Speaker 1: Fetcherman J. Powell making comments at the Economic Club of
Speaker 1: New York about his view of the economy and interest rates.
Speaker 1: You can be sitting down on the fireside chat with
Speaker 1: David Weston.
Speaker 2: Let me start with something you just referred to, which
Speaker 2: is the surprise of the upside in the economic data,
Speaker 2: despite as you've turned it, I think historically fast pace
Speaker 2: of growth. Are you surprised at how resilient the United
Speaker 2: States economy.
Speaker 1: Is just today.
Speaker 2: We've got jobless claims members surprised because they were low.
Speaker 2: We got the retail sales numbers you mentioned, We've got
Speaker 2: industrial production across the board. It seems like a very
Speaker 2: strong economy despite all you've done to try to slow
Speaker 2: it down.
Speaker 1: Yes, so we certainly have a very resilient economy on
Speaker 1: our hands. We've got the economy growing strongly. If you
Speaker 1: think back a year, many forecasts called for the US
Speaker 1: economy to be in recession this year. Not only has
Speaker 1: that not happened, growth is now running for this year
Speaker 1: above its longer run trend. So that's been a surprise,
Speaker 1: driven largely by consumer spending, driven by a very strong
Speaker 1: job market, with people getting jobs with high first high
Speaker 1: nominal wages, and that as inflation has come down real
Speaker 1: wages which is spurring spending, and we've also had inflation
Speaker 1: coming down, so you know that's it really is a
Speaker 1: story of much stronger demand. There may also be there
Speaker 1: may be some ways in which the economy is less
Speaker 1: affected by interest rates. It's hard to know precisely, but
Speaker 1: for example, companies, many companies, any company with bond market
Speaker 1: access will have termed out its debt right and therefore
Speaker 1: may not be feeling the effects of higher rates. The
Speaker 1: same may be true of homeowners who have a long term,
Speaker 1: fixed rate, low rate mortgage, who then are therefore not
Speaker 1: because it's not an adjustable rate or a higher rate,
Speaker 1: they're not feeling that increase in rates. So the economy
Speaker 1: may be somewhat less susceptible to the effects of rate increases.
Speaker 1: On the other hand, if you look at look at
Speaker 1: interra sensitive spending, these are very much the places where
Speaker 1: we see where we expect to see and do see effects.
Speaker 1: So for example, in housing or you know in the
Speaker 1: housing effectors sector has been very affected by higher rates.
Speaker 1: As purchases of durable goods. If you look at surveys,
Speaker 1: people will not say that it's a good time to
Speaker 1: buy a car or a house. Quite the contrary, So
Speaker 1: we see policy working through its usual channels. It may
Speaker 1: just be that rates haven't been high enough for long enough.
Speaker 1: And again it's all happening in the context of very
Speaker 1: strong demand. We've put other speculators.
Speaker 2: Maybe the terming out of debt, as you say, both
Speaker 2: corporate debt and hushole debt may diminish the effectiveness of
Speaker 2: rate hikes. Do you have a view of whether that's true,
Speaker 2: And if it is true, what does it say about
Speaker 2: matre pussy. Does it mean you have to go farther
Speaker 2: in the rate hikes or do you just not have
Speaker 2: the power to affect it.
Speaker 1: So no, I don't think that there's a fundamental shift
Speaker 1: in the way that interest rates affect the economy. There
Speaker 1: may be some differences in this cycle because of what
Speaker 1: I mentioned. As I mentioned, we are seeing those the
Speaker 1: effects where we expect to see them, which is interrasensitive
Speaker 1: spending and also asset prices to some extent, and the
Speaker 1: exchange rate, which you're also seeing a strong exchange rate,
Speaker 1: which is disinflationary. So I don't think there's a fundamental
Speaker 1: change in the way monetary policy affects the economy, and
Speaker 1: again it goes back to just very strong demand. We
Speaker 1: take the economy as it is, We take fiscal policy
Speaker 1: and the economy and all the things we don't control,
Speaker 1: they come to us, and we conduct policy always to
Speaker 1: achieve maximum employment and stable prices. So we just take
Speaker 1: what comes. The fact that we have a strong growing economy,
Speaker 1: a strong growing labor market, and inflation coming down. These
Speaker 1: are the elements that we want to see that to
Speaker 1: achieve the outcome we want. It may take more time,
Speaker 1: but ultimately this is the kind of thing you would
Speaker 1: want to see along the path to getting through this
Speaker 1: without a big increase in unemployment.
Speaker 2: How much effect thus far has the FED had We
Speaker 2: will have memorized now long and variable legs?
Speaker 1: How long? How variable?
Speaker 2: And where are you in that process? Are you at
Speaker 2: the twenty five percent point the fifty in terms of
Speaker 2: seeing it in the effect in.
Speaker 1: The real economy. So there's there's no precision in our
Speaker 1: understanding of how long legs are. One thing that has
Speaker 1: changed in the modern era is that markets now, over
Speaker 1: the course of the last thirty years, central banks have decided,
Speaker 1: instead of being secretive, to be very transparent. And what
Speaker 1: that has meant is that markets move actually well in anticipation,
Speaker 1: well before our policy moves, So the transmission from policy
Speaker 1: moves to financial conditions actually happens before the moves now,
Speaker 1: whereas that was not the case fifty years ago when
Speaker 1: Milton Friedman coined the phrase long and variable legs. But
Speaker 1: now you have financial conditions changing, and the questions how
Speaker 1: does it affect the economy? The standard channels are asset
Speaker 1: prices in such intrasensitive spending in the exchange rate, for example.
Speaker 1: And again we do see that happening, just not as
Speaker 1: fast as we would like. And I would attribute some
Speaker 1: of that to just stronger demand. Household savings were turned
Speaker 1: out to be higher. Household spending has been stronger, and
Speaker 1: that's by far the largest part of the economy.
Speaker 2: In order to conduct monetary policy effectively, do you need
Speaker 2: at least hypothesis about how much has already hit the economy,
Speaker 2: because it's hard to know how much more you need
Speaker 2: to do if you don't know how far you've come.
Speaker 1: So on legs, I think if you think back, it's
Speaker 1: been a year now since the last seventy five basis
Speaker 1: point hike we did. It was the November meeting in
Speaker 1: twenty twenty two. The first one was in June, so
Speaker 1: it's more than a year, so we should be seeing
Speaker 1: the effects. By the way, they don't all just arrive
Speaker 1: on one day. They arrive and then they're thought to
Speaker 1: peak and then to diminish. So there's a lot of
Speaker 1: uncertainty around lags, and one of the reasons why we
Speaker 1: have slowed down significantly this year is to give monetary
Speaker 1: policy time to work. The truth is, though you can
Speaker 1: find academic support for different different diferent speeds and duration
Speaker 1: of lags, So we have to use our eyes and
Speaker 1: a little bit of risk management in patients in slowing
Speaker 1: down the pace to make sure that we are seeing
Speaker 1: the full effects. And I think again that's part of
Speaker 1: why we've slowed down this year. We went very quickly
Speaker 1: in twenty twenty two to catch up to where we
Speaker 1: needed to be, and now we're moving carefully with these decisions.
Speaker 2: So when you spoke back in August of twenty twenty
Speaker 2: and sort of laid out the revisions to the framework
Speaker 2: as it were, you said that in terms of anticipated growth,
Speaker 2: the sort of consensus have gone from something like two
Speaker 2: point five to one point eight percent. I think we're
Speaker 2: the numbers you laid out of that. Where are you now?
Speaker 2: Where's the fed? Where are you? And what you think?
Speaker 1: Basically? The long run growth is long run potential growth
Speaker 1: is not something that moves around a lot over time.
Speaker 1: But I would my own guess is it's around two percent.
Speaker 1: I think that the standard mainstream view would be a
Speaker 1: little bit below two percent, But I would just say
Speaker 1: two percent real growth over time. And you know what
Speaker 1: causes growth is you know, growth in hours worked plus
Speaker 1: growth in productivity. Growth in hours worked is a function
Speaker 1: of population growth in the long run and also labor
Speaker 1: force participation. Many things affect productivity. But if you if
Speaker 1: you drop in reasonable standard longer term estimates of hours
Speaker 1: worked growth and productivity, which is just output per hour
Speaker 1: productivity growth, you get something around two percent. And that's
Speaker 1: that's higher than most other advanced economies.
Speaker 2: As you look at it, do you see historical precedents
Speaker 2: for having growing economy with high rates over a long
Speaker 2: period of time? I mean, as you look back, I mean,
Speaker 2: is it like the late nineties? For example? What analogies
Speaker 2: do you draw as you try to determine what this
Speaker 2: might be doing at the economy of the longer term.
Speaker 1: So that's really a question about the what the level
Speaker 1: of rates will be going for, what the neutral level
Speaker 1: will be, And I think it's it's very hard to
Speaker 1: know confidently what the answer to that will be in
Speaker 1: five years. Some of the reasons why rates were low
Speaker 1: for the last twenty five years were just the aging
Speaker 1: of the global population and globalization and you know, so
Speaker 1: lots of savings and relatively with an aging population, savings
Speaker 1: greater than investments, so rates are lower and productivity was low.
Speaker 1: So all of those led to low interest rates. So
Speaker 1: what has changed with the pandemic. You might see less
Speaker 1: effects from globalization, certainly demographics that the aging of the
Speaker 1: global population is not changed. I mean, this is a
Speaker 1: discussion we're having on an ongoing basis. It doesn't really
Speaker 1: affect current policy. But where will rates settle out? What
Speaker 1: will be at a normal rate. So if a typical
Speaker 1: FED tightening cycle would leave you at five or six percent,
Speaker 1: and this is in the before the pandemic and before
Speaker 1: the low inflation period, you would have had had FED
Speaker 1: rates in four or five percent or even higher. Frequently
Speaker 1: are we going back to that? I really don't know.
Speaker 1: I wouldn't want to speculate. I mean, my guess is
Speaker 1: it'll be somewhere in the middle. But I don't know.
Speaker 1: I mean, I think we can say this now, the
Speaker 1: effective lower bound is not an issue. You know, we
Speaker 1: were very concerned about that. Right now we're very far
Speaker 1: from the effective lower bound, and the economy's handling it
Speaker 1: just fine. But that's you know, that's because we're at
Speaker 1: a time of really elevated demand coming out of the pandemic.
Speaker 1: As we reopened with fiscal stimulus and monetary stimulus. We
Speaker 1: have very strong demand of the United States. Hard to
Speaker 1: know what the economy will want in the way of
Speaker 1: interest rates when five years from now, in all of
Speaker 1: the effects of the pandemic are behind us.
Speaker 2: You mentioned the long term equilibrium rate, which you talked
Speaker 2: about again back in Jackson Hole in August of twenty twenty.
Speaker 2: Back then you said you thought it had served, consensus
Speaker 2: had come down. I think it was from like four
Speaker 2: point twenty five percent to two point five percent.
Speaker 1: Where is it today? So, I think, by any reckoning,
Speaker 1: long term interest rates and the neutral interest rate came
Speaker 1: down steadily over the course of several decades. So where
Speaker 1: is it today? I don't know, you know, we're finding it. Basically,
Speaker 1: the idea was, I think the median indication of what
Speaker 1: the real neutral rate was around fifty basis points before
Speaker 1: the pandemic. It may have risen in the near term.
Speaker 1: The real question that matters, though, is will it rise
Speaker 1: in the long term, and that we don't know.
Speaker 2: But do you need to know in order to conduct
Speaker 2: monetary busy? I mean you must have to have at
Speaker 2: least a theory. I mean, I'm not saying you have
Speaker 2: to be right about it, but you have to have
Speaker 2: a hypothesis, don't you. As you look at the data,
Speaker 2: you have to put the data through some sort of theory.
Speaker 1: So we all write down our estimates of the longer
Speaker 1: run neutral rate every quarter in the summary of economic projections,
Speaker 1: and that's based on models. It's based on also looking
Speaker 1: out the window and including lags, thinking how are our
Speaker 1: current rates affecting the economy. So the evidence of your
Speaker 1: eyes is that the economy is handling much higher rates
Speaker 1: at least for now, without difficulties. So notionally, that might
Speaker 1: tell you that the neutral rate has risen, or it
Speaker 1: may just tell you that we haven't had rates high
Speaker 1: enough for long long enough. You're right, though, but you know,
Speaker 1: we have models for everything, we have formulists for everything. Ultimately,
Speaker 1: as a practitioner, we have to, you know, focused on
Speaker 1: what the economy is telling us, even taking legs into account.
Speaker 1: What's it telling us? Does it feel like policy is
Speaker 1: too tight right now? I wouldn't have to say no.
Speaker 1: I think the evidence is not that policy is too
Speaker 1: tight right now. So we'd five five and a quarter
Speaker 1: to five and a half percent.
Speaker 2: Do you think we're entering into a new phase in
Speaker 2: monetary policy? We had the vulgar disinflation I think you
Speaker 2: referred to it as and then we had sort of
Speaker 2: inflation targeting. For a time, there was concerned about secular stagnation.
Speaker 2: We were pushing the zero bound, as you said, we
Speaker 2: were concerned with that, and then we had the pandemic
Speaker 2: and we had the real problem with inflation.
Speaker 1: What's the next phase look like? How would you describe
Speaker 1: what we've been through? Is in all of the advanced
Speaker 1: economies around the world was a period where the effective
Speaker 1: lower bound, the proximity of interest rates free interest rates
Speaker 1: to the effective lower bound, which is zero or a
Speaker 1: little bit less, was a big problem for monetary policy,
Speaker 1: and just rates came down and down and down. And
Speaker 1: the problem is if rates are going to be close
Speaker 1: to zero in good times, then how do you cut?
Speaker 1: And so have central banks lost the power of their
Speaker 1: most important tool, which is interest rates. This was a
Speaker 1: subject of a vast literature in monetary policy research for
Speaker 1: twenty years, and the most common answer was some kind
Speaker 1: of a makeup strategy. So you would credibly promise to
Speaker 1: run inflation a little bit hot and above two percent,
Speaker 1: and that would anchor inflations two percent to counter the
Speaker 1: times when it was below. So that was a very
Speaker 1: serious problem which filled books worth of research. Then comes
Speaker 1: the pandemic, Then comes the response to the pandemic, and
Speaker 1: then comes the pandemic inflation, not just the United States
Speaker 1: but everywhere. The question is that a secular change or
Speaker 1: are these factors that brought us to that place? Are
Speaker 1: they still out there waiting to come back? And you know,
Speaker 1: books are written on this subject. Now you can argue that,
Speaker 1: and some have argued that effectively, the last twenty years
Speaker 1: before the pandemic, we're kind of a perfect storm of disinflation,
Speaker 1: and now that's all gone and we're going into a
Speaker 1: more inflationary period that will be characterized by more supply
Speaker 1: shocks and things like that and therefore more inflationary pressure.
Speaker 1: So are we going into such a I don't know.
Speaker 1: I mean all I can tell you I think it's unknowable.
Speaker 1: And you know, great theorists and researchers have different views
Speaker 1: on this. It's not something you can settle in advance.
Speaker 1: We'll have to see. I think our issue is right
Speaker 1: now trying to achieve a sufficiently restrictive stance of policy
Speaker 1: to bring inflation down to two percent over time. That's
Speaker 1: what we're really focused on.
Speaker 2: Whenever any of us goes, particularly institutions, go through tumultuous times,
Speaker 2: and know, as you've been through the tumultuous time, we
Speaker 2: look back and think, O coo do we learn? So
Speaker 2: after action report, look at the pandemic and then pandemic inflation,
Speaker 2: what would you say you learned in terms of macroeconomics,
Speaker 2: in terms of the economy from that experience.
Speaker 1: So, hindsight is always a wonderful thing, right. I think
Speaker 1: the fair way to judge the actions that were taken
Speaker 1: is to put yourself in the place of legislators and
Speaker 1: policy of other you know, and central bankers around the world,
Speaker 1: And there was no playbook. You know, we've never seen
Speaker 1: we hadn't seen a global economic shutdown. People were thinking
Speaker 1: that the pandemic might kill a whole lot of people,
Speaker 1: and that we wouldn't have a vaccine for five years.
Speaker 1: We might now have an economy for five years. So
Speaker 1: these things were all very possible in March of twenty twenty,
Speaker 1: and so we pulled out all the stops in Congress,
Speaker 1: put at all the stops. With the benefit of hindsight,
Speaker 1: Could we have done a little bit less and had
Speaker 1: a little bit of inflation, I guess we could. But
Speaker 1: I think if you look overall at the performance of
Speaker 1: the US economy, our economy is the strongest. We have
Speaker 1: the you know, we're actually also making the most progress
Speaker 1: on inflation, but we certainly have the strongest growth. We're
Speaker 1: back to prior growth trend, you know, not just the
Speaker 1: level of where we were, were actually back to the
Speaker 1: prior trend. The labor market. The last time we had
Speaker 1: this many consecutive months of unemployment below four percent was
Speaker 1: in the late nineteen sixties, so it's more than fifty
Speaker 1: years ago. So our economy is doing very well from
Speaker 1: all of that. But if you had perfect hindsight you
Speaker 1: might have. You might not have had as much inflation
Speaker 1: if we'd done less, although other countries who didn't do
Speaker 1: as much as we did also had substantial inflation problems.
Speaker 1: I think my question was just a little bit different.
Speaker 2: It's not so much of assigning blame or saying to
Speaker 2: somebody make a mistake, as are there things that going
Speaker 2: forward would change the way you conduct monetary policy that
Speaker 2: you learned from that that maybe nobody had reason to
Speaker 2: know at the time, but it was an experience you
Speaker 2: went through.
Speaker 1: Well, you know, we were in a time of a
Speaker 1: very long time, in a reasonably long time, of disinflationary forces,
Speaker 1: and I think everybody's in instinct had been attuned to
Speaker 1: risks coming from this direction, which is too low inflation.
Speaker 1: And so what this has taught us is that you
Speaker 1: know that period, that period is over, and we now
Speaker 1: have probably going forward, a more balanced set of risks
Speaker 1: where high inflation and low inflation are both risks. In fact,
Speaker 1: right now the risk is still high inflation, but I'm
Speaker 1: assuming once we get back to two percent we won't
Speaker 1: have that. But we've certainly learned that. And I mean,
Speaker 1: events are the possible range of events is so much
Speaker 1: wider than what we think it is on any given day. Right,
Speaker 1: the tails are so wide, and it's just not human
Speaker 1: nature to constantly be thinking about things that are way
Speaker 1: out in the tail. But they happen in financial markets
Speaker 1: and in economies. They happen far more regularly than they should.
Speaker 2: I suspect every person in this room as well. Where
Speaker 2: it's going on with yields with bonds, it's been a
Speaker 2: big story, particularly in the longer end of the curve.
Speaker 2: What is your understanding of what is going on in
Speaker 2: the bond market and why those yields are going up,
Speaker 2: particularly again at.
Speaker 1: The longer end of the curve. So it's it's really
Speaker 1: two questions. One is why is it happening? And the
Speaker 1: other is why does it matter for policy? And so
Speaker 1: I would say, on the why is this happening question,
Speaker 1: I think it's appropriate to have a little bit of humility.
Speaker 1: It's always hard to say exactly what's going on with
Speaker 1: longer term yields, but this is what I think we
Speaker 1: can say. First what it's not. It's not apparently about
Speaker 1: expectations of higher inflation, and it's also not mainly about
Speaker 1: shorter term policy moves. So FED funds moves over the
Speaker 1: next year or two. Really, if you can look at
Speaker 1: the two year for example, and two years moved up
Speaker 1: a little bit since September. But really the move is
Speaker 1: in longer run bonds. So it's really happening in term premiums,
Speaker 1: which is the compensation for holding longer run securities, and
Speaker 1: not principally a function of the market looking at near
Speaker 1: term fund rate. I think a few other ideas about
Speaker 1: the many candidate ideas and many people feeling their priors
Speaker 1: have been confirmed by this event, I'll say as well.
Speaker 1: But so one would be just that markets and analysts
Speaker 1: are seeing the resilience of the economy two high interest rates,
Speaker 1: and they're they're revising their view about the overall strength
Speaker 1: of the economy and thinking even longer term. This may
Speaker 1: require higher rates that could be part of it. You know,
Speaker 1: there may be a heightened focus on fiscal deficits that
Speaker 1: could be part of it. QT could be part of it.
Speaker 1: Another one you hear very often is the change changing
Speaker 1: correlation between bonds and equities. If we're going forward into
Speaker 1: if we are going forward into a world of more
Speaker 1: supply shocks rather than demand shocks, that could make bonds
Speaker 1: a less attractive hedge to equities, and therefore you need
Speaker 1: to be paid more to own bonds, and therefore the
Speaker 1: term premium goes up. So all of those are possible ideas.
Speaker 1: Then the question is does it matter for us as
Speaker 1: long as I'm talking about this. So the way I
Speaker 1: think about it is, uh, you know, we change our policy.
Speaker 1: Actual and expected changes in our policy affect financial conditions,
Speaker 1: and persistent changes in financial conditions affect economic activity, hiring,
Speaker 1: and inflation. So one question is are we seeing the
Speaker 1: longer run bonds? Are they increases in rates? Are we
Speaker 1: seeing those come through in financial conditions in a persistent way?
Speaker 1: And I think if you look at financial conditions indexes,
Speaker 1: the answer so far would be yes, you are persistence.
Speaker 1: It will be a matter of just seeing with our
Speaker 1: own eyes. But certainly they're coming. If you look at
Speaker 1: financial conditions indexes, they're showing tightening and it's a lot
Speaker 1: because of longer rates. Then the question is is indigenous
Speaker 1: and is it just because the market expects us to
Speaker 1: take things, to take further actions to tighten monetary policy,
Speaker 1: in which case, if you have to follow through, but
Speaker 1: that doesn't seem to be the case, is it doesn't
Speaker 1: seem to be principally about expectations of us doing more.
Speaker 1: It seems that the other factors are the more the
Speaker 1: more prominent ones. Another question is bottom bottom line? Know
Speaker 1: that that means it probably does over time, it makes sense,
Speaker 1: it's something that we'll be looking at.
Speaker 2: Well, that's the question I say, is over time. From
Speaker 2: what you understand right now, do you think this is
Speaker 2: a temporary phenomenon or do you think there are structural
Speaker 2: factors whatever they are, and we can talk about what
Speaker 2: they might be, that would really are This is the
Speaker 2: future that we're looking at now.
Speaker 1: So of the factors I just listed, some of them
Speaker 1: are shorter terms, some of them are longer term, and
Speaker 1: some of them could be either. So for example, fiscal
Speaker 1: concerns over fiscal deficits that that could be a longer
Speaker 1: term factor. The change in correlations between but stocks and
Speaker 1: bonds could be a long term I don't think we know.
Speaker 1: I think you know. Basically, bond prices are set by
Speaker 1: supply and demand. The supply of treasuries is is a
Speaker 1: known thing, but demand can be affected by any and
Speaker 1: all of these theories, and also just by sentiment. Sentiment too,
Speaker 1: which is hard to characterize. So you know, markets have
Speaker 1: been volatile, they've been longer than you know. You've seen
Speaker 1: the rates moving up and down a lot. I think
Speaker 1: we have to let this play out and watch it.
Speaker 1: But you know, for now, it looks it's clearly a
Speaker 1: tightening in financial conditions, and so we'll be watching.
Speaker 2: It carefully talking about the physical side. And you've been
Speaker 2: very careful repeated to say you want to stay in
Speaker 2: your lane. You're not responsible for fiscal issues. At the
Speaker 2: same time, you have to take into an account and
Speaker 2: it looks like the United States is going to have
Speaker 2: to borrow a fire amount of money, by the way,
Speaker 2: other countries are as well. Around the world, we have
Speaker 2: a big, big supply of treasuries coming on board. To
Speaker 2: what extent do you think that is a longer term issue?
Speaker 2: And let me tie it back to something you refer
Speaker 2: to in your marks. Actually, when we see geopolitical conflict
Speaker 2: around the world, like in Israel, like in Ukraine, some
Speaker 2: of the build up with respect to China, the defense
Speaker 2: spending is going to be elevated for the United States
Speaker 2: and for other countries. Do you take that into account
Speaker 2: and figuring monetary policy, because it may well mean that
Speaker 2: we're borrowing a lot more money than we have in
Speaker 2: the past, so we.
Speaker 1: Of course see the same things that everyone else. So
Speaker 1: I just came back from IMF meetings this weekend, and
Speaker 1: there's a lot of talk of the very large resource
Speaker 1: demands that organizations like the IMF and of course countries
Speaker 1: are facing, and the need for substantial amounts of revenue.
Speaker 1: You mentioned military. There's also dealing with climate change and
Speaker 1: things like that, so it's a there's a lot of
Speaker 1: that we don't as you mentioned, we don't comment on
Speaker 1: on fiscal policy. Actually, the fiscal authorities have oversight over
Speaker 1: us and not the other way around, so we stay
Speaker 1: away from that. So I would just say everyone knows
Speaker 1: that it's not a secret, and about all I can
Speaker 1: say is we know that we're on an unsustainable path fiscally.
Speaker 1: It's not that the level of the debt is unsustainable.
Speaker 1: It's not it's that where the path we're on is unsustainable,
Speaker 1: and we'll have to get off that path sooner res
Speaker 1: and later. It's not really something though, that affects a
Speaker 1: monetary policy decision about whether how much we raise rates
Speaker 1: in the next six months. It's not going to be
Speaker 1: driven by Uh. I mean if there were some vast
Speaker 1: new fiscal policy that we're about to be enacted, and
Speaker 1: then that that would have an effect on the models
Speaker 1: and have an effect on projections, and indirectly that would
Speaker 1: affect us, but we would not be in a position
Speaker 1: of responding directly in fiscal policy.
Speaker 2: When we talk about the treasure market, obviously there's there's
Speaker 2: buying and selling, and the United States government is issuing
Speaker 2: a lot of treasuries. There's also a question of who's buying,
Speaker 2: and we're we now have one buyer who stepped out
Speaker 2: of the marketplace, namely the FED, which is a big buyer.
Speaker 2: At the same time, we're getting reports that maybe some
Speaker 2: of the overseas buyers may be pulling back as well.
Speaker 2: How do you take that into account and assessing where
Speaker 2: we're going with long term bobb yells?
Speaker 1: So, actually, I think buying by overseas entities has actually
Speaker 1: been pretty robust this year. So there have been some
Speaker 1: small changes, but I think by and large it's been
Speaker 1: it's they've they've been buying, uh, you know, robustly. Again,
Speaker 1: look at we look at the broad financial conditions, We
Speaker 1: look at interest rates, other asset prices. That's what we
Speaker 1: look at. We're not you know, we don't focus on
Speaker 1: fiscal policy. We wouldn't change monetary policy because of for example,
Speaker 1: you know, because we think that the US is on
Speaker 1: an unsustainable path. Everyone knows that we're just going to
Speaker 1: do monetary policy to achieve maximum employment and stable prices,
Speaker 1: and that's how we think about it.
Speaker 2: I'm curious, though, one of the things you're most concerned
Speaker 2: about is the real economy.
Speaker 1: What's going on in the real economy.
Speaker 2: You distinguish yourself from some of your predecessors, and that
Speaker 2: you have a significant exposure to the private sector, not
Speaker 2: just the voice academics. As you talk to CEOs people
Speaker 2: in business, what are you hearing about the cost of capital,
Speaker 2: Because these bond prices are really affecting cost of capital
Speaker 2: for the.
Speaker 1: First time in a while.
Speaker 2: There was a long time the cost of capital felt
Speaker 2: like was almost zero, and business changes an awful lot
Speaker 2: when you really when the price of money goes up.
Speaker 1: I talked to several people this week who run companies,
Speaker 1: and they each said that the economy remains strong and
Speaker 1: that they don't see the consumer you know, you see
Speaker 1: there's some areas where we're spending is softening. But overall,
Speaker 1: I mean, look at the retail sales number. The consumer
Speaker 1: is strong. Volume is not going up very much, but
Speaker 1: companies are profitable. You don't know now if you get
Speaker 1: to where I think the cost of capital would really matter,
Speaker 1: would be for smaller companies and early stage companies, and
Speaker 1: that really does matter. So, you know, we don't have
Speaker 1: a lot of tools. We have interest rates, and they're
Speaker 1: far from perfect perfect. It's famously a blunt tool, but
Speaker 1: it's what we have to get inflation down. And really
Speaker 1: the world counts on us to deliver low and stable inflation.
Speaker 1: That's what we have to do. And you know, at
Speaker 1: a time like this, there are you know, we know
Speaker 1: that we're having negative effects on you know, we had
Speaker 1: the homebuilders in this week. It's a very tough time
Speaker 1: in the whole home building industry and we know that.
Speaker 1: But ultimately, what we want to get back to is
Speaker 1: a long period of price stability. That's the best thing
Speaker 1: we can provide, and that that policy makers and businesses
Speaker 1: and everyone can and people can just lead their lives
Speaker 1: not worrying about inflation. This is what we can deliver,
Speaker 1: it's what we have to deliver, and this is the time.
Speaker 1: You know, our independence is not for times when we're
Speaker 1: really popular. It's for when we're now, when we're doing
Speaker 1: something that that that really the public counts on us
Speaker 1: to do. Notwithstanding that, it's that it's challenging and difficult,
Speaker 1: and you know, higher interest rates are difficult for everybody.
Speaker 2: You have not wavered from your commitment to two percent
Speaker 2: again today two percent, no question about it. There are
Speaker 2: those who suggested, including some colleagues in the FED, that
Speaker 2: maybe the bond market is doing part of your job
Speaker 2: for you.
Speaker 1: Is that the way you see it, look, I would
Speaker 1: I would say it this way. The whole idea of
Speaker 1: tightening policy is to affect financial condition and to the
Speaker 1: extent higher bond rates to reflect that they do, they're
Speaker 1: producing tighter financial conditions right now. So that is that's
Speaker 1: how monetary policy works. That's literally how it works. So again,
Speaker 1: in principle, as long as they're as long as bond
Speaker 1: rates are going up for some reasons, and they're not
Speaker 1: going up just because they expect us to do things
Speaker 1: so that if we don't do them, they'll come right
Speaker 1: back down, as long as and we don't think that's
Speaker 1: the case, actually doesn't I don't think it's the case.
Speaker 1: It doesn't seem to me. That's where analysis leads you. Then,
Speaker 1: sure that's a tightening. That's exactly what we're trying.
Speaker 2: To achieve, And therefore it seems like almost arithmetic. It
Speaker 2: must reduce some of the impetus for you to continue
Speaker 2: to raise rates.
Speaker 1: At the margin. It could. I mean, I think that
Speaker 1: remains to be seen. And by the way, I'm not
Speaker 1: blessing any particular level of longer term rates, but just
Speaker 1: in principle, that's right. So let's talk about the labor market.
Speaker 2: You refer to that in your marks as well, And
Speaker 2: as you say, vacancies have come down some, although they
Speaker 2: still are pretty elevated. If I'm not mistaken, quits have
Speaker 2: actually gone up some. It seems to be a type
Speaker 2: of the labor worker. What do you make of what's
Speaker 2: going on in the labor marker right now?
Speaker 1: Labor market has been extraordinarily strong. So what happened in
Speaker 1: the pandemic was we had a negative labor supply shock
Speaker 1: is one way to think about it. So a whole
Speaker 1: lot of people left the labor market when the pandemic
Speaker 1: happened and then didn't come back. And so when the
Speaker 1: economy reopened and everybody you know, there was remember there
Speaker 1: was revenge, travel and revenge everything, very strong demand, and
Speaker 1: there just weren't the people. So you had two job
Speaker 1: openings for every person actively seeking employment. We've never been
Speaker 1: any where you're close to that. There was panic that
Speaker 1: you know, and wages and bonuses, and particularly in things
Speaker 1: like in person services where people had not gotten big
Speaker 1: wage increases and didn't want to come back to work.
Speaker 1: So that's that's where we were. So since then, there
Speaker 1: are very many signs that the labor market is getting
Speaker 1: back into balance, and I talked about some of that
Speaker 1: in my remarks. Surveys of work. You know, we survey businesses.
Speaker 1: We don't do it, but other people survey businesses and
Speaker 1: say our work plentiful, and that measure that measure was no.
Speaker 1: But now it's back to pre pandemic levels. Survey workers
Speaker 1: are jobs plentiful, and that was at an all time
Speaker 1: high and now it's still high, but back. So wage
Speaker 1: increases are coming back down to more normal levels. Job
Speaker 1: openings are down from two to one point four. They
Speaker 1: were at one point two in the very tight labor
Speaker 1: market of twenty nineteen. By the work week, by so
Speaker 1: many measures. The labor market is gradually cooling, and part
Speaker 1: of that is this all through twenty twenty two, we
Speaker 1: thought we were going to get more labor supply and
Speaker 1: we didn't, and I personally thought, well, I guess we
Speaker 1: won't get any and then we've gotten a substantial amount
Speaker 1: this year. The female labor. First participation is that in
Speaker 1: prime age workers is at an all time high, which
Speaker 1: has to be related in some way to work from home.
Speaker 1: But labor force participation increased, immigration increased, and now you
Speaker 1: see that in the overall cool of the labor market.
Speaker 1: So even though job creation is still very high, there
Speaker 1: are the workers to fill those jobs. And again businesses
Speaker 1: will tell you it's that it's very different. It's still
Speaker 1: a very tight labor market, but it's loosening.
Speaker 2: Coming back to your goal of two percent inflation, what
Speaker 2: have you learned from this experience about the relationship between
Speaker 2: inflation and labor I mean, there's a lot of talk
Speaker 2: about Phillips curve, whether it still applies, whether it's weaker,
Speaker 2: what is it? What's your hypothesis right now with the
Speaker 2: relationship between inflation and labor market.
Speaker 1: Let me tell you what it was before. So one
Speaker 1: of my favorite charts is just the slope of the
Speaker 1: Phillips curve over forty years, and so it shows the
Speaker 1: relationship between unemployment and inflation. If you go back to
Speaker 1: the high inflation of the seventies, it was a very
Speaker 1: tight relationship, and that relationships went down and down and
Speaker 1: down to the fact where the Phillips curve there was
Speaker 1: almost no relationship, meaning that the Phillips curve was very
Speaker 1: very flat. Now, actually, if you just ignore cause and
Speaker 1: just look at the data, it will tell you that
Speaker 1: the relationship is back. Do we really think that's a
Speaker 1: sustainable thing. I don't know. What happened though, was that
Speaker 1: people came to seriously expect two percent inflation, something like
Speaker 1: two percent inflation. And if people expect that, if companies expected,
Speaker 1: and workers expected, and you expect that in your shopping,
Speaker 1: then that's what will happen in a way, And that's
Speaker 1: what happened. So even in very very tight labor markets,
Speaker 1: we didn't have high inflation. I was at the FED
Speaker 1: since twenty twelve as unemployment went from six to five
Speaker 1: to four into the threes for the first time, and
Speaker 1: you know, the models were all saying that we should
Speaker 1: be seeing some inflation, and we never saw we never
Speaker 1: really saw two percent inflation on a sustained basis during
Speaker 1: that era. So we learned that the Phillips curve was
Speaker 1: really flat. Some pronounced it dead. Now I don't think
Speaker 1: most of the inflation we're seeing at all is from
Speaker 1: the Phillips curve, though, I think it was built really
Speaker 1: the collision of very strong demand, really strong demand with
Speaker 1: constrained supply. Cars being a great example. Many people wanted cars,
Speaker 1: didn't want to ride public transportation, wanted to move to
Speaker 1: the suburbs, unlimited demand for cars. Interest rates are low,
Speaker 1: yet we couldn't get semiconductors, so there are no more cars.
Speaker 1: Car production went down. How do you solve that problem?
Speaker 1: Prices just go way way up for cars. That's how
Speaker 1: you clear the market. So that's a classic example of
Speaker 1: what happened here. Really wasn't about the Phillips curve. It
Speaker 1: was more about constraints supply and demand more broadly, especially
Speaker 1: for goods. At the beginning.
Speaker 2: Let's chend you another responsiblit years, which is the banking system.
Speaker 2: Last March we had something was scare because of I
Speaker 2: guess interest rate risk with Silicon Valley Bank, and then
Speaker 2: some others.
Speaker 1: Are we through that? Now? Where are we in that process?
Speaker 1: Are you?
Speaker 2: Are you resting easy?
Speaker 1: So what you pay us for is not to rest easy.
Speaker 1: We don't do that. So, but I would say where
Speaker 1: we are is this though things have certainly settled down,
Speaker 1: certainly have settled down. We see the funding markets as fine.
Speaker 1: We see and you know, we paid a lot of
Speaker 1: attention to banks that looked anything thing like the banks
Speaker 1: that had the problems and made sure that they that
Speaker 1: they had credible liquidity plans and plenty of liquidity and
Speaker 1: all of that. And so I think all of that
Speaker 1: has worked, and we set up this facility that's available
Speaker 1: for banks to borrow, and so all of that has
Speaker 1: led to a real settling down. But you know, our
Speaker 1: job is to be on the case. And you know,
Speaker 1: we're still on the case, and we'll, you know, we'll
Speaker 1: we'll keep after that. Banks are generally very well capitalized
Speaker 1: and highly liquid in our country. Banks are strong. You know,
Speaker 1: we benefit from all those years of reform under DoD
Speaker 1: Frank and Buzzle three that we went through, you know,
Speaker 1: with former Governor Trula and many others, and so we
Speaker 1: benefit from a very strong, well capitalized banking system that's
Speaker 1: much better at managing its risks than the one that
Speaker 1: entered the global financial crisis very well capitalized. But you
Speaker 1: want some more proposal Buzzle three proposal, which is you know,
Speaker 1: it's a it's a rule that's out for comments. So
Speaker 1: there's not a lot I can say, but we do
Speaker 1: expect a lot of comment, and we do expect to
Speaker 1: take those comments very seriously.
Speaker 2: Talk about the commercial real estate, there are some concerns
Speaker 2: out there in the marketplace what's going on Because obviously
Speaker 2: there's a repricing that comes with your increased rates. It's
Speaker 2: thought that there's some real estate that it's not worth
Speaker 2: the money that was originally financed with it. How concerned
Speaker 2: should we be about that as something lurking out there
Speaker 2: that could really affect the system overall, not just to
Speaker 2: be able invested.
Speaker 1: So there's work from home and that's affecting downtown real
Speaker 1: estate in a lot of big cities and higher rates
Speaker 1: as well, as you point out, So this is an
Speaker 1: issue that we pay a great deal of very careful
Speaker 1: attention to. Commercial real estate is not a is not
Speaker 1: a principal risk or a major risk for the very
Speaker 1: large largest banks. It is much more for regional and
Speaker 1: really the smaller banks have proportionally much larger exposure to
Speaker 1: real estate, so commercial real estate. So what we've done
Speaker 1: is the supervisors are in there look at real estate portfolios.
Speaker 1: They're working with banks to make sure that they have
Speaker 1: they have plans to deal with the problems they have
Speaker 1: in their portfolio. These problems evolve over time, they don't
Speaker 1: they don't land with great suddenness like a market event,
Speaker 1: and so we're working with all of the bank regulars,
Speaker 1: are working with banks that have, you know, concentrations of
Speaker 1: troubled real estate to work it out. There will be losses,
Speaker 1: for sure. You can drive down through most downtowns in
Speaker 1: many downtowns anyway and see buildings that are empty and
Speaker 1: things like that. But we're working through it, and you know,
Speaker 1: we're on that case and don't see it as you know,
Speaker 1: as presenting much broader problems. But our job is to
Speaker 1: make sure that it doesn't.
Speaker 2: As you mentioned regional banks or where a lot of
Speaker 2: people focus on this as you conceptualize the bank system,
Speaker 2: what is the role of the regional banks. We have
Speaker 2: the super big banks that don't look like they're going anywhere,
Speaker 2: and we've got the community banks, the smaller banks that
Speaker 2: we understand are critical for portunity, for small businessinesses and
Speaker 2: local context. But what about the regional banks, how much
Speaker 2: pressure is on them and what would the would the
Speaker 2: damage be to the system if in fact there was
Speaker 2: more consolidation with some of the big banks.
Speaker 1: I think the regional banks are very important, extremely important.
Speaker 1: You know, we are we have forty five hundred banks,
Speaker 1: which is a lot more than any other country per
Speaker 1: capita or per dollar of GDP. But we have you know,
Speaker 1: our gesibs. The largest banks are deleting banks in the
Speaker 1: world in profitability and in their success in their business.
Speaker 1: We have community banks and you know, deal in smaller communities.
Speaker 1: But we also have these great regionals and I think
Speaker 1: they do. They do a great business among with you know,
Speaker 1: with many companies, and I do think their business model
Speaker 1: is under pressure, and I would not like to see
Speaker 1: us add to that by treating them exactly like gesibs.
Speaker 1: I think they need, they don't need exactly the same
Speaker 1: attention that a GCIM gets. So but I would say we,
Speaker 1: I personally think and I think we have to fed
Speaker 1: strongly think that that that the regionals and the smaller
Speaker 1: regionals are an enormously important part of our banking system. Okay,
Speaker 1: you've been very generous for your time.
Speaker 2: Really appreciate. I have one last question. Are you having
Speaker 2: a good time? You have so wide? No, no, no,
Speaker 2: I assume this wasn't that pleasant, but in general you're
Speaker 2: enjoying your job.
Speaker 1: I would say this, first of all, it's an incredible
Speaker 1: honor to do this job, and every day I do it,
Speaker 1: I feel so fortunate and so lucky and blessed to
Speaker 1: be entrusted with this. And you know, all I want
Speaker 1: to do is do the best job I can for
Speaker 1: the public that we all serve. And yes, there's a
Speaker 1: lot that is enjoyable about it, but mostly it's just
Speaker 1: so important to get it right and that's what we're
Speaker 1: trying to do. Thank you so much, Jared Pobble, it's
Speaker 1: really good at you all right. That was fed Shair J.
Speaker 1: Pale speaking at the New York Economic Club with our
Speaker 1: David Weston.