WEBVTT - BONUS: Fed Chair Jerome Powell Talks Fed Rates Outlook 0:00:00.080 --> 0:00:03.280 Fetcherman J. Powell making comments at the Economic Club of 0:00:03.480 --> 0:00:06.160 New York about his view of the economy and interest rates. 0:00:06.320 --> 0:00:07.880 You can be sitting down on the fireside chat with 0:00:07.920 --> 0:00:08.479 David Weston. 0:00:08.600 --> 0:00:11.080 Let me start with something you just referred to, which 0:00:11.119 --> 0:00:13.640 is the surprise of the upside in the economic data, 0:00:13.640 --> 0:00:16.480 despite as you've turned it, I think historically fast pace 0:00:16.800 --> 0:00:19.640 of growth. Are you surprised at how resilient the United 0:00:19.680 --> 0:00:20.560 States economy. 0:00:20.280 --> 0:00:20.720 Is just today. 0:00:20.720 --> 0:00:23.480 We've got jobless claims members surprised because they were low. 0:00:23.560 --> 0:00:25.759 We got the retail sales numbers you mentioned, We've got 0:00:25.800 --> 0:00:28.440 industrial production across the board. It seems like a very 0:00:28.440 --> 0:00:31.400 strong economy despite all you've done to try to slow 0:00:31.440 --> 0:00:31.760 it down. 0:00:33.040 --> 0:00:38.320 Yes, so we certainly have a very resilient economy on 0:00:38.320 --> 0:00:41.920 our hands. We've got the economy growing strongly. If you 0:00:41.960 --> 0:00:44.640 think back a year, many forecasts called for the US 0:00:44.720 --> 0:00:48.000 economy to be in recession this year. Not only has 0:00:48.040 --> 0:00:51.040 that not happened, growth is now running for this year 0:00:51.560 --> 0:00:54.320 above its longer run trend. So that's been a surprise, 0:00:54.760 --> 0:00:58.600 driven largely by consumer spending, driven by a very strong 0:00:58.760 --> 0:01:02.520 job market, with people getting jobs with high first high 0:01:02.600 --> 0:01:05.520 nominal wages, and that as inflation has come down real 0:01:05.560 --> 0:01:08.520 wages which is spurring spending, and we've also had inflation 0:01:08.600 --> 0:01:12.520 coming down, so you know that's it really is a 0:01:12.560 --> 0:01:15.800 story of much stronger demand. There may also be there 0:01:15.840 --> 0:01:19.399 may be some ways in which the economy is less 0:01:19.400 --> 0:01:22.959 affected by interest rates. It's hard to know precisely, but 0:01:23.080 --> 0:01:27.160 for example, companies, many companies, any company with bond market 0:01:27.200 --> 0:01:30.400 access will have termed out its debt right and therefore 0:01:30.640 --> 0:01:33.039 may not be feeling the effects of higher rates. The 0:01:33.080 --> 0:01:36.040 same may be true of homeowners who have a long term, 0:01:36.080 --> 0:01:39.840 fixed rate, low rate mortgage, who then are therefore not 0:01:39.880 --> 0:01:42.920 because it's not an adjustable rate or a higher rate, 0:01:42.959 --> 0:01:46.200 they're not feeling that increase in rates. So the economy 0:01:46.240 --> 0:01:50.400 may be somewhat less susceptible to the effects of rate increases. 0:01:50.480 --> 0:01:53.200 On the other hand, if you look at look at 0:01:53.240 --> 0:01:57.880 interra sensitive spending, these are very much the places where 0:01:57.880 --> 0:02:00.840 we see where we expect to see and do see effects. 0:02:00.840 --> 0:02:04.880 So for example, in housing or you know in the 0:02:04.920 --> 0:02:08.160 housing effectors sector has been very affected by higher rates. 0:02:08.240 --> 0:02:12.120 As purchases of durable goods. If you look at surveys, 0:02:12.160 --> 0:02:14.000 people will not say that it's a good time to 0:02:14.000 --> 0:02:16.520 buy a car or a house. Quite the contrary, So 0:02:16.560 --> 0:02:20.840 we see policy working through its usual channels. It may 0:02:20.919 --> 0:02:23.359 just be that rates haven't been high enough for long enough. 0:02:23.400 --> 0:02:26.240 And again it's all happening in the context of very 0:02:26.240 --> 0:02:28.440 strong demand. We've put other speculators. 0:02:28.480 --> 0:02:30.280 Maybe the terming out of debt, as you say, both 0:02:30.320 --> 0:02:34.680 corporate debt and hushole debt may diminish the effectiveness of 0:02:34.760 --> 0:02:37.320 rate hikes. Do you have a view of whether that's true, 0:02:37.480 --> 0:02:39.640 And if it is true, what does it say about 0:02:39.639 --> 0:02:41.600 matre pussy. Does it mean you have to go farther 0:02:42.120 --> 0:02:43.680 in the rate hikes or do you just not have 0:02:43.720 --> 0:02:44.480 the power to affect it. 0:02:45.440 --> 0:02:49.680 So no, I don't think that there's a fundamental shift 0:02:49.760 --> 0:02:52.160 in the way that interest rates affect the economy. There 0:02:52.160 --> 0:02:54.840 may be some differences in this cycle because of what 0:02:54.880 --> 0:02:58.960 I mentioned. As I mentioned, we are seeing those the 0:02:58.960 --> 0:03:01.480 effects where we expect to see them, which is interrasensitive 0:03:01.520 --> 0:03:05.240 spending and also asset prices to some extent, and the 0:03:05.280 --> 0:03:07.920 exchange rate, which you're also seeing a strong exchange rate, 0:03:07.960 --> 0:03:11.760 which is disinflationary. So I don't think there's a fundamental 0:03:11.840 --> 0:03:14.680 change in the way monetary policy affects the economy, and 0:03:14.720 --> 0:03:17.200 again it goes back to just very strong demand. We 0:03:17.280 --> 0:03:20.400 take the economy as it is, We take fiscal policy 0:03:20.639 --> 0:03:22.800 and the economy and all the things we don't control, 0:03:22.880 --> 0:03:26.680 they come to us, and we conduct policy always to 0:03:26.760 --> 0:03:31.000 achieve maximum employment and stable prices. So we just take 0:03:31.040 --> 0:03:35.240 what comes. The fact that we have a strong growing economy, 0:03:35.240 --> 0:03:40.280 a strong growing labor market, and inflation coming down. These 0:03:40.280 --> 0:03:43.080 are the elements that we want to see that to 0:03:43.120 --> 0:03:46.600 achieve the outcome we want. It may take more time, 0:03:46.680 --> 0:03:50.520 but ultimately this is the kind of thing you would 0:03:50.520 --> 0:03:53.400 want to see along the path to getting through this 0:03:53.480 --> 0:03:54.960 without a big increase in unemployment. 0:03:55.160 --> 0:03:58.800 How much effect thus far has the FED had We 0:03:58.840 --> 0:04:01.040 will have memorized now long and variable legs? 0:04:01.680 --> 0:04:02.800 How long? How variable? 0:04:02.840 --> 0:04:05.000 And where are you in that process? Are you at 0:04:05.000 --> 0:04:07.120 the twenty five percent point the fifty in terms of 0:04:07.160 --> 0:04:08.400 seeing it in the effect in. 0:04:08.400 --> 0:04:13.240 The real economy. So there's there's no precision in our 0:04:13.360 --> 0:04:17.880 understanding of how long legs are. One thing that has 0:04:17.960 --> 0:04:22.599 changed in the modern era is that markets now, over 0:04:22.640 --> 0:04:25.479 the course of the last thirty years, central banks have decided, 0:04:25.560 --> 0:04:28.560 instead of being secretive, to be very transparent. And what 0:04:28.560 --> 0:04:32.560 that has meant is that markets move actually well in anticipation, 0:04:32.760 --> 0:04:37.640 well before our policy moves, So the transmission from policy 0:04:37.720 --> 0:04:41.800 moves to financial conditions actually happens before the moves now, 0:04:41.839 --> 0:04:44.200 whereas that was not the case fifty years ago when 0:04:44.360 --> 0:04:49.479 Milton Friedman coined the phrase long and variable legs. But 0:04:49.600 --> 0:04:52.400 now you have financial conditions changing, and the questions how 0:04:52.440 --> 0:04:56.520 does it affect the economy? The standard channels are asset 0:04:56.600 --> 0:04:59.880 prices in such intrasensitive spending in the exchange rate, for example. 0:05:00.000 --> 0:05:03.240 And again we do see that happening, just not as 0:05:03.240 --> 0:05:05.520 fast as we would like. And I would attribute some 0:05:05.640 --> 0:05:10.000 of that to just stronger demand. Household savings were turned 0:05:10.000 --> 0:05:12.800 out to be higher. Household spending has been stronger, and 0:05:12.839 --> 0:05:14.720 that's by far the largest part of the economy. 0:05:14.839 --> 0:05:17.240 In order to conduct monetary policy effectively, do you need 0:05:17.240 --> 0:05:21.000 at least hypothesis about how much has already hit the economy, 0:05:21.000 --> 0:05:22.560 because it's hard to know how much more you need 0:05:22.600 --> 0:05:24.400 to do if you don't know how far you've come. 0:05:24.760 --> 0:05:27.400 So on legs, I think if you think back, it's 0:05:27.400 --> 0:05:30.760 been a year now since the last seventy five basis 0:05:30.760 --> 0:05:33.320 point hike we did. It was the November meeting in 0:05:33.360 --> 0:05:36.359 twenty twenty two. The first one was in June, so 0:05:36.400 --> 0:05:38.520 it's more than a year, so we should be seeing 0:05:39.120 --> 0:05:41.480 the effects. By the way, they don't all just arrive 0:05:41.640 --> 0:05:44.039 on one day. They arrive and then they're thought to 0:05:44.160 --> 0:05:46.839 peak and then to diminish. So there's a lot of 0:05:46.880 --> 0:05:49.880 uncertainty around lags, and one of the reasons why we 0:05:49.960 --> 0:05:53.599 have slowed down significantly this year is to give monetary 0:05:53.600 --> 0:05:56.800 policy time to work. The truth is, though you can 0:05:56.839 --> 0:06:02.040 find academic support for different different diferent speeds and duration 0:06:02.160 --> 0:06:05.440 of lags, So we have to use our eyes and 0:06:05.600 --> 0:06:08.719 a little bit of risk management in patients in slowing 0:06:08.720 --> 0:06:10.720 down the pace to make sure that we are seeing 0:06:10.960 --> 0:06:13.560 the full effects. And I think again that's part of 0:06:13.600 --> 0:06:16.919 why we've slowed down this year. We went very quickly 0:06:16.960 --> 0:06:19.440 in twenty twenty two to catch up to where we 0:06:19.480 --> 0:06:22.839 needed to be, and now we're moving carefully with these decisions. 0:06:23.720 --> 0:06:26.920 So when you spoke back in August of twenty twenty 0:06:26.960 --> 0:06:29.359 and sort of laid out the revisions to the framework 0:06:29.360 --> 0:06:32.520 as it were, you said that in terms of anticipated growth, 0:06:32.600 --> 0:06:34.800 the sort of consensus have gone from something like two 0:06:34.800 --> 0:06:36.680 point five to one point eight percent. I think we're 0:06:36.680 --> 0:06:38.920 the numbers you laid out of that. Where are you now? 0:06:38.960 --> 0:06:40.880 Where's the fed? Where are you? And what you think? 0:06:40.920 --> 0:06:44.520 Basically? The long run growth is long run potential growth 0:06:45.400 --> 0:06:47.719 is not something that moves around a lot over time. 0:06:47.760 --> 0:06:50.520 But I would my own guess is it's around two percent. 0:06:50.960 --> 0:06:55.040 I think that the standard mainstream view would be a 0:06:55.080 --> 0:06:57.040 little bit below two percent, But I would just say 0:06:57.080 --> 0:07:01.040 two percent real growth over time. And you know what 0:07:01.400 --> 0:07:04.159 causes growth is you know, growth in hours worked plus 0:07:04.200 --> 0:07:07.240 growth in productivity. Growth in hours worked is a function 0:07:07.279 --> 0:07:09.800 of population growth in the long run and also labor 0:07:09.840 --> 0:07:13.200 force participation. Many things affect productivity. But if you if 0:07:13.200 --> 0:07:17.400 you drop in reasonable standard longer term estimates of hours 0:07:17.440 --> 0:07:20.680 worked growth and productivity, which is just output per hour 0:07:20.920 --> 0:07:23.720 productivity growth, you get something around two percent. And that's 0:07:23.960 --> 0:07:26.080 that's higher than most other advanced economies. 0:07:26.520 --> 0:07:29.640 As you look at it, do you see historical precedents 0:07:29.680 --> 0:07:33.800 for having growing economy with high rates over a long 0:07:33.840 --> 0:07:35.720 period of time? I mean, as you look back, I mean, 0:07:35.800 --> 0:07:38.880 is it like the late nineties? For example? What analogies 0:07:38.920 --> 0:07:40.960 do you draw as you try to determine what this 0:07:41.040 --> 0:07:42.960 might be doing at the economy of the longer term. 0:07:43.320 --> 0:07:47.360 So that's really a question about the what the level 0:07:47.360 --> 0:07:49.760 of rates will be going for, what the neutral level 0:07:49.800 --> 0:07:51.720 will be, And I think it's it's very hard to 0:07:51.840 --> 0:07:54.560 know confidently what the answer to that will be in 0:07:54.640 --> 0:07:58.160 five years. Some of the reasons why rates were low 0:07:58.280 --> 0:08:01.280 for the last twenty five years were just the aging 0:08:01.320 --> 0:08:05.800 of the global population and globalization and you know, so 0:08:05.920 --> 0:08:10.080 lots of savings and relatively with an aging population, savings 0:08:10.120 --> 0:08:13.440 greater than investments, so rates are lower and productivity was low. 0:08:13.520 --> 0:08:16.120 So all of those led to low interest rates. So 0:08:16.160 --> 0:08:19.600 what has changed with the pandemic. You might see less 0:08:19.720 --> 0:08:23.320 effects from globalization, certainly demographics that the aging of the 0:08:23.320 --> 0:08:27.560 global population is not changed. I mean, this is a 0:08:27.600 --> 0:08:30.160 discussion we're having on an ongoing basis. It doesn't really 0:08:30.200 --> 0:08:34.080 affect current policy. But where will rates settle out? What 0:08:34.120 --> 0:08:37.680 will be at a normal rate. So if a typical 0:08:37.840 --> 0:08:41.240 FED tightening cycle would leave you at five or six percent, 0:08:41.440 --> 0:08:44.800 and this is in the before the pandemic and before 0:08:45.160 --> 0:08:48.640 the low inflation period, you would have had had FED 0:08:48.800 --> 0:08:51.199 rates in four or five percent or even higher. Frequently 0:08:51.320 --> 0:08:52.800 are we going back to that? I really don't know. 0:08:52.800 --> 0:08:55.040 I wouldn't want to speculate. I mean, my guess is 0:08:55.080 --> 0:08:57.360 it'll be somewhere in the middle. But I don't know. 0:08:57.440 --> 0:09:00.280 I mean, I think we can say this now, the 0:09:00.320 --> 0:09:03.079 effective lower bound is not an issue. You know, we 0:09:03.200 --> 0:09:06.079 were very concerned about that. Right now we're very far 0:09:06.120 --> 0:09:08.760 from the effective lower bound, and the economy's handling it 0:09:08.880 --> 0:09:11.600 just fine. But that's you know, that's because we're at 0:09:11.640 --> 0:09:16.200 a time of really elevated demand coming out of the pandemic. 0:09:16.240 --> 0:09:19.200 As we reopened with fiscal stimulus and monetary stimulus. We 0:09:19.200 --> 0:09:21.680 have very strong demand of the United States. Hard to 0:09:21.720 --> 0:09:24.400 know what the economy will want in the way of 0:09:24.400 --> 0:09:27.160 interest rates when five years from now, in all of 0:09:27.160 --> 0:09:29.079 the effects of the pandemic are behind us. 0:09:29.160 --> 0:09:31.920 You mentioned the long term equilibrium rate, which you talked 0:09:31.920 --> 0:09:34.760 about again back in Jackson Hole in August of twenty twenty. 0:09:34.840 --> 0:09:37.319 Back then you said you thought it had served, consensus 0:09:37.320 --> 0:09:39.360 had come down. I think it was from like four 0:09:39.360 --> 0:09:41.560 point twenty five percent to two point five percent. 0:09:41.640 --> 0:09:47.000 Where is it today? So, I think, by any reckoning, 0:09:47.280 --> 0:09:50.360 long term interest rates and the neutral interest rate came 0:09:50.400 --> 0:09:54.720 down steadily over the course of several decades. So where 0:09:54.800 --> 0:10:00.480 is it today? I don't know, you know, we're finding it. Basically, 0:10:01.840 --> 0:10:06.079 the idea was, I think the median indication of what 0:10:06.120 --> 0:10:08.920 the real neutral rate was around fifty basis points before 0:10:08.960 --> 0:10:11.880 the pandemic. It may have risen in the near term. 0:10:11.920 --> 0:10:14.400 The real question that matters, though, is will it rise 0:10:14.400 --> 0:10:16.560 in the long term, and that we don't know. 0:10:17.720 --> 0:10:19.319 But do you need to know in order to conduct 0:10:19.400 --> 0:10:21.320 monetary busy? I mean you must have to have at 0:10:21.400 --> 0:10:23.160 least a theory. I mean, I'm not saying you have 0:10:23.200 --> 0:10:24.280 to be right about it, but you have to have 0:10:24.320 --> 0:10:26.440 a hypothesis, don't you. As you look at the data, 0:10:26.480 --> 0:10:29.760 you have to put the data through some sort of theory. 0:10:29.840 --> 0:10:32.600 So we all write down our estimates of the longer 0:10:32.679 --> 0:10:36.000 run neutral rate every quarter in the summary of economic projections, 0:10:36.280 --> 0:10:39.760 and that's based on models. It's based on also looking 0:10:39.760 --> 0:10:43.319 out the window and including lags, thinking how are our 0:10:43.360 --> 0:10:46.360 current rates affecting the economy. So the evidence of your 0:10:46.360 --> 0:10:50.000 eyes is that the economy is handling much higher rates 0:10:50.080 --> 0:10:54.680 at least for now, without difficulties. So notionally, that might 0:10:54.760 --> 0:10:57.120 tell you that the neutral rate has risen, or it 0:10:57.120 --> 0:10:59.439 may just tell you that we haven't had rates high 0:10:59.559 --> 0:11:02.480 enough for long long enough. You're right, though, but you know, 0:11:03.480 --> 0:11:06.560 we have models for everything, we have formulists for everything. Ultimately, 0:11:06.600 --> 0:11:10.120 as a practitioner, we have to, you know, focused on 0:11:10.160 --> 0:11:13.319 what the economy is telling us, even taking legs into account. 0:11:13.480 --> 0:11:16.480 What's it telling us? Does it feel like policy is 0:11:16.520 --> 0:11:18.559 too tight right now? I wouldn't have to say no. 0:11:19.080 --> 0:11:21.080 I think the evidence is not that policy is too 0:11:21.080 --> 0:11:24.960 tight right now. So we'd five five and a quarter 0:11:25.000 --> 0:11:25.840 to five and a half percent. 0:11:26.240 --> 0:11:28.480 Do you think we're entering into a new phase in 0:11:28.520 --> 0:11:32.240 monetary policy? We had the vulgar disinflation I think you 0:11:32.320 --> 0:11:33.839 referred to it as and then we had sort of 0:11:33.880 --> 0:11:37.679 inflation targeting. For a time, there was concerned about secular stagnation. 0:11:37.800 --> 0:11:39.960 We were pushing the zero bound, as you said, we 0:11:39.960 --> 0:11:41.920 were concerned with that, and then we had the pandemic 0:11:41.960 --> 0:11:44.640 and we had the real problem with inflation. 0:11:45.400 --> 0:11:48.480 What's the next phase look like? How would you describe 0:11:48.640 --> 0:11:52.680 what we've been through? Is in all of the advanced 0:11:52.679 --> 0:11:56.600 economies around the world was a period where the effective 0:11:56.679 --> 0:12:00.840 lower bound, the proximity of interest rates free interest rates 0:12:00.880 --> 0:12:02.800 to the effective lower bound, which is zero or a 0:12:02.840 --> 0:12:05.720 little bit less, was a big problem for monetary policy, 0:12:05.800 --> 0:12:08.040 and just rates came down and down and down. And 0:12:08.080 --> 0:12:11.120 the problem is if rates are going to be close 0:12:11.160 --> 0:12:14.320 to zero in good times, then how do you cut? 0:12:14.400 --> 0:12:17.360 And so have central banks lost the power of their 0:12:17.400 --> 0:12:20.120 most important tool, which is interest rates. This was a 0:12:20.160 --> 0:12:25.440 subject of a vast literature in monetary policy research for 0:12:25.520 --> 0:12:29.960 twenty years, and the most common answer was some kind 0:12:29.960 --> 0:12:32.319 of a makeup strategy. So you would credibly promise to 0:12:32.720 --> 0:12:35.840 run inflation a little bit hot and above two percent, 0:12:35.880 --> 0:12:38.559 and that would anchor inflations two percent to counter the 0:12:38.559 --> 0:12:41.840 times when it was below. So that was a very 0:12:41.840 --> 0:12:44.840 serious problem which filled books worth of research. Then comes 0:12:44.920 --> 0:12:47.560 the pandemic, Then comes the response to the pandemic, and 0:12:47.600 --> 0:12:50.000 then comes the pandemic inflation, not just the United States 0:12:50.000 --> 0:12:53.880 but everywhere. The question is that a secular change or 0:12:53.920 --> 0:12:56.720 are these factors that brought us to that place? Are 0:12:56.760 --> 0:13:00.840 they still out there waiting to come back? And you know, 0:13:00.880 --> 0:13:03.760 books are written on this subject. Now you can argue that, 0:13:04.960 --> 0:13:09.080 and some have argued that effectively, the last twenty years 0:13:09.080 --> 0:13:12.079 before the pandemic, we're kind of a perfect storm of disinflation, 0:13:12.800 --> 0:13:15.680 and now that's all gone and we're going into a 0:13:15.720 --> 0:13:19.760 more inflationary period that will be characterized by more supply 0:13:19.880 --> 0:13:23.480 shocks and things like that and therefore more inflationary pressure. 0:13:24.000 --> 0:13:26.160 So are we going into such a I don't know. 0:13:26.240 --> 0:13:28.840 I mean all I can tell you I think it's unknowable. 0:13:28.880 --> 0:13:33.079 And you know, great theorists and researchers have different views 0:13:33.080 --> 0:13:35.680 on this. It's not something you can settle in advance. 0:13:35.720 --> 0:13:38.480 We'll have to see. I think our issue is right 0:13:38.520 --> 0:13:43.719 now trying to achieve a sufficiently restrictive stance of policy 0:13:43.800 --> 0:13:46.000 to bring inflation down to two percent over time. That's 0:13:46.000 --> 0:13:47.160 what we're really focused on. 0:13:47.880 --> 0:13:51.120 Whenever any of us goes, particularly institutions, go through tumultuous times, 0:13:51.120 --> 0:13:53.920 and know, as you've been through the tumultuous time, we 0:13:54.000 --> 0:13:55.760 look back and think, O coo do we learn? So 0:13:56.040 --> 0:13:59.800 after action report, look at the pandemic and then pandemic inflation, 0:14:00.120 --> 0:14:03.160 what would you say you learned in terms of macroeconomics, 0:14:03.200 --> 0:14:05.160 in terms of the economy from that experience. 0:14:06.040 --> 0:14:09.240 So, hindsight is always a wonderful thing, right. I think 0:14:09.280 --> 0:14:11.760 the fair way to judge the actions that were taken 0:14:12.600 --> 0:14:18.040 is to put yourself in the place of legislators and 0:14:18.520 --> 0:14:21.760 policy of other you know, and central bankers around the world, 0:14:22.120 --> 0:14:25.480 And there was no playbook. You know, we've never seen 0:14:25.560 --> 0:14:29.920 we hadn't seen a global economic shutdown. People were thinking 0:14:29.960 --> 0:14:32.680 that the pandemic might kill a whole lot of people, 0:14:32.720 --> 0:14:34.560 and that we wouldn't have a vaccine for five years. 0:14:34.600 --> 0:14:36.320 We might now have an economy for five years. So 0:14:36.800 --> 0:14:39.680 these things were all very possible in March of twenty twenty, 0:14:40.240 --> 0:14:42.800 and so we pulled out all the stops in Congress, 0:14:42.800 --> 0:14:45.600 put at all the stops. With the benefit of hindsight, 0:14:45.920 --> 0:14:47.800 Could we have done a little bit less and had 0:14:47.840 --> 0:14:50.200 a little bit of inflation, I guess we could. But 0:14:50.240 --> 0:14:52.200 I think if you look overall at the performance of 0:14:52.240 --> 0:14:56.640 the US economy, our economy is the strongest. We have 0:14:56.720 --> 0:14:59.480 the you know, we're actually also making the most progress 0:14:59.480 --> 0:15:02.560 on inflation, but we certainly have the strongest growth. We're 0:15:02.600 --> 0:15:07.320 back to prior growth trend, you know, not just the 0:15:07.440 --> 0:15:09.400 level of where we were, were actually back to the 0:15:09.440 --> 0:15:13.360 prior trend. The labor market. The last time we had 0:15:13.680 --> 0:15:17.240 this many consecutive months of unemployment below four percent was 0:15:17.280 --> 0:15:19.680 in the late nineteen sixties, so it's more than fifty 0:15:19.760 --> 0:15:22.520 years ago. So our economy is doing very well from 0:15:22.560 --> 0:15:25.360 all of that. But if you had perfect hindsight you 0:15:25.440 --> 0:15:28.000 might have. You might not have had as much inflation 0:15:28.080 --> 0:15:30.680 if we'd done less, although other countries who didn't do 0:15:31.280 --> 0:15:34.040 as much as we did also had substantial inflation problems. 0:15:34.320 --> 0:15:36.040 I think my question was just a little bit different. 0:15:36.080 --> 0:15:38.160 It's not so much of assigning blame or saying to 0:15:38.200 --> 0:15:41.320 somebody make a mistake, as are there things that going 0:15:41.400 --> 0:15:44.600 forward would change the way you conduct monetary policy that 0:15:44.640 --> 0:15:46.960 you learned from that that maybe nobody had reason to 0:15:47.000 --> 0:15:49.160 know at the time, but it was an experience you 0:15:49.200 --> 0:15:49.640 went through. 0:15:50.640 --> 0:15:53.400 Well, you know, we were in a time of a 0:15:53.520 --> 0:15:58.320 very long time, in a reasonably long time, of disinflationary forces, 0:15:58.800 --> 0:16:03.280 and I think everybody's in instinct had been attuned to 0:16:04.280 --> 0:16:06.760 risks coming from this direction, which is too low inflation. 0:16:07.360 --> 0:16:09.320 And so what this has taught us is that you 0:16:09.320 --> 0:16:13.480 know that period, that period is over, and we now 0:16:13.520 --> 0:16:17.520 have probably going forward, a more balanced set of risks 0:16:17.520 --> 0:16:21.480 where high inflation and low inflation are both risks. In fact, 0:16:21.560 --> 0:16:23.760 right now the risk is still high inflation, but I'm 0:16:23.760 --> 0:16:26.480 assuming once we get back to two percent we won't 0:16:26.480 --> 0:16:29.800 have that. But we've certainly learned that. And I mean, 0:16:32.400 --> 0:16:36.880 events are the possible range of events is so much 0:16:36.920 --> 0:16:39.800 wider than what we think it is on any given day. Right, 0:16:39.840 --> 0:16:42.680 the tails are so wide, and it's just not human 0:16:42.760 --> 0:16:45.840 nature to constantly be thinking about things that are way 0:16:45.880 --> 0:16:48.520 out in the tail. But they happen in financial markets 0:16:48.600 --> 0:16:52.920 and in economies. They happen far more regularly than they should. 0:16:53.120 --> 0:16:55.400 I suspect every person in this room as well. Where 0:16:55.440 --> 0:16:58.240 it's going on with yields with bonds, it's been a 0:16:58.240 --> 0:17:01.320 big story, particularly in the longer end of the curve. 0:17:01.960 --> 0:17:03.800 What is your understanding of what is going on in 0:17:03.800 --> 0:17:05.719 the bond market and why those yields are going up, 0:17:05.760 --> 0:17:06.760 particularly again at. 0:17:06.640 --> 0:17:09.440 The longer end of the curve. So it's it's really 0:17:09.480 --> 0:17:11.840 two questions. One is why is it happening? And the 0:17:11.880 --> 0:17:14.560 other is why does it matter for policy? And so 0:17:14.600 --> 0:17:16.560 I would say, on the why is this happening question, 0:17:16.600 --> 0:17:19.320 I think it's appropriate to have a little bit of humility. 0:17:19.320 --> 0:17:21.879 It's always hard to say exactly what's going on with 0:17:22.119 --> 0:17:24.320 longer term yields, but this is what I think we 0:17:24.400 --> 0:17:29.639 can say. First what it's not. It's not apparently about 0:17:29.720 --> 0:17:34.159 expectations of higher inflation, and it's also not mainly about 0:17:34.600 --> 0:17:37.560 shorter term policy moves. So FED funds moves over the 0:17:37.600 --> 0:17:39.879 next year or two. Really, if you can look at 0:17:39.880 --> 0:17:42.359 the two year for example, and two years moved up 0:17:42.359 --> 0:17:44.440 a little bit since September. But really the move is 0:17:44.480 --> 0:17:47.440 in longer run bonds. So it's really happening in term premiums, 0:17:47.440 --> 0:17:51.080 which is the compensation for holding longer run securities, and 0:17:51.119 --> 0:17:55.160 not principally a function of the market looking at near 0:17:55.280 --> 0:17:59.520 term fund rate. I think a few other ideas about 0:17:59.840 --> 0:18:04.080 the many candidate ideas and many people feeling their priors 0:18:04.080 --> 0:18:06.440 have been confirmed by this event, I'll say as well. 0:18:06.880 --> 0:18:11.480 But so one would be just that markets and analysts 0:18:11.480 --> 0:18:14.600 are seeing the resilience of the economy two high interest rates, 0:18:14.600 --> 0:18:18.399 and they're they're revising their view about the overall strength 0:18:18.400 --> 0:18:21.040 of the economy and thinking even longer term. This may 0:18:21.040 --> 0:18:24.679 require higher rates that could be part of it. You know, 0:18:25.000 --> 0:18:28.560 there may be a heightened focus on fiscal deficits that 0:18:28.560 --> 0:18:31.399 could be part of it. QT could be part of it. 0:18:31.640 --> 0:18:34.480 Another one you hear very often is the change changing 0:18:34.520 --> 0:18:37.960 correlation between bonds and equities. If we're going forward into 0:18:38.160 --> 0:18:40.320 if we are going forward into a world of more 0:18:40.359 --> 0:18:44.000 supply shocks rather than demand shocks, that could make bonds 0:18:44.400 --> 0:18:47.159 a less attractive hedge to equities, and therefore you need 0:18:47.200 --> 0:18:49.679 to be paid more to own bonds, and therefore the 0:18:49.760 --> 0:18:54.400 term premium goes up. So all of those are possible ideas. 0:18:54.520 --> 0:18:57.080 Then the question is does it matter for us as 0:18:57.119 --> 0:19:01.119 long as I'm talking about this. So the way I 0:19:01.160 --> 0:19:05.800 think about it is, uh, you know, we change our policy. 0:19:06.359 --> 0:19:11.040 Actual and expected changes in our policy affect financial conditions, 0:19:11.280 --> 0:19:16.159 and persistent changes in financial conditions affect economic activity, hiring, 0:19:16.160 --> 0:19:20.199 and inflation. So one question is are we seeing the 0:19:20.560 --> 0:19:23.879 longer run bonds? Are they increases in rates? Are we 0:19:23.920 --> 0:19:27.600 seeing those come through in financial conditions in a persistent way? 0:19:27.640 --> 0:19:29.919 And I think if you look at financial conditions indexes, 0:19:30.200 --> 0:19:34.600 the answer so far would be yes, you are persistence. 0:19:34.640 --> 0:19:36.800 It will be a matter of just seeing with our 0:19:36.840 --> 0:19:38.959 own eyes. But certainly they're coming. If you look at 0:19:38.960 --> 0:19:41.440 financial conditions indexes, they're showing tightening and it's a lot 0:19:41.480 --> 0:19:45.040 because of longer rates. Then the question is is indigenous 0:19:45.119 --> 0:19:48.679 and is it just because the market expects us to 0:19:48.760 --> 0:19:54.160 take things, to take further actions to tighten monetary policy, 0:19:54.359 --> 0:19:56.520 in which case, if you have to follow through, but 0:19:56.600 --> 0:19:58.840 that doesn't seem to be the case, is it doesn't 0:19:58.840 --> 0:20:03.600 seem to be principally about expectations of us doing more. 0:20:03.640 --> 0:20:06.600 It seems that the other factors are the more the 0:20:06.640 --> 0:20:10.040 more prominent ones. Another question is bottom bottom line? Know 0:20:10.200 --> 0:20:13.520 that that means it probably does over time, it makes sense, 0:20:13.560 --> 0:20:14.880 it's something that we'll be looking at. 0:20:15.040 --> 0:20:17.920 Well, that's the question I say, is over time. From 0:20:18.040 --> 0:20:19.639 what you understand right now, do you think this is 0:20:19.640 --> 0:20:22.119 a temporary phenomenon or do you think there are structural 0:20:22.119 --> 0:20:24.280 factors whatever they are, and we can talk about what 0:20:24.320 --> 0:20:26.960 they might be, that would really are This is the 0:20:27.000 --> 0:20:28.160 future that we're looking at now. 0:20:28.240 --> 0:20:31.320 So of the factors I just listed, some of them 0:20:31.400 --> 0:20:33.280 are shorter terms, some of them are longer term, and 0:20:33.320 --> 0:20:35.680 some of them could be either. So for example, fiscal 0:20:35.760 --> 0:20:39.480 concerns over fiscal deficits that that could be a longer 0:20:39.560 --> 0:20:43.320 term factor. The change in correlations between but stocks and 0:20:43.359 --> 0:20:45.399 bonds could be a long term I don't think we know. 0:20:45.760 --> 0:20:50.320 I think you know. Basically, bond prices are set by 0:20:50.560 --> 0:20:54.439