Speaker 1: The most important figure traditionally in monetary policy in the
Speaker 1: United States is the chairman of the Federal Reserve Board.
Speaker 1: The current chairman is JPW someone I've known for many years.
Speaker 1: I had a chance to sit down with him recently.
Speaker 1: You talk about interest rates, inflation, and the overall economy.
Speaker 1: There are a few billion people in the world are
Speaker 1: waiting to see what interest rates are going to be doing.
Speaker 1: Do you have any insights on where interest rates might
Speaker 1: be going?
Speaker 2: So I'm going to take that as a great opportunity
Speaker 2: to talk a little bit about the economy and then
Speaker 2: talk about where that leaves us with policy. So I
Speaker 2: would just start by saying that the US economy has
Speaker 2: performed really remarkably well over the last couple of years.
Speaker 2: Twenty twenty three. Last year was a year in which
Speaker 2: the economy grew well above three percent. The labor market
Speaker 2: remained very strong, unemployment remained very low, and inflation came
Speaker 2: down at quite a sharp pace, particularly in the second
Speaker 2: half of the year by a very large amount. That
Speaker 2: forecast was almost unheard of. It was unheard of before
Speaker 2: twenty twenty three, so big upside surprise that year. This year,
Speaker 2: we had expected the economy to slow a bit gradually,
Speaker 2: the labor market to continue to gradually cool off after
Speaker 2: being overheated a couple of years ago, and inflation to
Speaker 2: continue to make progress. And something like that is basically
Speaker 2: what has happened. The economy is growing now at about
Speaker 2: one and a half percent in the first half of
Speaker 2: the year. Most forecasters have about a two percent growth
Speaker 2: rate for the full year. The labor market again has
Speaker 2: moved into better and better balance, to the point where
Speaker 2: I think you can now say it's essentially no tighter
Speaker 2: than it was in twenty nineteen before the pandemic. Remember
Speaker 2: that the labor market of twenty nineteen was a very
Speaker 2: strong labor market, So we're back to that place, no
Speaker 2: longer overheated on inflation. In the first quarter, we didn't
Speaker 2: make any more progress. The second quarter, actually we did
Speaker 2: make some more progress. We've had now three better readings,
Speaker 2: and if you average them, that's a pretty good So
Speaker 2: turning to policy your question, what we've said is that
Speaker 2: we didn't think it would be appropriate to begin to
Speaker 2: loosen policy until we were more we had greater confidence
Speaker 2: that inflation was moving sustainably down to two percent. We've
Speaker 2: been waiting on that and I would say we didn't
Speaker 2: gain any any additional confidence in the first quarter, but
Speaker 2: the three readings in the second quarter, including the one
Speaker 2: from last week, do add somewhat to confidence. We've also
Speaker 2: said that, you know, we're a dual mandate bank. For
Speaker 2: a long time, since inflation arrived, it's been appropriate to
Speaker 2: focus mainly on inflation. But now that inflation has come
Speaker 2: down and the labor market has indeed cooled off, we're
Speaker 2: going to be looking at both mandates there. They're much better,
Speaker 2: in much better balance, and that means that if we
Speaker 2: were to see an unexpected weakening in the labor market,
Speaker 2: then that might also be a reason for reaction by US.
Speaker 1: Okay, I think I understand, So to put it in
Speaker 1: terms I can for sure understand, the markets are suggesting
Speaker 1: the future's markets that there's a ninety percent chance that
Speaker 1: the FED will lower its discount rate in September. Do
Speaker 1: you think the markets know what they're talking about?
Speaker 2: So I'm so today I'm not going to be sending
Speaker 2: any signals one way or the other on any particular meeting.
Speaker 2: So just to ruin the fund right at the beginning,
Speaker 2: I simply you know, we're going to make these decisions
Speaker 2: meeting by meeting, and we're going to make them on
Speaker 2: the basis of the data as they come in, the
Speaker 2: evolving data, the evolving outlook, and also the balance of risks.
Speaker 2: Now that the two mandates are basically close to being.
Speaker 1: In balance, right, there are some people who say that
Speaker 1: the FED would not like to lower interest rates in
Speaker 1: a presidential campaign period because you could be criticized for
Speaker 1: helping one party or another. Do you have any comment
Speaker 1: on whether that's an accurate view.
Speaker 2: I do so. Our undertaking at all times is that
Speaker 2: we'll make our decisions based on the incoming data, the
Speaker 2: evolving outlook, balance of risks, and only on that. We
Speaker 2: don't take political considerations into accoun We don't put up
Speaker 2: a political filter on our decisions. That would It's hard
Speaker 2: enough to make these decisions based on the appropriate factors.
Speaker 2: If you're going to add a whole different filter in
Speaker 2: an area where we're not experts, that's not going to
Speaker 2: improve the quality of our decisions. And it's also not
Speaker 2: the orders we have from Congress or orders from Congress.
Speaker 2: Sort of use our tools to foster maximum employment and
Speaker 2: price stability, and to do so without political considerations. That's
Speaker 2: what we're always going to do if you look at
Speaker 2: the modern record, that is what we do, and we
Speaker 2: don't think about election cycles or anything that's political.
Speaker 1: Many people use the phrase hard landing to describe hard
Speaker 1: landing is a euphanism for recession.
Speaker 2: I guess people.
Speaker 1: Thought in twenty twenty three we might have a hard landing.
Speaker 1: People thought in twenty twenty four we might have a
Speaker 1: hard landing. And none of these people were economists, professionally
Speaker 1: trained economists, but they seem to be wrong. So do
Speaker 1: you rely on these economists very much in the future
Speaker 1: when you're get projecting whether you should listen to their
Speaker 1: views and where the economy is going, or how do
Speaker 1: you react the fact that we haven't had a hard
Speaker 1: landing and disappointed all those economists.
Speaker 2: So I'll just say that, you know, as someone famously said,
Speaker 2: predictions are very difficult, especially about the future. On the
Speaker 2: hard landing question, I have always felt like that there
Speaker 2: was a pathway to getting inflation back down to our
Speaker 2: two percent goal on a sustainable basis without the kind
Speaker 2: of pain in the labor market, the kind of high
Speaker 2: unemployment that has been typical of tightening cycles and getting
Speaker 2: inflation down. And the reason why. My colleagues and I
Speaker 2: thought that was that the labor market was so overheated
Speaker 2: that it could cool down quite a bit without having
Speaker 2: to There still is apparently no slabor, no slack in
Speaker 2: the labor market. The labor market does not have slack. Essentially,
Speaker 2: you're at equilibrium now, but look where inflation is. Inflation
Speaker 2: is at two and a half percent. So this was
Speaker 2: in defiance of a lot of conventional wisdom. But we
Speaker 2: thought that was right, and that says that you have
Speaker 2: to be one thing that you learn as humility and forecasting.
Speaker 2: So I wouldn't rule it out, but I would say
Speaker 2: that the kind of hard landing scenario is not certainly
Speaker 2: not the most likely or a likely scenario.
Speaker 1: I think you have said somewhere that when the Fed
Speaker 1: does lower interest rates, not saying that you're saying it's
Speaker 1: going to do that, but if the Fed does lower
Speaker 1: interest rates, at some point you didn't think it was
Speaker 1: ever going to go back to kind of the free
Speaker 1: money practically of years ago, when the interest rates are
Speaker 1: on the zero. Is that a fair statement that you
Speaker 1: don't think it's a good idea to go back to
Speaker 1: interest rates as low as they once were.
Speaker 2: The period between the global financial crisis and the pandemic
Speaker 2: was his historically unusual from the standpoint that we had
Speaker 2: ever lower interest rates through that era, including a part
Speaker 2: of the era when, for example, sovereign debt of major
Speaker 2: European sovereigns was trading at a significantly negative rate. And
Speaker 2: still even with rates that low, inflation was very low
Speaker 2: below target. So and so the question, where you know,
Speaker 2: is what caused that? And are the forces that cause
Speaker 2: that gone for now? And I think most people attribute
Speaker 2: the low inflation era to slow moving forces like demographics, globalization, uh,
Speaker 2: technological evolution, things like that, and those may or may
Speaker 2: not have changed. But I but nonetheless, I look at
Speaker 2: where we are now or our funds rate is a
Speaker 2: five point three percent roughly give or take, and it
Speaker 2: seemed it feels like it's restrictive, but not not, you know,
Speaker 2: severely restrictive. So it tells me that rates, at least
Speaker 2: for now are the neutral rate must have risen, probably
Speaker 2: has risen from where it was during the inter crisis period.
Speaker 2: And I mean, I think instinctively I can't prove this.
Speaker 2: We're gonna, we're gonna we're going to learn about this empirically,
Speaker 2: but but it seems to me that the neutral rate
Speaker 2: is probably higher than it was during the inter crisis period,
Speaker 2: and so rates will be higher.
Speaker 1: The Fetish set its target for inflation of two percent.
Speaker 1: Now can you clarify does that mean that the inflation
Speaker 1: rate has to be at two percent before you're ready
Speaker 1: to move if you are ready to move, or does
Speaker 1: it have to be within sight? And what does it
Speaker 1: mean to be within sight?
Speaker 2: So when we change interest rates, that tightens financial conditions,
Speaker 2: and that in turn affects economic outcomes, you know, growth,
Speaker 2: labor markets, and ultimately inflation, but with lags that can
Speaker 2: be long and variable, as Milton Freeman famously said. And
Speaker 2: the implication of that is that if you wait until
Speaker 2: inflation gets all the way down to two percent, you've
Speaker 2: probably waited too long, because you know, the tightening that
Speaker 2: you're doing, with the level of tightness that you have,
Speaker 2: is still having effects which will probably drive inflation below
Speaker 2: two percent. So we've been very clear that you wouldn't
Speaker 2: wait for inflation to get all the way down to
Speaker 2: two percent. Our test has been for the past quite
Speaker 2: some time that we wanted to be to have greater
Speaker 2: confidence than inflation was moving sustainably down toward our two
Speaker 2: percent target. And what increases that in that is more
Speaker 2: good inflation data, and lately here we have been getting
Speaker 2: some of that.
Speaker 1: So if you go back in history when inflation began
Speaker 1: to arise after COVID, at some point people said had
Speaker 1: include a year, that it was transitory. In hindsight, what
Speaker 1: do you think people missed about the nature of the inflation?
Speaker 1: Why was it more enduring than people initially thought?
Speaker 2: So, these are this is a question that people will
Speaker 2: be writing papers about and debating long after all of
Speaker 2: us are gone. So and it's early to say it's
Speaker 2: actually kind of kind of soon to be answering it,
Speaker 2: but I think it's So here's my answer to that question.
Speaker 2: When inflation arrived, it was really coming out of the
Speaker 2: goods sector, and it was connected to really high demand
Speaker 2: for goods. And it was and you know, the supply change,
Speaker 2: global supply change, which account for most manufactured goods, collapsed
Speaker 2: because of too much demand and because of COVID, and
Speaker 2: you know, so and to us that looked like a
Speaker 2: a temporary fleeting situation. We also lost several million people
Speaker 2: out of the labor force, so wages went way up
Speaker 2: as the economy really boomed when we reopened the economy,
Speaker 2: and we thought, you know, there we were getting vaccines
Speaker 2: were coming in, and we thought that that would fix
Speaker 2: itself too, kids would go back to school. We essentially
Speaker 2: overestimated how quickly the economy would return to normal. Finally,
Speaker 2: these things finally did happen in twenty twenty three, but
Speaker 2: they didn't happen in twenty twenty one or two. And
Speaker 2: what we meant by transitory was that it would go
Speaker 2: away fairly quickly without the need for our intervention. You
Speaker 2: don't want to intervene with interest rates if something is
Speaker 2: going to go away quickly without us intervening, because you know,
Speaker 2: monetary policy, as I mentioned, works with long and variable legs.
Speaker 2: So the lore is you look through things like a
Speaker 2: temporary oil shock. So that was the mistake was that
Speaker 2: it actually it actually didn't reverse itself. The problems with
Speaker 2: the supply side didn't reverse themselves until twenty twenty three,
Speaker 2: when they really did. When we got it, we got
Speaker 2: a big burst of employment and also the supply chains
Speaker 2: were fixed.
Speaker 1: So in hindsight, now knowing everything you now know, would
Speaker 1: you have done anything differently? Would you have had less
Speaker 1: quantitative easing? Would you have changed interest rates differently? What
Speaker 1: would you have done differently? Now knowing everything we now know,
Speaker 1: You know, it's almost unfair. Hindsight's always twenty twenty, right,
Speaker 1: you know, we remember what we were doing in real time.
Speaker 1: We went from a really nice economy in December of
Speaker 1: twenty nineteen to a global partial shutdown of the economy,
Speaker 1: and we were contemplating there was no thought that vaccines
Speaker 1: were around the corner, the economies closing down.
Speaker 2: We were looking at severe and perhaps prolonged downside risks. Literally,
Speaker 2: people thinking and doing work on or are we going
Speaker 2: to have another depression? Is it going to be the
Speaker 2: nineteen thirties. So governments around the world, and in particularly
Speaker 2: the United States government really went to work to provide
Speaker 2: a lot of support to the economy. We did everything
Speaker 2: thing we could, including many things that were right. You
Speaker 2: know that we read lines that we'd never cross. We
Speaker 2: crossed them to support the economy and support the financial system.
Speaker 2: And it was all done because we were managing severe
Speaker 2: downside risks which did not materialize. We did not have
Speaker 2: a depression, and part of that is because of what
Speaker 2: we did. Then the economy reopens and demand is very,
Speaker 2: very strong, and we saw basically, we saw a big
Speaker 2: burst of inflation everywhere, including in the United States. It
Speaker 2: was different in different places, but so that's what happened,
Speaker 2: and you know it's not that's how I would answer that.
Speaker 1: Okay, but so what you did, You're happy with what
Speaker 1: you did in hindsight, you would say, in foresight.
Speaker 2: I think that the work that we did in twenty
Speaker 2: twenty in response to the pandemic will stand up very
Speaker 2: wealth in history. I think people will look at the
Speaker 2: things that we did, and essentially the financial system was
Speaker 2: grinding to a halt all around the world. We acted.
Speaker 2: We were the first central bank, and we were the
Speaker 2: most you know, supportive, and you know, I think that
Speaker 2: work will hand we'll hold together when historians are looking
Speaker 2: back on it in a long time. I think when
Speaker 2: you get to the inflation era, that becomes a different question,
Speaker 2: and you know, people are going to be arguing about
Speaker 2: that for a long time.
Speaker 1: The FOMC, for those who don't follow Washington acronyms, stands
Speaker 1: for what what is the FOMC.
Speaker 2: It's the Federal Open Market Committee. And who is on
Speaker 2: that committee. It's a little bit complicated. Our structure is
Speaker 2: we have seven governors here in Washington, all nominated by
Speaker 2: the President and confirmed to staggered fourteen year terms. And
Speaker 2: we have twelve reserve Bank presidents at reserve banks around
Speaker 2: around the country, all nineteen seven plus twelve our participants
Speaker 2: on the FMC. In any given year, all of the
Speaker 2: seven governors vote, and five of the twelve reserve bank
Speaker 2: presidents vote, but one of the voters is always the
Speaker 2: New York FED.
Speaker 1: And so when you have an FOMC meeting, how many
Speaker 1: do you have a year?
Speaker 2: We have eight a year, so you have eight a year.
Speaker 1: And when you get together, you get together for two
Speaker 1: days or so we do.
Speaker 2: So generally starts at noon or in the morning of
Speaker 2: a Tuesday, and we go all day. We generally talk
Speaker 2: about the economy, the financial stability issues, whatever special topics
Speaker 2: there may be. And at the end of the day,
Speaker 2: each person speaks on those things, and I speak at
Speaker 2: the end of that day. Then there's a brief presentation
Speaker 2: on monetary policy, and then we go to dinner upstairs
Speaker 2: in the Martin Building and we come back the next morning.
Speaker 2: We come in at nine o'clock and we talk about
Speaker 2: monetary policy until we're satisfied with the outcome on monetary policy,
Speaker 2: and that usually takes most of the morning.
Speaker 1: So when you go into an FOMC meeting that the
Speaker 1: first day, do you pretty much know where you want
Speaker 1: to come out at the end of the second day
Speaker 1: or you want to listen to everybody and you haven't
Speaker 1: made up your mind yet.
Speaker 2: You know, the way it works is that you know,
Speaker 2: I talk to the other eighteen participants regularly, and I
Speaker 2: talk to all of them at least once in the
Speaker 2: ten days before the meeting, and I'm thinking about this
Speaker 2: three or four weeks before the meeting. You know, what
Speaker 2: what should we want to achieve? What data do we
Speaker 2: need to see, how do we want to change our communications?
Speaker 2: All those things? And so I talk to people, listen
Speaker 2: to them, and I try to I try to put
Speaker 2: together an answer that has broad support on the committee.
Speaker 2: And so when we go into the committee on Tuesday morning,
Speaker 2: you know, I'm confident usually that I know where this
Speaker 2: is going to go. But you know, things happen. We
Speaker 2: get data during the meetings, sometimes events happen, but largely
Speaker 2: you go in kind of knowing what's what the likely
Speaker 2: outcome is, and that's that's that's that's the design of it.
Speaker 1: So a lot of people in Washington government agencies are
Speaker 1: very good at leaking, leaking things. You're not that good
Speaker 1: at that. Why don't't the Fed? Why doesn't the FED
Speaker 1: leak more?
Speaker 2: Why don't you.
Speaker 1: Kind of leak a lot more about what you're going
Speaker 1: to do? You just don't leak that much?
Speaker 2: I am. I'm kind of proud of that. Actually, we
Speaker 2: we do take our obligations to confidentiality very very seriously,
Speaker 2: and because we know, you know, how consequential it would
Speaker 2: be for someone at the FED to be leaking. You know,
Speaker 2: just our whole success depends on having the public's confidence
Speaker 2: that were ethical and that we're working on behalf of
Speaker 2: all Americans and not on behalf of ourselves. And we're
Speaker 2: not leaking in that kind of thing. So we do
Speaker 2: have a culture when we're working on a for example,
Speaker 2: a regulatory matter or or some matter involving one of
Speaker 2: the banks, it never leaks out of the FED. So
Speaker 2: I am proud of that record.
Speaker 1: Some people have suggested that the Fed's independence is not
Speaker 1: as good as people talk about it a being, and
Speaker 1: that maybe we better have more White House coordination with
Speaker 1: the FED.
Speaker 2: I'm sure you've heard about this I think that any
Speaker 2: comments on that, I'm happy to comment on what independence.
Speaker 2: On the point of central bank independence, so I think
Speaker 2: a long time ago people that learned that a central
Speaker 2: bank that's independent of political consideration does a better job
Speaker 2: getting inflation under control, and that is now that has
Speaker 2: accepted wisdom in all advanced economies around the world. It's
Speaker 2: also a principle that has very very strong and broad
Speaker 2: support where it really matters, which is in Congress. You know,
Speaker 2: you talk to senior leaders in both chambers, in both
Speaker 2: political parties, and they all understand that you want an
Speaker 2: independent central bank that doesn't run monetary policy to support
Speaker 2: or oppose any particular politician or political party.
Speaker 1: Do you ever get a call from the President, I'd say,
Speaker 1: saying interest rates are too high or something like that.
Speaker 2: So Ever, no, I would say that, you know, meetings
Speaker 2: with the president are rare and appropriately so.
Speaker 1: You are you are originally appointed to the Board of
Speaker 1: the Fed and by President Obama, and you're appointed chair
Speaker 1: by President Trump and reappointed by President Biden, and your
Speaker 1: turn mischair goes through I think May of twenty twenty six.
Speaker 2: So any thought.
Speaker 1: About staying through all the way through May twenty twenty six,
Speaker 1: you're going to do that? Yes, And if some president
Speaker 1: came along and said, well, you did a great job,
Speaker 1: I'd like you to reappoint you, would you consider that.
Speaker 2: I have nothing for you on that today, Okay? Right?
Speaker 1: And is being chair of the FED a enjoyable job
Speaker 1: or not so much?
Speaker 2: It is? Actually I think I enjoy it. I enjoy
Speaker 2: it quite a bit. I do. It's a first of all,
Speaker 2: it's a great honor. It's incredibly interesting. I love the
Speaker 2: people we work with, I love the institution. At this
Speaker 2: time in my life, it's just been a great thing.
Speaker 2: I'm in my thirteenth year there now and it's just
Speaker 2: been it's been, you know, really challenging and all that.
Speaker 2: But what else would you want? You know, I'm very
Speaker 2: happy doing the job now.
Speaker 1: The Federal Reserve is over one hundred years old, was
Speaker 1: created under Woodrow Wilson. If you were around then, what
Speaker 1: would you have suggested they do better than they did?
Speaker 1: And creating the system where you think the system works
Speaker 1: pretty well after one hundred years and you wouldn't change
Speaker 1: it very much.
Speaker 2: So I'm giving myself perfect hindsight here. I would do
Speaker 2: what Congress did in nineteen thirty three. So the original
Speaker 2: FED didn't have an FOMC, and it really didn't function
Speaker 2: very well during the early parts of the depression or
Speaker 2: during other So in nineteen thirty three the current structure
Speaker 2: was put in place, and that's with the FOMC, with
Speaker 2: the number of governors and the voting arrangements, and I
Speaker 2: think that arrangement is fine. It works really well. In
Speaker 2: the seventies, the dual mandate was added. But ultimately we're
Speaker 2: not looking for any law change. We think we have
Speaker 2: the authorities that we need. We think that the law
Speaker 2: is in just a fine place.
Speaker 1: So basically, do you think the system works reasonably well
Speaker 1: as it is today?
Speaker 2: And today?
Speaker 1: What is the the biggest economic challenge you think facing
Speaker 1: the country?
Speaker 2: Is it growth?
Speaker 1: Is it inflation, hard landing potentially or what are you
Speaker 1: most worried about what keeps you up at night of
Speaker 1: anything in the economy.
Speaker 2: So I'll say in the short term, that's what keeps me.
Speaker 2: But like literally, you know, the thing I'm thinking about
Speaker 2: in the middle of the night is always this balance
Speaker 2: we have between not wanting to if we ease too early,
Speaker 2: you know, we can undermine the progress on inflation, and
Speaker 2: if we wait too late. We can undermine economic activity,
Speaker 2: we can undermine the expansion, and you know, so we
Speaker 2: want to get this right and getting it right is
Speaker 2: incredibly important for the people we serve. So that is
Speaker 2: really that's that's what I spend a lot of my
Speaker 2: you know, thinking time on you know, longer term. There
Speaker 2: are lots of things to worry about, but that's really.
Speaker 1: What most people they have dinner with friends or sometimes
Speaker 1: how can you have dinner with friends without hinting what
Speaker 1: you're thinking about? And do you ever get suggestions from
Speaker 1: your friends at dinner this is what you should do?
Speaker 1: Or and how do you respond when they kind of
Speaker 1: say maybe you should lower interest rates just keep eating.
Speaker 2: Or what you might define the word friend to mean
Speaker 2: doesn't ask you about interest rates. So no, people don't
Speaker 2: do that generally. You know, people I don't know will
Speaker 2: always say, hey, cut rates. Somebody said that in the
Speaker 2: elevator this morning. Did that influence you or no? I said,
Speaker 2: thank you, sir? You know, no, but I mean, you know,
Speaker 2: we people say things, but you know, it's fine.
Speaker 1: So in some parts of the society these days, people
Speaker 1: are making decisions based on something called artificial intelligence AI.
Speaker 2: Have you thought if you thought about, you.
Speaker 1: Know, calling up chat GBT and saying, you know, you know,
Speaker 1: here's the all the data we have. What do you
Speaker 1: think about would be a good idea?
Speaker 2: Have you ever thought about that? Or are they're not
Speaker 2: going to like to do that. We haven't done that.
Speaker 2: I mean we have. We have done little things like
Speaker 2: we've asked chat GDP, GPT to generate questions for the
Speaker 2: press conference, and I'm happy to report for any journalists
Speaker 2: who are here that the questions were not as good
Speaker 2: as the ones we get from real journal.
Speaker 1: So what about my questions? How do they compare to
Speaker 1: my questions? Okay, so they weren't that great. Okay, thanks
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