Maxine Cuffe 00:03 

You’re listening to Speaking of Quality: Wealth Management Insights with Hank Smith. A podcast by The Haverford Trust Company. On Speaking of Quality, Hank chats with authors, influencers and wealth management experts to bring a sense of clarity and calm to the complexity and stress of personal finance. And now – here’s your host, Hank Smith. 

Hank Smith 00:26 

Hello, and welcome to another episode of “Speaking of Quality: Wealth Management Insights.” I’m your host, Hank Smith, Director and Head of Investment Strategy at The Haverford Trust Company. 

On this podcast, we explore topics ranging from quality investing, retirement resilience, stock market trends, estate planning, small business ownership, behavioral psychology and more. This season, my conversations with guests are focused on navigating change and the key decisions driving the future of the economy. Today, I’m excited to welcome Loretta Mester to the podcast. Loretta is a member of the Board of Directors at The Haverford Trust Company and previously served as President and CEO at the Federal Reserve Bank of Cleveland for 10 years. She’s also an adjunct professor of finance at the Wharton School of the University of Pennsylvania. Loretta, thanks for joining me. 

Loretta Mester 01:20 

Great to be with you, Hank. 

Hank Smith 01:23 

Well, I think we’re going to have a fun podcast together. And why don’t we just start right at the beginning. It’s a logical place to start. What got you interested in the field of economics? 

Loretta Mester 01:36 

It’s a great question because I really wasn’t that interested in economics. In fact, I never applied to economics grad school. I was doing math at Barnard College, which was part of Columbia University, and it was actually pretty easy to add a second major, so I added economics. You just had to do six courses and write a thesis. And then I was going to get my PhD in mathematics. So, I applied to some schools, and one of the schools I applied to was Princeton University, and I ended up getting two letters, one from one professor called Hugo Sonnenschein and another from Bob Anderson. And they each wrote me and said, “Well, you know what? We looked at your record; come here and do economics instead of mathematics.” And I got to thinking about that. I think I was a little intimidated by the field of math I wanted to do because most of the hard questions had already been solved, so it would be even harder. And so, I ended up doing that. I went to Princeton, and I got my PhD there, and I got into it, and I love it. So, it was an interesting thing. It reminds me: Always keep yourself open for things that you’re not expecting because sometimes they work out really well. 

Hank Smith 02:44 

I have to point out that having a second major isn’t easy for everyone. It certainly wouldn’t apply to me. So, I’m going to put you into the category of a “smarticle particle” in SpongeBob terminology. So, from Princeton was your next stop the Federal Reserve Bank of Philadelphia? 

Loretta Mester 03:05 

Correct. I met my husband in Princeton. He was also a graduate school student in economics. He got his PhD from Princeton. And when you go, when get your PhD, the year you get it, you do something that economists will understand – go on the market – and basically, the universities, you go out to universities and other institutions, and they talk to you whether they want to hire you or not. Well, he got an early offer from University of Pennsylvania, and back in the day, you wanted to live with your spouse. We ended up not living together all the time just because of Cleveland. But I looked for jobs located near University of Pennsylvania, and the Philly Fed wanted to hire me, and it was a great place. So, I ended up again, kind of just by happenstance, ended up being there as an economist, and it was fantastic. It was a really good place to be. I learned so much being there. 

Hank Smith 04:03 

You spent nearly 20 years at the Philly Fed. Tell me about some of the roles you played while you were at the Federal Reserve Bank of Philadelphia. 

Loretta Mester 04:13 

I hate to admit this, but I think it was more like 29 years, but in any case, it was a long time. So, you get hired. I was hired right out of grad school, so I was an economist, and that’s a combination of supporting the policymaking of the Fed, whether it be monetary policymaking, but also some of the regulatory and supervisory responsibilities for banking. And then we also did a lot of work in the community. So, community development is one of the areas which came out of the Community Reinvestment Act. That’s one of the reasons that the Fed is involved in some of that work. It’s because they were charged with sort of making sure that banks followed that rule. And so, you just start doing that. You do your own research; you publish it in academic-style journals and also in publications of the Federal Reserve Bank of Philadelphia. And then I became Head of the Banking Research Group within the Research Department, then eventually moved up from that to being the Research Director, which oversees the whole Research Department there. And then also we had a payments card center because of Delaware being a very important industry for our district in the third district. And then from there I went to Cleveland to become President and CEO for 10 years. 

Hank Smith 05:32 

Can you share with us a little bit of the inside baseball of how one is identified and then appointed to being President and CEO of one of the regional Federal Reserve banks? 

Loretta Mester 05:47 

Well, it’s a process. I can tell you that. Partly, I think I got to know a lot of people within the Federal Reserve system. They got to know me, so that helps. I spent some time on secondment to the Board of Governors. And so, I got to work with their staff quite a bit over two stints. And that was good, I think, to just getting yourself known, and then people understand the research that you’re doing, so they understand that. You attend FOMC meetings as the Research Director. So, I had the opportunity to be with four different Fed chairs, and that was very interesting. And then it’s really up to the boards of directors of each of the Reserve Banks to identify candidates that they think would be the right candidate to lead their bank. And the banks have different emphases, like Cleveland was one of the four reserve banks that did payments work for the US Treasury, and they’re still doing that. So that again, you need someone who can sort of run overseas, sort of large-scale technology projects or at least not be daunted by that. So, it depends on the bank and what they’re looking for. But I think just my name got on the list just because I had been in the Fed a long time and people knew me. 

Hank Smith 07:05 

Right. And is there an interviewing process, or are you just basically appointed, and you say thank you very much? 

Loretta Mester 07:13 

Oh no, there’s a deep interviewing process because remember, it’s the board. So, the way that the system works is the board of directors except for the bankers on the board. So, there are three bankers who serve on a Federal Reserve board. They, since Dodd-Frank, are not part of the process of selecting the next president of a Federal Reserve bank. And many of the directors feel that that process is one of the chief duties they’re assigned as a director of a reserve bank. It’s really to choose the next leader of that reserve bank. So, there’s a long interview process. Most of the reserve banks hire a search firm to help them identify candidates. They reach out to the community. They do public forums, where they explain what they’re looking for and then request names. You can put your name in on most of the searches. There’s usually a web portal where you can put the name in. So, they gather a lot of different types of people. And again, you don’t have to have a PhD in economics to be head of a reserve bank. I happen to have that, but a lot of other ones don’t. And it really depends on what the reserve bank is looking for. They may be looking for someone who has a markets background. They may be looking for someone who has a banking background. They may just look for someone who’s been doing work in a business that then they understand the importance of policy. So again, it depends on what they’re looking like. And then eventually, once the board of directors gets to their point where they’ve identified their candidate, they will send names down to the Board of Governors, and that’s another round of vetting and interviewing. And then it’s up to the Board of Governors to approve the choice of the directors of the reserve bank. 

Hank Smith 09:07 

Now your boss at the Philly Fed, Ed Boehne, Haverford’s current economic advisor, he had a 20-year run as President and CEO of the Philly Fed, which I believe might’ve been one of the longest runs of any Fed bank, CEO. You had a 10-year run. Would you say that was about an average amount of time for that role, or does it really vary? 

Loretta Mester 09:34 

Well, it does vary, and I had to leave because I hit the age limit. So, I hit 65, but it’s an arcane rule because it’s like age 65, but you get 10 years. So, if I had been at the nine-year mark, I could have stayed another year to make my 10 years, but since my term and my age kind of coincided, they were a little bit off, but basically coincided, I had to leave when I was 65. Ed was a young gentleman when he got appointed as President, so he could stay a lot longer without hitting that age limit. And then, ultimately there’s a 75-year age limit for people appointed after they’re 65, but that’s very rare. 

Hank Smith 10:20 

As a regional bank head, you rotate on the FOMC, the Federal Open Market Committee, and the governors are permanent voting members. 

Loretta Mester 10:34 

Correct. 

Hank Smith 10:34 

Is that how that works? And so, is that every other year, every couple years? How does that rotation work? 

Loretta Mester 10:42 

Okay, it depends on the bank. Okay, so the New York Fed President is always a voting member of the FOMC. The other ones will vary in triples except for what was my bank, the Cleveland Fed, and Chicago. Cleveland and Chicago vote every other year. So basically, I would vote every second year, whereas the other reserve banks other than New York and Chicago vote every third year. 

Hank Smith 11:13 

But you’re still attending every FOMC meeting. You’re still involved in all the conversations, but when it comes down to the vote, you’re either a voting member or you’re not. 

Loretta Mester 11:24 

Right. That’s correct. In fact, there’s no difference in the meeting at all of whether you’re a voter or not a voter. You do all the same preparation; you do all the same participation at the meeting; you’re at the table, and people listen to you, which is nice even if you’re voting or not voting. And then just at the end of the meeting, when the committee has decided, okay, this is where we’re going, as a group, all participants, you will, then they will take a poll of the voting members, and that is what’s recorded. And then that’s also if you wanted to dissent, you could only dissent if you’re a voting member, but you have the opportunity in the meeting to say whether you’re pro or anti the direction that the meeting in particular would be going. 

Hank Smith 12:16 

I’ve always been curious about this question. How many economists are actually in that meeting? Since you’ve got Fed Governors and their team, the regional bank presidents and their team, there just must be a lot of economists in one room. 

Loretta Mester 12:33 

So, the reserve banks, we’re allowed to bring one person with us, and it can be a research director; it can be another economist because you want them to have experience of what it’s like to be in a meeting, but we’re all one. So, the 12 of us would have one. And then they try to limit very much who’s in that room for obvious reasons because they don’t want things to get out early. So, it’s very limited in terms of, there’s the staff that present. So, there’ll be Board of Governors’ staff of the three divisions, the economics division, that will basically give a report on what developments were in the economy as they see it and where their forecast is saying the economy is going. There’s a section at the board called international finance, which then will report on what’s happening in other parts of the world, their economies, and then there’s a section that’s called monetary affairs who will lay out the potential options, reasonable options for the meeting that span sort of the possibilities. They’re not policy makers, but they lay out sort of the cases for and against. And then there’s also the New York Fed staffer who runs the System Open Market Account, which basically implements policy. They’re the ones who would go and buy and sell securities to actually implement whatever the committee decides. And there’s a report very early in the meeting about what’s happened in the markets over the inner-meeting period between that meeting and the prior FOMC meeting. So, there’s limited staff in that meeting, and most of them have to do with either presenting or being on tap to answer questions or perhaps being prepared to then set up the next meeting because they want to hear what’s going on in the rooms that they’re prepared for the next inner-meeting period to do the analysis that the committee’s requesting. 

Hank Smith 14:42 

So, before we jump into current monetary policy and the economic outlook, let’s just go back a little bit. I probably should have prefaced at the beginning. Your tenure at the Cleveland Fed was from 2014 to 2024, so you were right in the middle of the global pandemic, but you were at the Philly Fed, also involved in another Black Swan event, the great financial crisis. So, your career has seen some really, really intense moments. Give us a little bit of an idea of how – obviously incredibly stressful, both periods of time. I might argue for different reasons: the financial crisis because we had never had a period where we had had a complete shutdown in the credit markets. We’ve had credit freezes before, but never, never to the extent – give us some flavor around those two environments. 

Loretta Mester 15:55 

Well, I mean it was very stressful in one sense, but also because you really needed to focus. And you needed to do the best – during the financial crisis, I was the research director, so it was my job to make sure we were giving the best economic financial analysis we could to the president. That focus, we have to do this for the public good, really kept you sort of on track. So, in some sense, what is the saying, idle hands are the devil’s workshop, because everyone was focused on, wow, this is unprecedented. We got to make sure that we’re at least using our tools as well as we can to get the economy through it. That kind of helped in a way. It didn’t de-stress it, but it kept you so focused that you didn’t have time to sort of worry. You had a job to do, and you had to do what you could do in a small way. Obviously, there were lots of people working on this to do what you can with your insights or tools or whatever to help get the economy through it. And the other thing that was very interesting: in retrospect, it seems like there was one path, but in that moment, there were different views about what was going on. So, your president might have a view of one way of things happening, and it was Charles Plosser at that time. He might have a different view than others. So that also was making sure that you kept apprised of other viewpoints because it wasn’t like business as usual, and you have to admit that some ideas were good ideas; some ended up being not the right idea, but it was still a good process in the sense that everyone felt very comfortable airing their views on what was going on. So that was that. And then the pandemic, I was the head of the Cleveland Fed by that point, the president. I mean that was unprecedented as well. And what struck me during that period in particular was how willing businesspeople – you’d reach out to businesspeople, and bankers were to help the Fed. I had no problem calling somebody and just one of our advisory council members or directors or others that I ran into in my work at the Fed, to ask them, what are you seeing out there? Because we didn’t have the usual sources of information, and they had their own problems. They had to run their firms; they had to worry about their employees, but they were very willing to speak with us and tell us how they were seeing things and what they were planning to do, and that was crucial information as we were working through the situation. 

Hank Smith 19:07 

I’ve been doing media for Haverford, interviews on the business networks and radio interviews and what have you, and I made this observation in the mid-teens just from having CNBC next to my screen, but guest after guest, it was just so easy to always be critical of the Fed. And the Fed, it seemed to me over this incredible stressful period from ’08 into the mid, even late teens, one guest after another would criticize Fed policy, and yet the Fed got it mostly right during that period. And there was a wonderful analogy. I heard that because of the Great Depression in the ‘30s, the Fed was given a lot of tools that were in the toolbox, that they never had to open that toolbox until ’08-‘09, and thank goodness they had the wherewithal to do that and implement some very unique and unused techniques and policies because it certainly saved us from having a depression. 

Loretta Mester 20:28 

Well, it’s interesting because the chair at the time was Ben Bernanke, a very esteemed economist, academic economist, and his research area was the Great Depression. So that was actually very fortuitous in the sense that he understood probably more than others, really. He could see the path, and he understood, maybe deeper than others, because it was history, a long study area for him, about what happened during the Depression and how sometimes the right steps were not taken during the Depression. And so, he could bring that kind of those lessons to the current situation and apply some of them. Of course, the financial markets were very different. I mean, subprime mortgages was the source, but as things unwound, you could see how it was playing out maybe a bit differently, but still lessons were learned from his research that he could then apply. And in any kind of situation like that, you have to know that you can’t have every piece of information you need to make sure you make a right decision. And then for things that didn’t necessarily work out the way we might’ve expected, then you learn from those situations and hopefully take that to the next situation. I think both the financial crisis and the pandemic, there’s a lot of things to learn about how the Fed operated and then hopefully take that in on board. 

Hank Smith 22:11 

And certainly, with the global pandemic, there was no, well, the last time we had one of these, this is what we did, and this is what worked, and you can’t call the Spanish flu comparable to what we went through. There was some criticism of the Fed in the spring of 2020 voiced by the Wall Street Journal among other others, that the Fed was battling the pandemic in the same way that they battled the great financial crisis. But this was a healthcare crisis, not a financial crisis. Do you care to respond to that criticism? 

Loretta Mester 22:59 

I mean, yes, it was a healthcare crisis, but the healthcare crisis had implications for the economy. And so, the Fed wasn’t trying to alleviate the healthcare crisis. What it was trying to do is alleviate the effects of that healthcare crisis on the US economy. And so that’s how we always sort of viewed it. In fact, at one point – we would use – the FOMC would actually, each member would put in a forecast four times a year. We didn’t do it one of those times during the height because it was very hard to forecast what was going to happen because it was so dependent on the virus. The subsequent time, I remember when I wrote mine down, I actually in the narrative, I said, “Well, it really all depends on how the virus goes.” And so, I kind of did two forecasts. I had to write down one set of numbers, but I kind of explained it as, okay, if the virus ends up doing this, then this is what I think will happen. That ends up going a different direction. And that’s the only way you could really do it internally. You’re not an expert in healthcare, although we did talk to people to find out. I’m on the board of the Cleveland Clinic, so I had insight into how they were coping with this hugely impactful healthcare crisis. So, you had insights that would help you then think about, okay, what’s the implications for the US economy and businesses and households and communities? And that’s what you were trying to address with monetary policy. You were not trying to address the healthcare crisis per se. 

Hank Smith 24:41 

And of course, there was a heap of criticism on Chairman Powell for his remarks on inflation being transitory. I personally believe that he may have been absolutely correct were it not for the second wave of the COVID virus, the Delta variant, that occurred in the late summer of ‘21, that continued, well, it halted the progress in the improvement of the supply chain, and that’s where a lot of the inflation came from, the total disruption of our global supply chains. And were it not for that, I think the history would show that he might have been correct in that, but the Fed has taken a lot of criticism for that. And then on the flip side, for maybe even being too aggressive on raising too late and too aggressive on raising rates. How do you compare? 

Loretta Mester 25:49 

So, we were too late. I was on the committee. I can fully – we were too late. Yes, hindsight is important. There were many of us on the committee who were thinking that we should be moving sooner. So even within the committee, some of us were saying, how long can you say it’s transitory when it’s been lasting months and months and months? And the danger with being too late was we had to go aggressively. And that has a whole other set of risks around it. No one really wants to be raising rates at that pace that we had to raise them at, but we had an inflation problem, and we had to tighten monetary policy to address it. There are studies now that show that had we gone earlier, we may not have had to be as aggressive, but be that as it may, once we identified, okay, this is not going to go away on its own, we have to bring demand back into better balance with that constrained supply and raise interest rates. I’m hoping that that was, again, you can’t go back and rewrite that, but you can learn from it. And you’re right, the source of that inflation might’ve been the supply shocks. It might’ve been the second wave of COVID leading to further, but it doesn’t really matter. What matters is if you have that kind of constrained supply that isn’t coming back, you need to react in order to contain price pressures. And I think that’s something that the Fed has learned. And we’ll see because we’re in a similar kind of situation now in terms of inflation risk being on the upside where employee risk is on the downside and they’re going to have to balance those. 

Hank Smith 27:36 

And certainly fiscal policy was no friend to monetary policy in the sense that I think everyone would agree we needed that first trillion dollar tranche of transfer payments at the beginning of the pandemic, but I don’t think we needed the second and third one, particularly the third one in the spring of ‘21, where the economy was already opening up and had tremendous momentum, and that certainly helped fuel inflation and made the Fed’s job much harder. 

Loretta Mester 28:20 

I agree, and I think that was also something that we at the Fed did not fully appreciate is how strong the fiscal stimulus would be. I think we were still thinking that it wouldn’t have as big an impact as it did, and again, that would’ve been a reason to delay, which we did, and that was the wrong call. 

Hank Smith 28:39 

How much communication is there between the Treasury Secretary and the Fed Chair? Do they talk weekly, monthly? 

Loretta Mester 28:49 

Yeah, I mean, my understanding is that there is a weekly breakfast where the Treasury Secretary and the Chair get together. Now, whether it’s changed since I’ve left the Fed, I can’t tell you. But yeah, I mean it’s not like they’re not communicating to one another. They don’t talk policy, but they do talk sort of what’s going on in the economy, how are you seeing things? And so that’s a good way of them staying in touch with one another, even though the Fed has the role of setting monetary policy independently from political influence. 

Hank Smith 29:26 

So, let’s talk about a little bit the current environment. You kind of touched on it, the conundrum of inflation being a little bit sticky around 3% and employment softening. We still have a very healthy unemployment rate, but hirings have clearly come way down. We haven’t seen too much in the way of firings, although it looks like that’s picking up a little bit. So, you’ve got this dual mandate of stable money, inflation, and full employment. Is that a 50/50, or does that really depend on the environment as to how the Fed is thinking about at any given time what’s more important? 

Loretta Mester 30:18 

So, the Fed always is worried about both parts of the mandate. I think a lot of times if you just read the financial press or turn on the financial TV, they always say, okay, they’re only caring about employment now, and they’re not caring about – that isn’t true, right? It’s always you have to have both mandates in mind, and it is what you said: it’s price stability, and we define that as 2% inflation measured by the personal consumption expenditure index, but be that as it may, 2% inflation, and then maximum employment consistent with price stability, right? Because the Fed can’t push on employment, it just tries to cushion the employment to help the economy along. So, it has to keep both of those in mind, and at any one time, depending on the environment, the risk around those could be different. So, for example, we went through, after the financial crisis, we went through and when the economy came back, we went through a long period where inflation was below the target, and the Fed had a very accommodative monetary policy. Post-pandemic, as we just talked about, very high inflation – we had the focus on that and tighten monetary policy. Right now, what’s difficult, well, there’s many things difficult in this current environment, but one of them is that the shocks that have hit the economy, for example, tariffs, they tend to reduce growth and ultimately employment. At the same time, they push up prices. So, you have things happening that move the dual mandate goals in opposite directions. So that makes it an even tougher environment because you’re trying to hit both of them. And so, what the Fed does in those situations is really balance the risk. So last time at the last meeting, they ended up moving the interest rate down because they were more concerned that it looked like the weakening in the labor market might necessitate taking out some insurance about – they’re not sure that it’s an out of imbalance because supply and demand of labor are moving, which also makes it difficult, but they took out some insurance. At the same time, as you pointed out, inflation does appear to be sticky at three. And in my view, you can’t attribute it all to tariffs. There’s a stickiness there that goes beyond any temporary, if you want to call them temporary, tariff effects. So again, they’re going to have, they have a challenge in how to balance this, and that’s what sort of the role of the Chair of the Committee is to lay out: here’s a path, not necessarily a funds rate path, but a way of thinking about policy. Here’s our narrative that we think is the way things are going to work out, and then go ahead and lay that out to the Committee, and then the Committee can just debate it and decide whether they go along with that or not go along with it. 

Hank Smith 33:24 

Yeah. Haverford Trust has a fairly optimistic outlook for accelerating GDP growth in 2026, but it’s predicated on tariff certainty replacing what is right now very uncertain. The rules are changing weekly, if not daily, which really paralyzes decision making from the C-suite because they need to know what the rules of the road are. And if by year end, we can get tariffs and the narrative of all these changing tariffs off the front page, and there’s reasonable confidence that what is in place will stay in place, we think there could be a real acceleration in growth given the deregulation that’s going on, the passing of the “Big Beautiful Bill” that secured the tax code, created even some additional business incentives. And so, it’s a very optimistic view, but there is a caveat, and we’ve got to get the whole shifting and changing of tariffs to just settle down to whatever rate it’s going to be and then just leave it there. 

Loretta Mester 34:51 

Well, you’re right in the sense of, I agree that the uncertainty is really what when you talk to businesspeople, they tell you is the real hurtful thing. It really, early on, of course, the tariff levels were so high that they were very much – I’ve talked to business, and they’re like, okay, I don’t know how I’m going to get through that. But it was the uncertainty that was really bothering them. I had a number of businesspeople tell me just tell me what the rules are. I can handle it because they’re confident in their own business, in running their business. If you tell me what the rules are, I can manage. And we’ve seen businesses being able to do this so far. I mean, I think one of the things that’s remarkable about the US economy is how resilient it has been. Even though we have higher tariffs now that we’re moving around; we had the geopolitical risk. And so, there’s a whole bunch of other things going on, and yet the economy has held up pretty well. And I think it’s because businesses, with the experience of the pandemic, they did already rejigger some of their supply chains. They’re more flexible. A number of businesses brought in inventories in the first quarter to try to get ahead of a tariff. So, you haven’t really seen a lot of pass through a price. You’re seeing it now in the inflation measures now, but I think there is more to come, and that’s going to be the challenge, is how do you ensure that you don’t do the same? I mean, the way I would phrase it is I hope the Fed has learned from what happened in the pandemic where it’s stuck on that narrative of transitory inflation, which turned out to be too long. What we learned is you’ve got to keep your monetary policy well positioned for whichever way the economy turns so that you don’t have to do aggressive movements if the economy turns in a way you don’t expect. I think that that’s what they’re doing. They’re doing that hard work now to try to keep it well positioned. It could be that the labor market, as you say, is in stasis right now. There’s not that much firing going on, but there’s not hiring going on either. So, I would call that an uneasy balance, and the Fed doesn’t want that to get worse. At the same time, it has to worry about – could be tariffs become more drawn out, and price level keeps rising, and they have to do something about it. So that’s the challenge. There’s a lot of risks out there, and they’re going to have to keep their eye on that. So, they just have to keep both mandates in their mind at the same time. 

Hank Smith 37:29 

So, businesses have been incredibly resilient. Balance sheets are as strong as they’ve ever been across the board. Profits are growing. But the other consistent force in our economy has been the consumer, which has been incredibly resilient. They’ve spent the COVID transfers, but they’re still spending. And while it’s very interesting to me, while consumer confidence surveys have been in the doldrums for a while, for the most part, that has nothing to do with consumer spending. The consumer can respond to a survey on the one hand and continue spending. And so, yeah, I know there’s some chinks in the armor at the lower income level, but you know something? I’ve been through many business cycles as you have, and it always seems to me as though there’s some chinks in the armor at the lower level, but the mid-tier consumer and upper-end consumer continue to fuel a good part of this economy. 

Loretta Mester 38:42 

Yes, you’re right. But there does seem to be a little more disparity, I would say, between the upper income levels and the lower end. In fact, one of the characteristics of this economy is how there’s disparities by sector and by income, and even by age. So lower income people are feeling the effects of higher tariffs, partly because of some of the – if you look at their – during the pandemic, this was even very clear. They were buying essentials, and those are what had the highest price increases, where upper income people would buy other things that they wouldn’t feel the prices as much. So that is going on with the tariffs as well. You have sort of older workers versus younger workers; it’s very difficult to find a job now if you’re coming out of college. So, they’re feeling the burden more than an upper-income person who already has a job and just wants to hang on to the job. So those kinds of disparities are longer-term issues. They’re not going to necessarily affect the business cycle at the kind of frequency we’re thinking about, but it will, I think, have some impact. It’s same thing in industry, right? AI, if you’re touching AI, you’re doing extremely well right now. Other parts of the stock market aren’t doing as well, although all ships seem to be going up, and the market keeps going up. So again, something to keep an eye on to see how it plays out. I mean, two things that you mentioned in terms of next year, I mean, I think people will get, households will get, much bigger refunds than they’re expecting just because the bill went through, and then the withholding was not the same. So, I think when they get their tax refund, that’ll be a positive for people in terms of their sentiment, and it’s just worth spending. And then the depreciation is being expedited. So again, that’ll help businesses. So, I think there is some positives coming into next year, and I agree that we probably will see a pickup in growth next year a little bit higher than we saw growth that’ll end up this year. But we’ll just have to see, and I think the risks are worth watching to see if that plays out the way we’d expect. 

Hank Smith 41:02 

And it certainly made the Fed’s job a little bit easier if we see that. And it also translates to the labor market as well, and we get through this kind of soft patch that we’re experiencing right now. I just want to, in our few minutes remaining, I want to go back to inflation. And you mentioned the Fed’s 2% target rate. If I’ve got my numbers correct, if you go back over 40, 50 years, inflation has averaged closer to 3% than 2%. Where did the 2% as an official target – where did that come from? 

Loretta Mester 41:48 

Yeah, so the idea is you want – not everything in the economy’s indexed, right? So, you want to have some cushion because not everyone’s salary’s indexed. There’s a whole bunch of things in the economy that aren’t indexed. So, you need a little bit of inflation because you don’t want to have either wages or, worse, prices being negative. So, on average, you don’t want to have that kind a thing. And so, 3% really doesn’t seem to be right, because most people will take that into account when they’re thinking about what they’re buying. 2% is a low enough level that – it was Alan Greenstein who said, what’s price stability when people aren’t figuring it into their decision making? And 2% seems to meet that goal. And there’s also a lot of history across countries that show that a 2% inflation rate, you end up with a pretty good economic situation. So, I think that was sort of the reasoning behind it, is that you don’t want zero, even though in some theoretical models, that might be what you want. You don’t want to have something too high that people actually will take into account and make decisions based upon. You want something in the middle, and a lot of countries have a 2% target. 

Hank Smith 43:08 

Finally, Loretta, regardless of my guest’s field, this subject seems to always come up: philanthropy. And you mentioned your board service, the Cleveland Clinic, but you’re also involved in several other boards in Cleveland. So, clearly, philanthropy is important to you, and giving back is important. Can you talk a little bit about your thoughts on that, and are you going to bring some of that philanthropy to Philadelphia? 

Loretta Mester 43:40 

Well, I hope to bring it to Philadelphia, for sure. Yeah, once you get into a situation where you feel like you can help organizations do their important work, then I feel like that’s a good thing to do. So, I’m on the board of the Cleveland Clinic, as you mentioned. I’m also on the board of the Cleveland Orchestra, which is a wonderful organization. And then I’m on the board of the Council for Economic Education, which is a nationwide organization, but it focuses in on really K through 12 students, having them understand economics in the classroom and also financial literacy. And I think living over the last 10 years, I think everyone could do with a dose of understanding financial literacy and economics because it’s getting more complicated out there, and we want people to be able to make good decisions. So those are the organizations I’ve been involved in. 

Hank Smith 44:38 

I want you to certainly stay on that board because I am passionate about financial literacy being mandatory in K through 12. Civics should also be mandatory, and it would be so beneficial to our society that we have financially literate children and young adults. And so, I think the ripple effect could be nothing but positive. Loretta, thank you for joining us on Speaking of Quality. It’s been a pleasure speaking with you about all things related to the Federal Reserve, monetary policy, and today’s economy – and a few other subjects. Thank you for listening to this episode of Speaking of Quality: Wealth Management Insights. Our next episode will be released shortly. In the meantime, please send suggestions or questions for me or The Haverford Trust team to marketing@haverfordquality.com. And don’t forget to subscribe, rate, review, and share this podcast. Until next time, I’m Hank Smith. Stay bullish. 

Bryan Tracy 45:51 

Hello, all. That was a great episode. It’s time for Planning in Practice. I’m Bryan Tracy, Vice President and Director of Wealth Planning at Haverford Trust. In this segment, we’ll uncover key insights and tangible advice for your own wealth planning journey. What a conversation by Loretta and Hank. I really enjoyed the discussion around the inner workings of the Fed and how interest rate decisions are made. In particular, I was an economics major at Brown University, only an undergraduate degree. Loretta took it much further than I did in the field of economics, but a fascinating conversation and an important conversation when we think about our clients and their financial lives and decisions that they’re making and goals and objectives that they have. Even over just my 15-year career here, I’ve seen a lot of change on the interest rate and inflation side. Going back to when I started in the business in 2010-11 timeframe and all the way up to 2021, inflation and interest rates, low interest rates were really kind of background noise up until that ‘21 period. And we’ve seen such a shift here over the past four years with inflation and interest rates going up over this period of time, and it’s really created a different environment that we’re now working in compared to that pre-‘21 time period. When we think about the impact that the Fed has in their decision on interest rates and really also to their mandate on inflation, it shows up in our clients’ daily lives when we think about savings on cash and interest rates, yields on cash. We’ve seen that just here in the past four years of working with clients to organize their financial situation, their balance sheet, to identify opportunities when it comes to cash and where they’re holding cash, whether in a bank or in a taxable account, to really get the best yield that they may be able to receive on that cash. And with the movement over the past four years, that was an area that we really identified, working with clients to add value and get a better return on that cash. The other area really is around loans. When we think about mortgages, we have daily or, really, weekly conversations with clients around decisions, maybe making around purchasing a home and really making a decision on how much of maybe a mortgage they’re taking out on that home. What is the interest rate? What is a potential path for the Fed and interest rates into the future? From a financial flexibility perspective, they’re organizing that situation to position themselves to be able to make decisions down the road. When we think about how much they’re putting down, are they selling equities or assets that they gain to have more equity in the home, et cetera. So those are really all areas that we really kind of get into the details with clients and interest rates, and rates on loans has an impact there. One other area is on the kind of estate planning front and wealth transfer, various strategies within that field are dependent on what is called the applicable federal rate, the AFR rate, which is set by the IRS and is kind of dependent upon Fed interest rate decisions and where that goes, and that shows up as far as now a strategy may be more valuable compared to another strategy depending on where that rate is. Family loans are a big area as well, talking through with clients that want to maybe help a child purchase a home, what is the interest rate that they are required or the minimum rate they need to charge on that for it to be a loan and not a gift? So, these are all areas that, again, the Fed and the decisions on the interest rates are really showing up in our client’s daily lives, and we’re helping them from the perspective of providing options, information for them to make decisions. I’ll lastly close on another big area, and something Loretta and Hank talked a lot about is inflation. And certainly, over the past four years, we’ve seen the negative impacts of inflation, and it is a very important aspect of a client’s financial plan when we think about projecting into the future and what their expenses will be 5, 10, 15 years into the future with the concept, or keeping in mind that we want to have the same purchasing power today that we had, say five years ago, and inflation is an important aspect of that. So, we’re building that into a client’s financial plan when we think about the growth of their expenses and even going into the detail around various expense categories, maybe education expenses. What is the inflation rate expectation on education or tuition expenses compared to say utilities or groceries, and having different rates for those different expense categories. Medical expenses. and long-term care is another big aspect of that. When we think about the growth and the inflation on those expenses have typically been higher than core inflation. So, factoring that in so that we’re able to plan for a client’s future needs around that to ensure that they have enough assets and sustainability of their portfolio to pay for those expenses. So, as you can see, the Fed and interest rates and inflation have big impacts on an individual’s financial plan. It’s an important aspect to be factoring in and preparing for. If this is a conversation that you have found helpful and you want to expand on further as it relates to your individual situation, we’re happy to help have a conversation and be a resource for you. Thank you. 

Maxine Cuffe 51:22 

Thank you for listening to this episode of Speaking of Quality: Wealth Management Insights with Hank Smith. To hear future episodes of Speaking of Quality, please subscribe on Apple Podcasts, Spotify, Google Podcasts or wherever you listen to podcasts. To learn more about The Haverford Trust Company, please visit https://haverfordquality.com/. This podcast is provided as general commentary and market overview, and should not be relied upon as research, a forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt an investment strategy. Any opinions expressed are as of the date this podcast was recorded and may change at any time and are the opinions of that commentator, not Haverford. Any opinion or information provided are believed by Haverford to be reliable at the time of this podcast’s recording, but are not necessarily all-inclusive or guaranteed for accuracy. Before making any financial decisions, please consult with an investment professional.