Kugler.
Dr. Kugler took office as a member ofthe Federal Reserve Board of governors in
2023 to fill an unexpired term in 2026.
Prior to her appointment on the board, Dr.
Kugler served as the US Executive Directorat the World Bank Group.
(01:13):
She's also on leave from GeorgetownUniversity where she's a professor of
public policy and economics andwas the Vice Provost for Faculty.
Previously, she served as Chief economistat the US department of labor from
2011 to 2013.
Dr. Kugler is also a research associateat the NBR and the Center for
the Study of Poverty andInequality at Stanford University.
Dr. Kugler's other professionalactivities also include being the chair
(01:36):
of the Business Economics StatisticsSection of the of the American Statistical
association.
Who's also a member ofthe Board on Science,
Technology, and Economic Policy atthe National Academy of Science.
And served on Technical Advisory Committeeat the Bureau of Labor Statistics.
Dr Kugler also receiveda BA in Economics and
Political Science from McGill University.
I grew up in Toronto, so it's wonderfulto have a fellow Canadian connection
(01:58):
there and also a PhD in economics fromthe University of California, Berkeley.
I'm a Stanford Economics PhD.
There's sort of a famous rivalrybetween the school, two schools, but
we won't hold that against her.
But without any further ado,I wanna welcome
to Governor Kueger to the stage topresent some remarks that she's prepared.
And then we're going to doa fireside chat afterward.
Thank you so much.
(02:18):
Please give a round of applause.
>> [APPLAUSE]>> Jon Hartley: This is a live recording
of an episode of the Capitalism andFreedom in the 21st Century podcast,
which I, Jon Hartley,am the host of at the Hoover Institution.
It's the official podcast at the HooverInstitution Economic Policy Working Group.
(02:39):
Really, really excited to havethis conversation with you,
Governor Kugler and ask you somequestions, starting with monetary policy.
So the Fed funds targetranges between 4.25 and
4.5% after some cuts.
What do you consider to be the appropriatestance of monetary policy rates?
>> Adriana Kluger (03:03):
So there's some magic number.
There is no specific numberthat we're looking for.
We look at the totality of the data andwe also definitely look at trends.
That for me is really important.
We don't overreact to any particularnumber or any specific number.
(03:24):
We look at the totality of the data andthe trends and how the economy is moving.
And the other thing thatwe look is at forecasts and
any risk that may be coming our way.
So given that, as I mentioned,
2024 ended at a very solid place and
(03:45):
2025 is also startingat a very good place,
the economy in 2024 expanded at a rate
of 2.5% compared to 3.2% in 2023.
So a little slower, but
it's still the highest growth rateamong any advanced economies.
(04:08):
So economic activityremains very resilient.
Now let's turn to the labor market.
As I said, we got data this morning andwe receive good news.
The labor market is healthy, it's stable.
For some time the labor markethad been cooling gradually.
(04:29):
Unemployment increasedfrom 3.4% in April 2023
to about 4.2% sometime inthe fall of last year.
But what we have seen is that theunemployment rate has hovered around 4%,
4.2%.
It remains stable.
Also something that we see is thatthere's still hiring going on even
(04:53):
though the hiring rate has goneback to pre pandemic levels and
layoffs remain subdued.
So that that gives us hope thatthere is a balanced labor market,
as I mentioned in the remarks,that is neither weakening nor overheated.
The labor market is stable, which gives usa little bit of time to make decisions.
(05:15):
By the same token,I have to say in the past few months we
have seen the inflationrate moving sideways.
It has firmed a little bit.
So we were paying attention to that.
If we look at the overall inflation,whether it's headline or
(05:35):
whether it's score, it has moved sideways.
Specific components have made progress.
So I want to acknowledgethe progress that we have made.
For example, in terms of the housinginflation component component,
in terms of services inflation,which had been persistent for some time,
but at the same time non marketservices inflation has increased due
(05:57):
to portfolio management categories andthings of this sort.
And then we are making less progressin terms of goods inflation,
which has usually kept a lidon inflation as a whole.
So that's holding us a little bitat the same level without allowing
us to make progress because we're not yetat the 2% level.
(06:20):
That means it makes sense to hold ourfederal funds rate where it is now.
And the final issue is, as I mentioned,
we have uncertainty coming ahead interms of new policies that may be put
into place in terms of some policies thathave already been put into place, but
that we're not sure how they willshape up once they're implemented.
(06:42):
So I think the cautious and
the prudent step is to hold the federalfunds rate where it is for some time,
given that combination of factors,given that the economy is solid,
given the fact that we haven'tachieved our 2% target.
and given the fact that wemay have uncertainties and
(07:03):
other factors that may bepushing up the inflation or
maybe reducing output andgrowth into the future.
>> Jon Hartley (07:11):
So my next question was gonna be on inflation.
And so there's been some.
The Fed's engaged in a few cuts andit's now halted,
sort of with the latest inflationarygoing a little bit sideways.
As you say, year over year inflation's now3%, core inflation's a bit higher, 3.2%.
And what do you think inflationneeds to be before thinking
(07:33):
about any further accommodation orrate cuts?
>> Adriana Kluger (07:36):
So, again, I'm not one that has a magic number in mind, right?
I will keep looking at the trends.
I will keep looking at where the economyis going and at the risks ahead.
Now, you're right.
We have made tremendous progress sincethe height of inflation in 2022,
in the middle of 2022,when headline inflation was 7.2%.
(07:59):
It is now Now 2.6%.
If you look at core inflation,
it has halved from 5.6% in 22 to 2.8%.
But in recent months we move sideways.
It's really firm.
So we want to make sure thatwe continue to make progress.
This talks to the trends issue, right?
(08:20):
That we continue to make progress andcontinue to slow down
inflation to feel comfortablewith also changing rates farther.
That's not where we are right now.
I am concerned about goodsinflation increasing a bed
from minus 0.6% lastyear to now minus 0.1.
(08:42):
So we're not getting as muchhelp from goods inflation.
Again, this non market component ofservices inflation is not helping us
either.
But the better of goodnews is housing inflation,
which had been very persistent, it wasat around 5% at the beginning of 24,
came down in the fourth quarter to 4.7%.
(09:04):
The services component ex housingcomponent of inflation has come
down to 3.2% at the end of lastyear after being at around 4%.
So there is some progress in somecomponents, I would say, but I am paying
attention to why these other componentsare kind of moving backwards now.
>> Jon Hartley (09:24):
And it's a great point.
Inflation was at this basicallypeak of many decades and
we've come a long wayin the past few years.
I wanna talk a little bitabout the balance sheet.
The Fed's balance sheet today is closerto about $7 trillion from its peak of $9
trillion just a few years agoin the post pandemic period.
(09:45):
How do you think aboutthe Fed's balance sheet and
where should it be if you think thatthere should be some terminal level?
>> Adriana Kluger (09:52):
So as you will remember, during the last two recessions,
the 2008, 2020 recessions, we,and I wasn't there at the time,
but I have to say the Feddeployed balance sheet tools to
help make progress on revitalizingthe economy at the time.
And I think that served economy well.
(10:16):
In March 2022, the Fed then decided to
start reducing the sizeof the balance sheet.
And that has been happening ever since.
And I would say that what the Fed,what we aim for
is to reduce the balance sheetto a point that serves us in
(10:36):
terms of our effective functioning andmonetary policy.
Given what is now an ampleregime system that we have now,
we're paying close attention to anyindicators of the conditions in money
markets because what we want to see isthat we're somewhat above this ample level
(10:56):
to feel comfortable with stopping thisreduction in the balance sheet size.
And we don't have any specific date.
We're watching very closely, but we,
we don't have a date in mindas to when that may happen.
We're just continuingto watch very closely.
>> Jon Hartley (11:13):
So as a nerdy economist, I love asking questions about R Star.
R star it's this level of the interestrate that's neither inflationary nor
disinflationary andthere's all these different estimates for
it out there in the literature.
We have model driven estimates fromLabbock Williams which is R Star
(11:35):
kind of falling furthersince the pandemic.
And also surveys out now from the NewYork Fed which ask questions of market
participants and their forecasts for wherethe, where the, where they would think
the short term rate will be in the longrun, effectively asking about R star.
That median estimate orforecast from the New York Fed survey of
professional forecasters has actually beenrising quite a bit since the pandemic.
(11:59):
And other measures showR Star rising as well.
The median forecast beingaround 3% from that survey.
Lawback Williams is I thinkcloser to below 2% now.
Do you have a particular estimateyou like to use for R Star?
>> Adriana Kluger (12:13):
So I use a wide range of models to inform my opinions about our
star, but I also look ateconomic conditions generally.
I also look at the financialconditions index to see the level of
restrictiveness of our policyrates as they start for those.
(12:34):
And I know there are a few studentshere who wonder what these R Star
is,is the neutral rate of the interestrate is basically the interest
rate that will keep us at 2% withoutthe labor market either weakening or
overheating and without any shocks.
So it's a theoretical concept becausewe're gonna continue to have shocks,
(12:58):
believe me.
So it's kind of a long termconcept where we would like to be,
but it's a theoretical concept.
So that's why we have these models.
And I rely on a variety of models.
I definitely look atthe Lobach Williams estimates,
which is a semi structural model as wellas many other semi structural models.
(13:18):
There are the reduced form models.
There is a number of them, Negro et al.
And Liebherg and Matthews.
There are quite a few of them.
So they have a range of estimates.
But besides looking at these estimates,
something that I pay a lot of attentionto is the determinants of R Star.
Why that neutral orlong term interest rate may go up or down.
(13:44):
So the reason why I do that is becauseI wanna be paying attention to whether
these determinants or factors that affectR Star are permanent or temporary.
And so that will make a big difference.
And so one of the things that I andmany others pay attention to,
including Constance here,who's nodding and
(14:05):
going, of course,is government debt, right?
So government debt has been going up.
And this government debt meansthat we need to issue and
supply more US treasuries.
And that increases RStar.
So I think that's here to stay forsome time.
That's pushing up R Star, for sure.
(14:26):
The other thing is what I talkedabout in my speech, productivity.
So productivity also pushes up RStar.
So as, as you have seen,I'm a productivity optimist.
But there are others that are not as much.
And time will tell, as I said, right?
We'll have to see if that remainsthat will push up our start.
(14:46):
There are many other factors thatcould push our start down, in fact.
So one of them is the agingof the population, which is
happening across the world, not onlyhere in the US but all across the world.
When the population ages, people savemore and they invest in safe assets.
So there is greater demand forthings such as US Securities.
(15:09):
That pushes down our star.
Other things that may push down our staris international demand for US Treasuries.
And that has been going up for some time.
As you know,there are many countries around the world,
including Latin America,which deregulated financial markets.
Financial flows have increased.
(15:29):
That would push up Star.
That would push down our star.
Also because there is greater demand forUS treasury.
So there's a combination of factors.
If you ask me,I would say our star has gone up some,
but not as some others predict.
I think there is some momentum, butI would say there are other factors that
(15:51):
are keeping it down still at a level notas far from from what it used to be.
So I'm paying attention to thatbecause As we move on towards
normalizing our federal funds rate,
we need to pay attention to when we stop,we need to be close to that rSTAR.
So we're not quite there yet,but we all pay attention to that.
(16:15):
And my colleague, President Bostic,who's here from Atlanta,
pays close attention to that as well.
We are all definitely keeping a close eyeon RSAR and we all have our estimates.
>> Jon Hartley (16:28):
I think you're in good company with rSTAR thinking that rSTAR may
be on the rise.
I love the fact that the New York Fed,along with the bank of Canada,
bank of England, European Central bank,they now put out these surveys
asking professionals abouttheir estimates of RSR.
So not only do you get to and obviouslythey look at these models as well, but
(16:50):
you also get some information in termsof what people are thinking about RSR.
I have a whole paper on this.
I'm very invested in survey estimatesof the natural rate of interest for
full disclosure.
But I do think it's kind ofa methodological step forward because
sometimes these models canbe very structural and
very complicated to understand.
And at least being a sort of empiricalreason person, I appreciate sometimes just
(17:12):
asking people what they think rather thanhaving to go into a very deep model.
I want to talk a little.
>> Adriana Kluger (17:17):
That's really true,
I have to say I do like lookingat the surveys as well.
And there's survey based models, right?
Which use the survey data toinform where rSTAR is too.
So thank you for mentioning that.
>> Jon Hartley (17:30):
Exactly and they can still coexist with model based estimates.
And I think those model based estimatesmaybe inform those survey estimates.
Yeah, I think it's a really understated,underappreciated development.
I think that's continuing tocome out of central banks.
The New York Fed actually hasbeen doing this for 10 years,
whereas the bank of Canada,European Central bank and ECB and
(17:52):
also the Reserve bank of Australia havebeen doing it for just a couple years now.
But they're following your lead,you being the Fed.
I want to talk a little bitabout the labor market.
You star a little bit.
You are a very decorated labor economist.
How do you think aboutslack in the economy?
(18:13):
You star full employment wheredo you think we are today versus
say full employment orlatest unemployment reads at 4%.
>> Adriana Kluger (18:23):
Yeah the typical way to measure slack is by looking
at the unemployment gap or the output gap.
So the gap between actual unemployment andwhat we call the Nairo,
the natural rate of unemployment orthe output gap,
which is the gap between the totaloutput in economy and potential output.
(18:47):
And those are usually they'reestimates created by the CBO,
by the Congressional Budget Office, but
we certainly come up withour estimates of those gaps.
Now, I have to say, during the pandemicand post pandemic period, and
especially during the postpandemic period and
this inflationary period thatwe have been living through.
(19:09):
We definitely realized that therewere some other measures of slack
which were better.
So one that I pay a whole lot of attentionto is the vacancies to unemployment ratio.
So number of vacanciescreated by employers and
businesses over the total numberof people looking for jobs.
(19:29):
It gives you a better sense of that gapbetween the total jobs available and
the total number of people looking forjobs.
That VU ratio has moved tremendouslyover the past few years.
It was 1.2 prior to the pandemic.
It reached 2 in May of 2022,and now it's back.
(19:53):
The numbers just came outthis morning to 1.1 again.
So it's almost 1 to 1.
So that tells you something about how theeconomy is in much better balance, right?
In terms of labor supply beingbalanced with labor demand
other things I pay attention to are flows.
So the hiring rate,the layoff rate that I mentioned before.
>> Jon Hartley (20:16):
The jolts data.
>> Adriana Kluger (20:18):
Yes, exactly, the jolts data from the Labor Department.
So I used to be chief economistat the Labor Department.
So this was where I spent mostof my time on days 247 looking
at the labor data, andthat includes the jolts data.
So the hiring rate is now belowwhat it was pre pandemic.
(20:40):
The layoff rate surprisinglyhas been subdued.
It had been going up fora while now it's leveled off again, but
it's remained subdued given the timewe're living through, right?
So there has been a reduction in demandfor workers, but that has come through
reduced hirings and not necessarilythrough people being laid off.
(21:04):
And that's good news.
That's a good situation to be in becausepeople are not desperate losing their
jobs, right?
It's not the 22 million that I mentionedbefore back during the pandemic.
So that's good news.
One other measure, which, again,this shows you how nerdy I am.
So I love that you are also like that.
(21:27):
Is this measure of quits?
The quit rate is one of those things thatI paid so much attention when I was chief
economist because it tells you aboutopportunities in the labor market,
even for those who are already employed.
So you all remember the timeof the Great Resignation.
So during the Great Resignation,people were leaving looking for
(21:48):
jobs elsewhere because there wasan abundance of demand for labor.
So that gives you an idea of how tightthe labor market was at the time.
And there is even the wage premium forquitters, for workers, right?
How much more their wages are when theyleave a job and jump to another job.
(22:09):
That tells you how tightthe labor market is.
That has all gone backto pre pandemic levels.
So that tells you once again thatthe labor market is at a good place.
It's healthy, it's resilient, butit's well balanced at this point.
It's neither weakening we saw theunemployment rate tick down this morning.
(22:32):
But it's not overheated the wayit was certainly a few years ago,
which was causing a lot of trouble aswell for businesses in terms of having
shortages of workers, pushing up wagesto a level that was not sustainable.
So I would say the labor marketis sitting at a good place.
(22:53):
It's stable, it's healthy,and it's resilient.
>> Jon Hartley (22:57):
No, absolutely and it's fascinating too,
just how much has changedin the past six months.
There's so much worry aboutthe unemployment rate moving up.
It triggered some of these variousmeasures like the SAHM rule and
some of these other measures.
But, yeah, it seems like we'rein a much better place now.
And I think to your point, it can't beoverstated how big a shift is going
(23:19):
from having two job vacancies forevery unemployed worker to simply one.
Yeah.I mean, that was just a massive shift.
And I think vacancies, the beveragecurve is something that people, I think,
are starting to paya little more attention to.
So I think that's terrific.
I want to ask you just a little bitabout the Fed's framework review.
(23:41):
I'm curious, what do you think aboutthe upcoming Fed framework review and
what do you think it shouldaddress in your mind?
>> Adriana Kluger (23:47):
Yes, so we literally just started talking about these with
Rafael and my other colleaguesin our last FOMC meeting.
And I have to say.
That one thing that I support and
approve unequivocally iskeeping our 2% target for
(24:08):
inflation in terms of somany other parts of the framework.
I'm entering this processwith a very open mind and
we're going to have a whole lot ofdiscussion, analysis papers and
reviews that we will be doingin the next many months.
So that's what we're doing now.
(24:29):
I do have to say, andthis has been told by others and
it's well known that the lastreview was heavily influenced by
the period between the last tworecessions, between 2008 and 2020.
So much of that review ofthe framework at the time focus
(24:51):
on the zero lower bound, right?
On that ability to maneuver potentiallyif we were hit by a new recession,
given that we were very closeto the zero lower bound, or
it was influenced by an inflation whichwas running persistently below 2%.
(25:12):
And how to get that up, given thatwe had a flat Phillips curve, right?
We thought there wasa flat Phillips curve.
So a lot of those things is what wewere seeing in the last framework.
In my mind, the next frameworkneeds to fold in what we
have learned from this last period.
(25:33):
We learned that we couldn'ttake stable prices for granted.
Certainly, we had to deal with these verytight labor markets and wage inflation
as well is price inflation that hit levelsthat we hadn't seen in many decades.
So I think we need to fold inthe lessons from the pandemic,
but also the lessons from the postpandemic period together.
(25:57):
Again, we shouldn't forget about thatperiod between the last two recessions,
2008, 2020, with persistently lowinflation, we should consider as
many possible situations that could affectus moving forward to learn from them.
And then the other thing as I mentionedthat we have learned is that I think we
(26:20):
can count on many different measures thatwe didn't use to count on to understand
the level of tightness and slack inthe labor market or in the goods market.
So many other things that could beincorporated as well moving forward.
So again, entering with an open mind,
happy to learn from my wisecolleagues around the table and
(26:44):
certainly very committedto keeping our 2% target.
>> Jon Hartley (26:49):
Well, I think that's several excellent points.
Certainly, I think the last frameworkreview flexible average inflation target
was very influenced by the past 10 yearsof very low inflation, zero lower bound.
And certainly, I think it totallymakes sense that the next framework
review incorporates the eventsof the past few years.
And I think over all this time Icouldn't agree with you more that just
(27:13):
inflation targeting issort of the central thing,
I think, to celebrate andto certainly keep in the framework.
It's been around since the 90s, formally,
was put in with Ben Bernanke.
And I think just in terms of anchoringlong run inflation expectations has been
(27:34):
hugely, hugely successful.
Last question.
The first Hispanic governorof the Federal Reserve Board.
What does Miami mean to you?
And I know you have some family here.
>> Adriana Kluger (27:46):
Yeah, in fact, I have some family sitting here with me.
And so for me, certainly Miami first and
foremost means family.
As I said,I've been coming to Miami since the 1980s.
My late grandmother used to be here,so I was always visiting.
(28:08):
We have four generationsof family members, right?
My great uncle, my great grandmother.
Now we've moved to three generations.
The last two generations have allbeen born here in the US and so
for me, it means family andit means opportunities.
I feel so very honored to bethe first Hispanic person,
(28:32):
man or woman,to serve in the Federal Reserve Board.
I take ncure.
I take this role with so much humility and
with the responsibility of feelingthat I can represent everybody,
all Americans across the country withthe work that I do at the board.
(28:57):
So how did I ended up here at the board?
Right?I came because I'm an expert in labor
markets.
I'm an expert in price andproductivity dynamics.
And that's how I ended up coming tothe board, contributing that expertise.
But I also bring that perspectiveof somebody who's a Latina,
(29:17):
who's a woman,who's a daughter of immigrants.
And that perspective comes across when.
When I make my decisions and I chooseto focus on certain issues that are.
No, are very important formany Americans across the country.
So one thing that I spend a lot of timeon is not only talking to my family here
(29:39):
in Florida and across the country,but also talking to all Americans and
meeting with communitiesacross the country.
Because I think aside from the data andyou saw, I'm a data geek and
I love this stuff.
I also love talking to people and findingout about their economic realities and
(30:00):
understanding how they're seeing theeconomy and them telling me in real time.
And that's the difference betweenlooking at the lag data that we get and
kind of understandingthe realities today and
how they're seeing thingscoming up tomorrow, right?
So I would say that that's critical for
me, that I represent well allAmericans across the country.
(30:25):
And because I'm an expert on labormarkets and business dynamics,
being in Miami, you saw it in my speech,is just a real lab and an opportunity
to explore these issues in an environmentthat is very dynamic and very vibrant.
So I'm so excited to be back in Miami,as I said, not only to see my family,
(30:47):
we're having a huge picnic with about100 family members, four generations.
And I'm very excited to get together andhear from them and
hear how they're seeing the economy.
Definitely, but also to understandhow people see our future.
>> Jon Hartley (31:07):
I couldn't agree with you more.
There's millions of people underlyingall these data points, and
I think that that can't be forgotten and.
And should be remembered.
Well, I want to really thank you forall your wonderful government service and
thank you for this wonderful conversation.
Thank you so much, Governor Kubler.
>> Adriana Kluger (31:24):
Thank you, Jon.
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