Jackson Hole 2021: Fed Governor Christopher Waller speaks with Yahoo Finance [Transcript]

Federal Reserve Governor Christopher Waller joined Yahoo Finance on the virtual sidelines of the annual Jackson Hole Economic Symposium to discuss the impact of the Delta variant on the U.S. economy and how the Federal Reserve is responding.

Below is a transcript of his appearance on Yahoo Finance Live on August 27.

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BRIAN CHEUNG: Thanks Seana. Well, obviously all eyes on the Jackson Hole Economic Symposium which is wrapping up today, but we've got a very special guest here in an exclusive interview. Federal Reserve Governor Christopher Waller is here to chat with us a little bit more. How are you Christopher?

CHRISTOPHER WALLER: Hi, I'm doing great, Brian. How are you?

BRIAN CHEUNG:

I'm great, Chris. It's great to have you on the show. I kind of wanted to kick things off with a discussion of the chairman's speech earlier this morning. We did hear the chairman say he felt the economy had made substantial further progress on inflation, but only clear progress on maximum employment. I guess I'm wondering, how does that compare against your thinking on the economic recovery so far?

CHRISTOPHER WALLER: Well, I agree with Chair Powell on inflation. We definitely have made progress rewarded after many years of even below 2%, which was our inflation target. It's clearly gone over it this year and probably will next year. On the employment front, I think we've come a long way. I think that one more good job report, if it's in the 850,000 to 1 million [range], will be sufficient to claim substantial progress in employment for tapering. That's kind of my benchmark. Some others have stated that they would like to wait and see a few more, but when you adjust the labor force, jobs, or the early retirements, if we get another million, we will recover about 85% of the jobs that were lost.

And that took almost seven years after the last recession, so to me that's tremendous progress in a very short period of time in the labor market. So, if we were to hit that, I would say we're ready to go early this fall.

BRIAN CHEUNG: And that jobs report is going to come out next Friday. And I guess there is also, though, at the same time, the downside risk of Delta, which may bleed through that August data. So is there any sort of risk that the data that you'll get next Friday might actually be short of that 850,000 to 1 million that you're looking for, and how might that maybe change your outlook?

CHRISTOPHER WALLER: Yeah, so the critical thing I want to stress is that we look at the economic data. We make our policy decisions on that we don't necessarily look at the virus data, except for how it may spill over into the economy.

It hasn't necessarily been that good in the past, if you go back to December of last year, we were forecasting potentially a recession in the first quarter, and we had a growth of over 6%. And that was the worst part of the pandemic. So the economy doesn't necessarily follow the virus that closely and I kind of have that feeling this time. This is going to have some possible downside risks to the forecast. But my view is it's going to pretty much continue on as it is, there'll be sectors that will get a particular hit from it. But I think the economy is going to proceed just like it has been.

BRIAN CHEUNG: So, if that number, though, at the same time, does hit that mark, you did say you'd be ready to go this fall, I'm guessing that implies some sort of announcement in that September 22 meeting. So then how would you like to structure the taper in terms of, maybe, how long that taper would last, whether or not you're going to bias towards the agency mortgage-backed securities given the hotness of the housing market, as opposed to U.S. Treasuries? How would you like to have that structured?

CHRISTOPHER WALLER: Yeah, so I would like to go early this fall. I don't see any reason that we would need to wait until next year — that's my own view, unless something really bad comes out in the job market report next week, which I just don't expect to happen.

So, any financial market impacts, or almost all financial impact will be at the announcement of taper. Whether it's a four-month taper or a six-month taper or eight-month isn't going to have much price effect. So, once you announce it, that's going to be the big impact on the markets. And at that point, my view is to try to go as fast as you can so that we can get the tapering done to give ourselves some optionality for 2022, the second half, in the event, if we need to, to raise rates. I'm not saying we would, but in the event, we'd like to have some space to do that instead of dealing with a long drawn out taper.

On MBS [mortgage-backed securities], I definitely would like to see MBS taper faster. I've been advocating for tapering MBS first, but that's not going to happen. So, I would prefer a faster pace on MBS and get that done and over with.

BRIAN CHEUNG: Let's talk about inflation. We did get a read from the BA [Bureau of Economic Analysis] this morning on personal consumption expenditures clocked in at 3.6 on a core basis of 4.2% on the headline. Haven't seen that type of pace in over 30 years. How would tapering address that?

CHRISTOPHER WALLER: So the inflation numbers, we think, are going to cool off in the next few months, we've argued that this was transitory. [For] a lot of reasons I've argued it, most of my colleagues in the FOMC have made similar comments. There is a general concern that this is going to last longer: supply bottlenecks that we're seeing are not unraveling as fast as we thought they would, we're seeing a little more wage pressure, starting to come through. All my business contacts are telling me that firms have pricing power for the first time in a decade, and they fully intend to use it. So they fully intend to pass costs through to consumers.

So I don't think inflation is going to get worse and I think it's better to cool off, but I do think it's going to be more persistent than I may have thought back in May.

BRIAN CHEUNG: And you mentioned earlier the idea of giving yourself optionality on a rate hike possibly in the second half of 2022. But what was interesting was that the chairman did outline what might be perceived as a higher bar for liftoff, especially with the new framework, warning that tightening before the labor market kind of had the time to heal as something that could be particularly harmful. So, how are you thinking about that, as maybe after you start tapering, you then start to look towards eventually normalizing rates?

CHRISTOPHER WALLER: Right. It's really important to stress that we have two different sets of metrics for taper, and liftoff. On the taper, we want substantial progress on the economy. Liftoff is ‘we’ve pretty much achieved our dual mandate’. So, for me, a simple example would be I see 85% of jobs recovered as substantial progress. That's not enough to lift off. So I'd want to see us closer to 100% before taking into account that we should raise rates. So that's what I mean , those are different standards, those are different bars, the bar for liftoff is definitely much higher. And then that's also, we're gonna be keeping an eye on different distributional impacts of policy, of groups, kind of move towards where they were in March or February 2020, where we’re seeing a lot of inequality in the way this recovery has gone. Those are the things people will be looking at, that maybe they're not looking at necessarily that hard now, when it comes to a tapering decision.

BRIAN CHEUNG: And then, final question here, financial stability risks, this is a part of the framework as well. A lot of people [are] fixated on the maximum employment and price stability side of things, but that is a big caveat as well, especially with regards to tapering. Do you worry that the length of how long you've been buying purchases has led to any sort of weird pricing in certain quarters, anything that you're watching on that front?

CHRISTOPHER WALLER: Well, I, like several of my colleagues, have been concerned about the housing market, I mean these are eye-popping price increases. A lot of it is fundamentals, you have millennials coming off the sidelines for the first time in a decade, kind of a permanent shift from work in the office to work at home. Those are not going to go away anytime soon and those are driving prices.

But I don't think any of this is financial excess. We're seeing housing prices being driven by a lot of equity, which we did not see in the last housing boom. Something like over 20% of all housing purchases are all cash. So if there's no credit bubbles fueling us there's really not going to be any threat to the banking system or financial system. The banks are in great shape. I mean they have capital ratios of 12%, they’ve weathered the storm and the financial crisis well, we're not seeing any excesses and landing in any way shape or form. So, pretty much the financial system works fine. There's gonna be the odd assets of people employed to look at, particularly crypto assets, but I'm not going to bet Financial Stability Policy on crypto assets.

BRIAN CHEUNG: Probably a good point to clarify there. Federal Reserve Governor Christopher Waller, in an exclusive here on Yahoo Finance, thanks again for stopping by. Hopefully we'll see you in person at Jackson Hole next year.

CHRISTOPHER WALLER: All right, very good, thank you Brian for having me on.