The conversation has been edited for length and clarity.
Do you expect strong growth to continue next year?
We certainly think next year we’ll continue to grow at solid rates — sufficient growth to continue to take slack out of the labor market. There’s the headline rate of unemployment, but the measure I look at much more is what’s called U6 [which measures both people who are actively seeking work and those who say they’d like a job]. That’s back at 7.6 percent, at its pre-recession level, and that suggests we’re either at or near full employment, and I would expect those numbers to improve.
And Texas? How goes the recovery from the hurricane?
We saw in Texas weakness immediately after the storm, about 55,000 to 75,000 temporary job losses. We expected at that time a bounce-back in the fourth quarter and into the first quarter, and we think we’ll get back some time in the first quarter to the absolute level of G.D.P. where we would have been, and then we’ll get back to trend growth. And that’s similar to the pattern we’ve seen in other storms: If the trend before the storm was the trend we’ve seen in Texas, of good growth, the storm normally will not interrupt that. People still want to live in the Houston area.
Should the Fed raise its benchmark interest rate in December?
Whether we’re at full employment, we’ll know in hindsight, but I believe we’re going to continue to take slack out of the labor market. I’m very aware that we’re undershooting inflation, but my team believes we’re going to get to 2 percent in the medium term. It may be slower and more uneven than people expect, but from a risk management point of view, I think it would be wise to take the next step. I’m being very careful in the way I’m saying it because I continue to believe that removal of accommodation should be done in a gradual and patient way.
Why does inflation remain below the Fed’s 2 percent annual target?
I am a strong believer that cyclical pressures are building and, as we continue to take slack out of the labor market, they’ll continue to build. The issue is, there’s a headwind in terms of inflation: technology-enabled disruption. What do I mean? Yes, of course, technology is replacing people, and that has been going on for a long time. Increasingly, though, consumers have more use of technology to shop for goods and services at lower prices — that’s accelerating. And a third thing is the emergence of new models for selling goods, manufacturing goods or distributing goods.
The obvious ones you think of are Uber vs. taxis, Amazon vs. retail, Airbnb vs. hotels. But every business is facing disruption. What we’re finding is increasingly businesses lack pricing power. Even since I’ve been sitting in this seat, I talk to maybe 30 C.E.O.s a month, and some businesses that had pricing power two years ago are now telling me stories that they’re in the middle of a price war.
Give me an example of where that’s happening.
Autos. Fifteen years ago you’d deal with a salesperson. Today the car is sold online. The salesperson is a much less important job. People shop online and walk in, and they’re ready to transact. So there are fewer salespeople. The person who does your website is a much more valuable person. The automotive technician is a much more valuable person. And you can’t find enough of them.
Shouldn’t those workers be able to negotiate higher wages? In your story, it’s profits that should be squeezed. But instead, the opposite is happening.
So companies are replacing people with technology. Older workers are getting bought out, and the work force is getting younger. And you’ve got to segment this by educational attainment. If you’ve got a college education and you’re in a high-skilled job, I actually think you’ve got pretty good negotiating capability for wages. If you’ve got a high school education or less, what I’ve been seeing — and this is more anecdotal, and we need to be doing more research on this — it is highly likely that your job is either getting restructured or eliminated and you don’t have the educational background to easily move, unless you get retrained, which is an easy thing to say but a very hard thing to do.
Do you see evidence for this in the available data?
To collect data means it’s already happened. I’m confident that 10 years from now we’ll have good data on this phenomenon in the same way I’ve seen recently some great papers on big-box retailers replacing mom-and-pop retailers. That happened years ago.
Is our deteriorating relationship with Mexico affecting the Texas economy?
What I am concerned about is the presidential election in the summer of 2018, and I know people in Mexico are also concerned about it. We’ve benefited as a country by having strong relationships with Mexico, and I think the concern I have is as a result of the rhetoric, the political atmosphere is now to the point where you might have to be negative toward the United States in order to be elected.
You’ve said in recent speeches that you’re keeping a close eye on the market.
If we could call a timeout right now and ask if you see imbalances, I’ve said that they’re manageable right now. But I do know that it pays to monitor these things very carefully at this stage in the cycle. All I’m pointing out is that we need to be on our toes. I don’t see overheating, but I think as we continue to take slack out of the labor market, we could well see imbalances build.