A Fed duet: Janet Yellen in conversation with Ben Bernanke

there's an old of fed saying that goes only hawks go to central bank heaven in contrast to that conventional wisdom Janet Yellen staked out a very different territory for her maiden speech in Chicago she appeared at a conference of neighborhood revitalization organizations and said quote although we work through financial markets our goal is to help Main Street not Wall Street more than five years after the financial crisis she spoke mainly about unemployment and told the stories of three blue-collar Chicagoans two black and one white who'd lost their jobs in the recession it became quickly clear that this was a Fed Chairman well suited for the time in which we lived however not everyone recognized that or her not long after she took office somebody came up to her airport and said you look just like Janet Yellen shortly thereafter Forbes magazine recognized her as the second most powerful person in the world the most powerful woman in the world after Angela Merkel a towering figure who measured in at five feet and three inches tall as the feds leader she leaves with roughly four percent unemployment 1.5 percent inflation she successfully raised interest rates off the zero bound engineered a policy framework for reworking the size of the Fed's balance sheet and overseen substantial increases in bank capital and liquidity it is noteworthy that she became one of the best forecasters on the Board of Governors during her tenure at the Fed while David Wessel was at The Wall Street Journal they examined more than 700 predictions made between 2009 and 2012 in speeches and congressional testimony by 14 policymakers four at the Fed Janet Yellen came in number one trailed significantly by Ben Bernanke who logged in at number five perhaps Ben would agree that it's time we upgraded our forecasting capabilities here at brookey's now according to her her financial disclosure forms janet has a stamp collection that she inherited from her mother and claims was worth between fifteen and fifty thousand dollars that's what it says we certainly hope she doesn't plan to spend much time on it in near future because our nation and Brooking still expects much of her welcome Janet the second-best forecaster I'm Ben Bernanke and I'm here to interview my new colleague at Brookings welcome all of you welcome Janet it's great to have you here at Hutchins and the Brookings and I hope this is more pleasant than sitting in front of House Financial Services Committee well I watched my colleague do that this morning for those lovely welcoming remarks and I just want to say I'm really thrilled and delighted to be at Brookings I think the budget center that I'm affiliated with is doing terrific work on monetary and fiscal policy and Brookings more generally I greatly respect for the quality of analysis of public policy issues and I'm looking forward to being here and to contributing to discussions about good public policy great okay well we have time for we're gonna do about 45 minutes of conversation and then leave time for questions I thought we could go a little bit chronologically and I would start off by just asking you to talk a bit about how you got interested in economics and how'd you decide to make economics your profession well I decided in college to major in economics and then stayed in economics from there and I guess I didn't really know a lot about economics before college I was very interested in math and enjoyed it and I suppose when I went to college I would have written down that I thought math was my likely major but when I was exposed to economics I was really impressed that this was a discipline that relies on logical thinking mathematical thinking but rigorous analysis but is very much a discipline that's concerned with human welfare and that was a combination that greatly appealed to me and so I must admit after my first economics course that was kind of love at first sight and I stuck with it I I also found out early in my career I studied macroeconomics in my first courses I was exposed to kind of I guess what you call Keynesian thinking about the Great Depression and very impressed that capitalist economies were capable of occasional breakdowns in the functioning of labor markets that could result in such prolonged misery for such a large share of the population and I was impressed that there did absolutely seem to be a great deal that had been learned about what could be done to address such episodes and so with my early interest and its continued member of your professor was in the first class oh I had Herschel Grossman was one of my was my first macro economics teachers and then and then in graduate school you you were advised by James Tobin right yes I'm fluent you well Tobin was my teacher I will have to say he was more than my teacher he was actually an inspiration to me I think what impressed me was not only his analytic skills and his knowledge of macroeconomics and the work that he did but also his very strong commitment to social justice and to the view that economics is people and it's about making the world a better place and you know economists use more and more these days a great deal of math and sometimes people joke or criticize economists for treating it like it's recreational math and some of it not really in some sense really being about very much and I think for me what Tobin stood for was always doing work that was about something and that was devoted to advancing human welfare so in that sense he was very influential in terms of what I wanted to do when in terms of the subjects that I was interested in I worked very closely with him I took courses from him I was his teaching assistant in the core Graduate macro class we thought about came close to writing that up as a book but while we were doing it the ration the rational expectations revolution intervened and I think changed our thinking quite a bit about what what should be in a core course he was my thesis advisor he later in later years when I he when I was first a governor in the Fed and later at the Council of Economic Advisers I looked to him for advice and stayed in touch with him while I had those posts he worked for Kennedy when he was he worked for Kennedy he was at the Council of Economic Advisers and involved in the programs in the early and mid sixties that led to a long period of strong growth in the US economy and low unemployment now I have to ask I don't hope you don't mind me asking you or maybe the only woman in the class in the graduate school or is that true I think I was one of two one two women in my class there were not a lot of women at that time it was at a problem for you it wasn't the problem it wasn't the problem for me I mean I think I was always treated fairly Tobin and Stiglitz with whom I worked were always very strong mentor for me and I enjoyed the graduate program very much but it is sometimes a problem so I think I was I think I was looking in that respect and I think that that is sometimes a problem for women being in such a small minority so you went on we were at the Fed but you went on to a mostly a research career I did and what looking back what what what was the most exciting work that you did did you that you're most proud of that you so you still think about so I went when I held a number of academic jobs and then ended up at Berkeley and I also ended up marrying somebody I met in the Fed cafeteria who who was that she made George a colossal one I shared my strong interest in the topic of unemployment and economic theory bearing on unemployment and I'd say the most significant work that I did before becoming a Fed governor was jointly with George and our work was both theoretical and empirical and on the theoretical front we were really concerned with what I think is has long you know for maybe a hundred years been the core question in macroeconomics a what to me is a core question in macroeconomics which is can there be such a thing is involuntary unemployment you know this this is an important strand of the real business cycle versus New Keynesian debate and that debate of Keynes versus the classics goes back to Cannes and it existed before Cannes and a key question there is why on earth if someone says I'm involuntarily unemployed I'd like to get a job goes to a firm and says well you have these workers here and you know what I have just exactly the same skills and I'm willing to work for less than your pain as an employer why shouldn't I be able to get get that job and bit away that job and if I'm not willing to make that offer am I not in essence saying I don't really want the job and therefore I'm voluntarily unemployed but that's always been a puzzle of why in a market system someone who's qualified for a job and willing to work at a little bit below at or below what others are getting shouldn't they be able to bid for jobs so that was the theoretical puzzle that we attacked in our work and so an important strand of theory that we've developed falls into a general class of theories I'd call efficiency wage theories and essentially what these theories say is that firms have a set of very good reasons when you come to the door and you say look replace your existing workers with me I'm willing to work for Less those firms have set very good reasons for turning you away and being unwilling to cut wages and replace their existing workers with you and there are a set of theories some are based on information and turnover costs what they have all in common is the the idea that if they were to take you up on your offer and cut wages for you and everyone else the productivity or efficiency would suffer and therefore it would not be a cost-saving move on the part of these firms and I think a lot of our contributions to that theory fell in terms of the sort of sociological models violations of fairness and the consequence of what happens in a firm to productivity and worker morale when an employer violates norms of fairness sociological considerations but there were also more neoclassical considerations and so these theories essentially explain why it is that wages may be set at levels of both those consistent with market clearing but this isn't necessarily an explanation of business cycles and an important question and this existed at the time as it always has is is there anything monetary policy can do to combat unemployment and the theory I just described to you actually doesn't automatically have any rule for monetary policy because this kind of wage setting is referred to as real wage rigidity so to explain why monetary policy might work it was necessary to explain why money wages or nominal wages and prices might be sticking and we worked on a theory that we referred to as new rationality essentially what we tried to show was that in a world where efficiency wage type considerations were prevalent firms could follow rules of thumb in adjusting wages and prices that would lead to slow adjustment and while these rules might not be exactly optimal or profit maximizing from their point of view the cost to them are following these rules would be second orders small or miniscule but their consequences for the aggregate level of wages and prices and adjustments would be substantial and therefore monetary policy could work so ideas like that Greg Mankiw was also involved at the time in writing similar work referred to it as menu costs of changing prices and those micro foundations became important in New Keynesian models and we also did empirical work we wrote several papers we contributed to the Brookings papers in the 90s one documenting how strongly procyclical quits are and employment employer to employment moves which is what you would expect in a world where there's involuntary unemployment and we documented the benefits people knew about the cost of fights are and over we tried to document the benefits of greater turnover in a strong labor market we also did a paper looking when German unification took place we were quite concerned that under the arrangements that were put in place there would be very high unemployment in East Germany and we undertook research that documented why that would be true when tried to suggest a scheme that of course wasn't adopted that would be helpful in minimizing unemployment yeah not aficionados I have to emphasize how the work on rigidity nominal and real wage rigidity played into the new Keynesian revolution which brought back you mentioned earlier when you were in graduate school how the rational expectations revolution had shaken things up and in particular ended up ended a lot of the traditional Keynesian approaches because oh my gosh they're not rational they can't be explained by any kind of reasonable behavior but these these new Keynesian ideas that you contributed to were important for rebuilding that sort of rethinking the micro foundations of Keynesian economics to try to answer the objections of the rational expectations school so you were a successful academic doing interesting research and then suddenly in the 90s you find yourself on the Federal Reserve Board how did how did that happen I've heard it does happen but it's interesting transition it's a good question I never had any policy experience although I had had a stint working as an economist in the international finance division of the Fed and had always been interested in help holding a policy post of that sort but one day the phone rang I guess it was the spring of 1994 there were several open positions on the board of governors and it was someone from the Treasury asking me if I would be interested and I asked them to hold the phone for a couple minutes and decided maybe I should talk to my spouse and see how he would feel about moving to Washington and my son and he said well of course we'll make it work this is something you probably like to do and I got back on the phone and basically said if you offer me the job I'd be delighted to take it waited a couple of months and lo and behold I was nominated along with Alan Blinder who was nominated at the time is Vice Chair and so I went to the Fed I thought that the research I'd done and the background I had you know were reasonable basis to try to contribute to monetary policy during the time I spent there of course and I'm sure you've had this experience as well learned a lot about a lot of the other responsibilities of the Fed including supervision and regulation and some of the operational responsibilities that the Fed has but you know I I was delighted to be offered the opportunity to do it and learned a lot when I when I actually assumed the job when you were there was peak Greenspan right so what was it like working with Alan so I did I did work with Alan I guess I went in 94 and then left and moved to the Council of Economic Advisers at the beginning of Clinton's second term in 1997 and I didn't really know Alan before I went I really was impressed with his his intellectual strength with his originality no one knew the data and understood the idiosyncrasies of the data and could make better use of it to provide insights on the economy that app than Alan could and I thought he was a very original thinker and I enjoyed talking to him and I found him very open to debate I didn't agree with him about everything but I did agree with him about a lot of things I guess I the opportunity to debate with him the question of whether or not the Fed should adopt an inflation target and if so what that target should be and he let me do that in the context of an FOMC meeting so it went into the permanent record I was on record then is saying I thought we should adopt a numerical inflation target and I thought it should be 2% and I think I articulated the reasons about the zero lower bound and nominal wage rigidity that later you know became central to our decisions Ellen's view was that we should not adopt an inflation target at all and of course he was successful in stopping that from happening until you and I worked together in it I think had long been your desire to see this happen as it had been mine and I I think we you know you especially should feel proud that you were able to put in place what I think has been a successful framework ellen was also very focused on the stock market at the time and he gave his famous irrational exuberance speech I believe it was the fall of 96 he showed it to me in advance and he asked me my opinion and I read this long dry speech and I think it was something like page 26 of this speech he was going to give in the evening I think it was at the American Enterprise Institute and there was this reference to irrational exuberance and I thought nobody is going to be awake by the time he gets to this and this is really just deeply buried and I him I thought this was simply too mild and nobody would get the point and that was an error in judgment Spotify he gave the speech in the stock market immediately swooned but after that of course after the stock market immediately tumbled it and all the ground that had lost and continued week after week to reach new heights and Alan decided that maybe there was a good reason for the stock market to be that high now I frankly never you never changed my opinion about that but he did because he became very focused on productivity growth and the notion that all who was not a parent and the statistics at that time that we were really seeing a substantial pickup in productivity growth and so for the last couple of years that I was at the Fed unemployment was falling it was falling below levels that were then thought to be the level of the longer the narrower longer-run normal rate of unemployment inflation was already running above two percent but it had come down and many of us including Alan were anxious to make sure that inflation did keep coming down gradually over time and not raising rates when the unemployment rate was falling ever lower struck almost everyone on the FOMC is a mistake and I will have to say that I fell into the same category I too thought it was a mistake by the fall of 1996 I went to Ellen and basically said I'm willing to support you and not raising rates at this meeting but I really I doubt that I'm going to be able to support this very much longer I think the case is there to raise rates well again I turned out to be wrong the you know there was all my perhaps one rate increase from then until late into the 90s the unemployment rate continued to fall and inflation continued to be very low Ellen was focused on productivity he also thought workers felt very insecure because of technological change and it was constraining wage bargaining in this way some ideas I actually was pretty sympathetic to and so he and I had very good discussions I wrote something on that topic it looked at things in a theoretical model that I think he wasn't he wasn't that familiar with and I think he valued that so you and I had the same path from academia to being a governor than going to the CEA for for a period yes that was a great job I like that job tell us about your experience with CEA well the CEA was a fascinating job and you're involved with every aspect of economic policy i with respect to you know the performance of the macro economy it was a wonderful time and you know by the end of the 90s I think the final month of 1999 the unemployment rate had fallen to 4% and inflation was running around 2% so inflation it was it was terrific and we were certainly celebrating in the White House we worked a lot on the budget and I participated in an event in which we were able to announce that at long last the budget was balanced we were very concerned as I remain at least this concern now or more so about the longer run trajectory for the federal debt and worked hard on devising a plan by which as the budget went into surplus we would take those surpluses and pay down the debt and create some additional fiscal space that would be that wouldn't be all that would be needed to address long-term fiscal issues but it would be a down payment and we worked on that I suppose more than any other topic I spent a great deal of time on climate change I was there during the run-up to Kyoto and after Kyoto and the Council of Economic Advisers was deeply involved in work climate change policy I remember the Fed was planning for what would happen when all the Treasury debt was paid back and how were they gonna run monetary policy yeah that was really yeah yeah so you were in in these two important positions in the 90s too and then you wrote a book with Alan Blinder about the 90s as I recall right what what lessons did you take from that decade is it repeatable perhaps we're repeating it but I guess I took away two two lessons or that we expand expanded expanded to particular lessons in that book one is that Clinton's first steps first economic policies were to put in place a plan that would lower budget deficits and there had been great concern about out-of-control budget deficits and I think it was reflected in high long-term interest rates but the Clinton administration was rightly I think very concerned that tightening fiscal policy you had an economy that was just recovering unemployment remained high and they were worried about the negative impacts of fiscal tightening on the economy I think our Reid so let me just say at the outset in general the view the type fiscal policy tends to depress employment and economic activity I believe to be correct and I'm not questioning that but the Clinton policy was one that phased in very slowly over time a tightening of fiscal policy so it wasn't a tightening in day one or year one that was dramatic and I believe it was a very credible multi-year commitment which served to quickly bring down dramatically long-term interest rates so in point of fact I think for at least for several years this was a fiscal tightening that actually was expansionary because the decline in spending or increase in taxes didn't occur immediately and long-term rates came down very quickly so the economy continued to recover so the notion that a very well-designed fiscal tightening policy need not have adverse impact on economic activity was one lesson we took away another lesson well we've looked at why was it possible for unemployment to decline as low as 4% an inflation stay so very low and again we have a similar situation with inflation isn't even yet up to the feds 2% target and I think our conclusion was that that good experience reflected a set of favorable supply shocks the most important of which was what Alan had pinpointed what which was that productivity was really increasing dramatically unfortunately temporarily but dramatically and that was holding down prices in addition to that and unfortunately that's not one of the things that is currently operative in addition to that there was a strong dollar the appreciation of the dollar was holding inflation down and oil prices also plummeted at that time and those things have been operative in the u.s. recently finally on top of that we pinpointed a decline in the pace of health health care cost increases this was a period in which there was a restructuring many people moving from fee-for-service to managed care type plans and at least for a period it held down the growth of health care costs significantly and we also concluded that that was so all of these were supply shocks but we concluded that that was important and I think I think in the present situation some of those things are present as well ok so you went back to academia then in 2004 was it that you became I did president in San Francisco fed yes what was it like being was this is one experience you've had you've had more experience in the Fed than almost anybody maybe maybe literally anybody except reps Greenspan I was never reserving president you had some time at that job what how's that like what is that like how's it different from being a governor so a variety of ways one way is that an important job of a reserve bank president is to collect information that can be helpful in in bearing on monetary policy and understanding what's happening in the economy so the Reserve banks are structured there are quasi public quasi private kind of entity they were chartered to serve a public purpose but structured like banking organizations with private sector boards of directors and those directors a president meets with regularly and important role that they have is to provide information on what they're seeing in the economy and more broadly Reserve Bank presidents are expected to interact with all significant groups in the areas that they serve both business leaders also members of community groups labor groups to try to understand what's happening in the economy so duta I suppose historical accident the twelve regions of the Federal Reserve the twelve districts aren't of equal size the San Francisco region I guess back in 1913 there wasn't all all that much out west but there got to be quite a bit and so my district represented twenty percent of the national economy and covered nine states and so you know I traveled all over our district meeting with people and trying to understand what was happening and to distill all that I heard into something that could be relevant input for monetary policy we also had a lot of operational responsibilities of course supervision is something that's important then you will receive the supervisory staff but we also had operational responsibilities for check and cash and other things and some of these things like check their businesses and under US law they have to when there's competition with the private sector they have to cover their costs when I got to the San Francisco fed check volumes were declining at an astonishingly rapid rate so it was clear that cheque was going to be a contracting business and you can imagine that with substantial fixed costs and hugely huge declines in cheque volumes covering cost was an extraordinarily difficult task and so for my first couple of years there I was involved in essentially having to shrink the operation my first week in the job I had to send out pink slips to employees in two of our branches who were involved in check that we were going to close and I'd really never been involved in that and had to go and talk to them and explain to them why it was that they were going to be losing their jobs and tried to help them adjust to what that was going to mean which was you know for me a very different kind of experience was no surprise to them they could see that every day the volume of work coming into their operation was was plummeting you know the Fed during that time during those years went from something like 50 to up-air brant you know places in which we processed check down to one so it was a substantial cut we also were very active in Community Development the Community Reinvestment Act is something that's designed to ensure that the banking banks serve the needs of their communities including low and moderate income areas and the Fed was active in doing research and providing a forum to figure out what would be helpful and I became quite involved in the community development work that we did big part of it is talking to your board and to community leaders into business leaders and trying to get intelligence for the monetary policy process yes trying to get that Intel you were pretty early in identifying problems and housing and banking I mean help tell us about how you how you saw those issues from very closely I was I was in San Francisco starting in 2004 and then came and joined you in Washington in 2010 so I was out in an area that was the center of these problems developing while that was happening and I have to say I saw a lot and I think I reported on a lot that was very worrisome from day one when I walked into the bank I met with our Banking Supervision folks and they told me how concerned they were about commercial real estate lending so we had booming housing markets we supervised many small community banks and their commercial real estate lending especially for land acquisition and development was growing at a very rapid pace their lending was growing more rapidly than their deposits they were beginning to rely heavily on broker deposits they had very high concentrations often in small lending in small geographic areas that were the center of you know what became the housing boom and bust and quite a few of them ended up failing later on my staff was very worried about that that focused me I had many directors and other business contacts who were involved in housing and of course in San Francisco you couldn't you can go to a cocktail party without people telling i popping tales about deals that had been struck on houses how much house prices and so i heard all of that and my contacts were quite concerned our supervisory folks that i met with were alerting me to underwriting practices that were of huge concern they were telling me about low-doc and know doc loans about the rising prevalence of ninja loans no income no jobs no asset type loans we supervise countrywide for a while and looked at their mortgage business which was growing enormous Lee I met pretty regularly with Angelo Mozilo and the San Francisco fed was quite concerned about what was going on we tried to insist on tighter risk controls and one day Angelo came up and we had our regular quarterly meeting and he said to me Janet I have to tell you it's been terrific to be supervised by you you guys are really on top of your game and we really appreciate all of the valuable advice that you've given us but you know we've we've realized that we don't actually need to be a bank holding company we we realized it would both be okay to be a thrift holding company and so we're changing our charter and and indeed they did so and decided it would be nice to be supervised by the office of Thrift Supervision that is no more so that kind of gave me a sense of what was what was what was happening beyond beyond housing which I was concerned about I have to say as we got closer to 2007 2005 and 6 I had directors who were simply telling me about broad-based financial access and the way one person put it was you know the banks and financial institutions are just absolutely throwing money at us never seen anything like it and you know for anything and one day I met with a member of my advisory council who was principal in a major private equity fund and he told me a story fit simply I found terrifying and I'll I'll tell you how it goes so he says you know there's a well-known company I won't mention the name of there are many big private equity companies that are competing to take this company private with look we've looked at this firm and my partner's and I just don't see any way in which we can possibly win this he said but the head of our firm really encouraged us to see if we could put together a bid said you know we sat down we looked at what on earth would it take in order to win a bid to take this company private he said we would have to get the most incredible financing terms from a bank not only with the rate have to be low but even if the economy stumbles we might be unable to make the interest payments on our loan and therefore we would have to have a deal by which if we couldn't make the interest payment on our alone we just be able to add that unpaid interest of the principal balance and automatically borrow to get through these hard times he said nope no banks gonna give us a deal like that well lo and behold the head of the firm said why don't you just try it so they went to a bank and the bank just fell all over itself and was delighted to agree to these terms and this type of arrangement became known as a pick toggle or payment and kind toggle you know this is just really broad-based financial access so you know I was quite concerned about it I think what I fail to appreciate was that if housing prices began to fall I just really did not understand what the how vulnerable the financial system and particularly the shadow banking system had leveraged it was how much maturity transformation there was how much of this risk that we thought was being dispersed through the economy was really remaining on the books of these institutions so I wrongly thought if housing prices fell a medium amount it would do damage to the economy and the outlook but it would not destroy the core of the financial system and I think that was a failure to appreciate the weaknesses and yet I think frankly the reason I think that your your forecasting rating is so good is that in eight when when oil prices had gone $250 at a number of your colleagues in their fluency were still worried about inflation you were already very much looking towards the real side and worried about the recession so you were extrapolating from housing through the financial system to the economy I mean what was your thinking at that well I think that you and I were probably looking at things very much alike I think by the summer of 2007 before we ever really encountered the problems with Lehman or Bear Stearns or any of that it was cash prices were already falling and I think it was becoming clear that credit was growing quite tight and while the unemployment rate was very low and we tightened monetary policy inflation had risen a little bit above 2% I thought downside risk to the economy and to the labor market were beginning to dominate the outlook and certainly by 2008 and after Lehman even though later on there was another surge in oil prices that took inflation up we had a real economic situation that was simply becoming so dire that some you know to my mind there was no that was the dominant matter of concern and that if unemployment rose to the levels it looked likely to rise and I think we're lucky it rose no higher than ten percent I think you know if you hadn't done all of the interventions that you supported god knows what would have happened to unemployment but I had no doubt that that was the primary what our primary focus had to be in that inflation surely would come down in that kind of context well after those interventions and trying to stabilize the financial system we didn't had to turn to monetary policy and with the zero lower bound being effective we did quantitative easing we did for guidance we did a variety of other new tools or at least new for the United States what what's your retrospective I mean there's been there was a conference on Friday where there was a paper which argued quantitative easing wasn't particularly effective and what's your thinking on the whole suite of tools at this point so I thought it was an all-hands-on-deck type of situation and we should do everything that we could plausibly think of to try to help and you know it's a time when I think 2009 and 10 when interest or term interest rates were effectively at zero long-term rates were still over 3% and it seemed clear to me and I think to you as well that there was plenty of scope to bring long term rates down so the two major obvious things that we did were communications to try to shape market thinking about what the likely path of short-term interest rates would be that would then have bearing on longer-term interest rates and asset purchases so I I think you know my read there are a lot of papers people will study it for a long time I know the paper that was presented at the u.s. monetary policy forum cast doubt on the effectiveness of asset purchases but I think my reading of the full you know if the literature on this I think the overwhelming set of studies to my mind documents that long-term purchases of large-scale asset purchases were effective in lowering the term premium in longer term rates and bringing it down exactly how much you know I'm not sure and it's hard to tell there's very limited evidence and of the event studies that people typically do they captures some of what happens but I think some of the what we did was anticipated maybe people didn't know the exact quantities that we would do were how long a program might last but it was expected that the Fed would do something more so I think it's event studies have problems in capturing what happened I think that the forward guidance that we gave was also quite effective in lowering expectations about the path of short-term interest rates many people I think including people in the FOMC when we lowered rates to zero but this would be a situation that would last for a short time not tariff year or tube not terribly long you know it was seven years that we held rates at zero and people didn't expect that and you know there's a big debate about can forward guidance be effective if it's so-called Delphic rather than Odysseus namely it's just conveying the committee's expectations as opposed to a specific commitment and a lot of the guidance we gave was Delphic but nevertheless I think it did influence market expectations that rates would stay low for long and the general policy of when you're against the zero bound holding rates at zero for a longer time than would otherwise be called for I think is a generally sound approach to power sitting people ask one more question and I just want to ask you we didn't get too far we're just getting into your chairmanship and I'm sure the questions will come up their bytes let me ask you one one thing just to finish as part of it sure which is tell us about your leadership style I mean how did you manage the committee how did you think about working with with up to 19 people around the fomc table well my style I think was very similar to yours which I would describe this collegial rather than dictatorial I wanted especially for policies like running down our balance sheet that's something that would take place over many years with changing representation voting on the committee I thought it's important to have a program that's understood by the public that will be get broad-based support when the voting members of the committee change there shouldn't be a change in this aspect of policy there were other things we did as well operational decisions about how to manage interest rates and the general notion that raising rates to a normal level the new normal lower than in the past but that we should do that gradually I wanted broad-based committee agreement and to try to generate that I let a lot of time for committee discussion many meetings we would try to develop how will we run down our balance sheet and initially initially at meetings we would have a lot of options on the table and there would be go arounds and people would express their views the options there were people who would favor options that didn't get a lot of support and they would tend to see that you know I loved option number 9 but I was pretty much alone in doing that and what I found was it was great over time people who favored options for which there wasn't a lot of support tended to shift their support to options where there was greater support and gradually we narrow things down to one and got complete agreement so I guess what I do is I often compared the job of managing the committee to the issue a designer would have to face who is trying to decide what's the right color to paint a room and you got 19 people around the table and you want to you could want to come up with a decision we can all live with on what color to paint the room we go around the table Ben what would you like you think baby blue is just absolutely ideal David what do you think chartreuse this is a lovely lovely color and we got a room like that and the question is are we ever going to converge and I would fill my job is to get everybody to see that off-white is not a bad not a bad alternative and as brilliant as your choice was maybe you can live with off-white and it's not so bad and we can converge on that and it's going to function just fine and maybe we can agree so I felt I was often trying to get the committee to coalesce and decide we'd come up with a good option that we could all agree on very good David thank you I'm David Westland director of the Hutchins Center thank you all for coming those online and also to Bernanke and Janet Yellen I want to also thank Glenn Hutchins for his generous support of our program here I want to ask one follow-up question then I'm going to take questions in the audience when you were arguing with Alan Greenspan about an inflation target part of the argument was some people thought if there was going to be a target it should be zero today there's some thinking of it maybe 2% made sense then but people worry that the unconventional policy tools that you talked about quantitative easing and forward guidance might not be sufficient the next time we get a recession and so there's a lot of talk about an alternative framework maybe a higher inflation target maybe something called price level targeting and stuff and now that what you say no longer matters to the markets I want to know what you really think about those alternatives first say there is there is a there is a problem and it's a problem that I think I didn't didn't recognize when we chose 2% as a target how serious it would be there had been only one country at that time Japan that hit the zero lower bound that seemed like a rare circumstance and since then many advanced countries have faced the zero lower bound and there's now growing agreement that somehow the new normal going forward in a world where productivity growth has been low perhaps we'll be lucky in a little rise but it has been low we have aging populations and the strong demand for safe assets it looks like interest rates long and short had generally been trending down among advanced countries even before the financial crisis and I think there is now reason to believe that the new normal for the US and many advanced economies will be a lower average level of short term rates the FOMC in their December projections projected the longer-run normal level of the funds rate at 2.75 which is just three quarters of a percent in real terms and if that's right and their estimates of the equilibrium real rate that are even lower than that zero bound episodes can be much more frequent and means that monetary policy at least short-term rates have much less scope to be used to stabilize the economy and I think the first thing is to recognize this really is a problem and it behooves policymakers and researchers more generally to think about are there changes we can make to the monetary policy framework that would be helpful in dealing with that so I mean the what I've said is chair is that the tools that we discussed that we used during the crisis for with guidance and asset purchases I think for this reason should stay part of the toolkit if you agree that they were effective even if we it's hard to quantify how effective we should keep those things in the arsenal and have them available to be used I'm not saying that that is a full solution and there can still be situations so what more could you do you said you could raise the inflation target and I suppose the type of reasoning that led us to 2% which was partly based on estimates of how often you'd hit the zero lower bound we probably would come out with a higher inflation target now if we were starting from scratch but moving to a higher inflation target is a tricky business and number one I'm not sure that Congress would regard it as consistent with their mandate of price stability I think the transition from a lower to a higher inflation target would be a difficult one and could succeed in an anchoring inflation expectations that I interpret is reasonably well anchored around 2% and I think that's been a tremendous advantage to monetary policy and there are some costs of having inflation running generally at that level so that to me is not it's certainly worth considering the costs and benefits but it's not a or yes we should have a higher target that takes you to other systems like nominal GDP targeting that has some interesting advantages or price level targeting and I think these things are worth considering I think Ben's suggestion for essentially making it clear that the Fed would resort to price level targeting in situations where the zero lower bound is binding that's a type of lower for longer approach that you would codify in advance of a zero lower bound episode or absolutely they have some attractive features I think they're worth studying debating because this is an important issue is there a silver bullet there it's something that just obviously is going to work and make a huge difference I will admit to a little bit of skepticism about that I think these systems would have to be very well understood by the public and I think explaining how any of these systems would work to the public is a difficult task what's the right time to phase it in if you were to try to phase in price level targeting at a time when you'd had a prolonged shortfall of inflation I think you would face the Japanese situation where if inflation has been four years below your target and now you say not you've not been able to use your tools to achieve the target and now you say you know what we want you to believe that we're going to run above the target for as long as it takes to eradicate the cumulative shortfall I'm not sure that that's an effective way that that will be credible policy some of these policies require a degree of commitment that's I think difficult to achieve given the governance arrangements that most central banks have it's not impossible for committees to make sort of long-term commitments with some credibility I would say our plan to shrink our balance sheet is a commitment that it got great support in the committee we think it is something that will hold though for many years but the governance Arrangements challenging so I think these things need to be studied I would be myself quite you know quite open to considering different approaches and I think it's a real problem you know finally let me just say I really think monetary policy should not be it's not a healthy situation for monetary policy to be the only game in town and I would like to see a situation in which fiscal policy was in a better position to make a contribution on the kinds of occasions and situations we're talking about and that's one reason that our current fiscal situation concerns me as much as it does thank you so I want to take two or three questions and give them a chance to answer and when there's a guy right here in the pink shirt I want you to tell us who you are and keep the questions short and remember the questions and in a question mark okay so my name is Steve popeck I'm with the Federal Deposit Insurance Corporation my question is not related to monetary policy it's about the research that the Fed has done in 2015-2016 there were a number of papers talking about the issue of replicability of replicability in our economic studies it's something that we've been dealing with as a professional group for a number of years now we've had some some conversations around the a EAS about the inability for economic studies to be replicated by other authors and so I wanted to know if you had any thoughts or suggestions either view for ways that we can move forward as a discipline on that okay thank you a woman in the front and the red cape Thank You Elle morgan stanley thank you for your service and thank you for progressing women in economics I hope that continues David stole my first question so I'll ask you my backup question which is productivity does appear to be rising the unemployment rate is low inflation looks like it's rising gradually toward the 2% goal do you still believe that that our star the real equilibrium rate of interest is about flat or do you see it rising now ok one more in the back rich can you stand up assume about replication thank you very much for doing this rich rich rich Miller with Bloomberg can't you you likened the period now a little bit to the late 1990s you said there were some similarities are there any lessons you draw from the way that period ended with a recession and a you know the popping of the tech Nasdaq bubble that could you know we could lessons we could draw for now thank you okay replicability our star and are we gonna relive the 90s you have to pick real quickly I'm now part of the American Economic Association leadership and I think replicability in other words what that means basically our economic studies can they be replicated by another scholar or that can the data and the programs be shown to be clean and that anybody anybody else could do the same study and get the same results or even do a related study and get you know related results so I think it's really important obviously and the American Economic Association is trying and Olivier Blanchard here is the president current president of the AEA we're working to greatly step up our game on that the journals are greatly increasing the requirements for demonstrating recommending providing the data providing the softs software the source code with with all accepted studies so I think there's a ways to go but this is something that has really become the center of attention at the AEA which has broad influence in the whole range of journals of course that the AAA manages thank you take one of the other ones okay the our our store is the possible the equilibrium real federal funds rate is rising so let me first say there is uncertainty about what our star is and I think I I and some of my colleagues and we're not alone you know many analysts have amassed a lot of data suggesting that there is a long-run trend toward lower real rates and I think that's been important in shaping the markets and our own understanding of what monetary policy should be but this is a matter that's uncertain and I think people don't always appreciate the uncertainty around that so I don't know that I know the answer on what the long-run our star is going to be and the estimates are quite uncertain you mentioned that productivity is picking up but it's still picking still at a very low level I mean estimates of the economy's long-run growth potential the FOMC lasts the median was 1.8 percent that assumed to pick up in productivity above the abysmal levels that it achieved previously so I can't say I'm really impressed with the pick up productivity is being something that would boost it but you know we do have things like fiscal policy are relevant to it you know a more expansionary fiscal policy policy if it's long-lasting has the potential of boosting our stars somewhat there were always questions about and initially I'd say my own thinking was that the reason our stars seemed to be so very low was partly because of headwinds from the financial crisis that I thought would dissipate over time I changed my view on that and became more convinced that it was productivity demographics and other things that were more secular and longer-lasting than we're driving it but it is conceivable that there could be some pick up and there was something to that earlier explanation but I don't really have a strong view on on this I I think this is a matter about which there there is there is uncertainty and we'll learn something over time so the other question was what lessons do we learn from the 90s which ended with a recession and a bursting tech stock bubble so I mean we certainly had a stock market bubble it burst and when it bursts that caused a recession it did not cause a financial crisis there were people who lost money there were you know there were macro consequences from it the economy recovered reasonably well from that recession it wasn't that deep you know it was an event that was had a sufficient macro consequent consequence that it caused a recession and at the moment I you know I think there's general agreement that asset prices are elevated that certainly was the conclusion and incorporated in the Fed's monetary policy report and you know an important question now is then would be if asset prices were to fall what would that mean about the economy and the financial system and I guess I would agree with the general conclusion that's incorporated in in the last week's monetary policy report which is that we have a much stronger financial system it's wittle' capitalized has a lot of liquidity has relatively little exposure to declining equity prices we've stressed tests we do regular stress testing and look for example in that stress test of what the consequence would be of sharp declines in commercial real estate prices and i think i Regeneron conclude that as is that report does that overall risk to financial stability are moderate not elevated at this point leverage is very much lower the financial system is stronger with some non-financial corporations we've seen a notable increase in leverage especially among a riskier corporations lower rated corporations but household debt has gone down relative to income since the crisis substantially so in that sense if there were to be an adjustment in asset prices I think this economy is better able to absorb it then it would where the financial system was sound take a few more questions but I want to give you the you if you have a question for Ben Bernanke you're allowed to ask it so just think about that for a minute it's a guy in the back there standing up and then and how when once you go over here to the guy and that gets the window hi my name is Dmitry Chairman Bernanke chairman Yellen thank you very much for this and for your service my question is for both of you during your time the economy became ever more global and other financial markets became more important around the world I'm just wondering what challenges and opportunities that presents in your roles and for me the central bank swaps that were implemented in 2008 were a great example of the cooperation that's possible so just anything along those lines thank you very much thank you over here yeah Tim weather had editor at the hill economics I wanted to ask about deficits and debt I'm sure you're both expressed concerns over outsized debt but I was wondering specifically what those concerns are and sort of how those will become realized and what the time frame for that would be 2 o'clock Friday afternoon and huh Antron phenomena working stress tree a lot of attention has been given when it comes to the relatively slow grover some people think slow growth of the economy to the supply side I wonder about the demand side and particularly whether the growing inequality it kind of puts a ceiling on the man's growth thank you you want to take the global question sure so yes the global financial system has become much more integrated it is very challenging for central banks because are first of all because our regulatory systems are national not not international there's a lot of coordination and cooperation and conversation but there's nothing that a US bank regulator can do directly to deal with a problem Bank in in in another country likewise the US has a special role because the dollar is so important in in financial transactions which you mentioned the swap agreements and during the crisis which some of the swap agreements are still in place they were ratified yet again in a January meeting that provides a way for the Fed to get dollars into the system where there's a shortage of dollars in different contexts via other central banks so it does make it and finally monitoring you know we have since the crisis we did a lot to get regular monitoring of financial stability risks throughout the system again much more difficult if some of the institutions some of the borrower's etc are outside of your borders so it is harder but the good news is that there's a lot of cooperation jana and i regularly met with our colleagues and basel switzerland with regulators and central bankers at the g20 other context there are they do sort of scenario planning where we talk about what would happen if if a major institution were to fail all of this some other problem were to emerge role playing kinds of exercises so there's a lot of effort to coordinate and indeed there's a lot of cooperation in general but certainly the mismatch between the global system and the national borders which are where the laws and the regulations are set does provide an ongoing challenge there in inequality and is it constraint on aggregate demand I'm not sure I would say it's a constraint on aggregate demand but I think it is an influence that such a large share of income gains have gone to high income consumers probably with lower marginal propensity to consume so I mean we have had very healthy in spite of that growth in consumer spending it is something that's been driving the economy this year and for several years so I'm not sure I see it as a constraint but it certainly is something that's a significant influence has been and probably will continue to be on consumer spending and either you want to give a quick answer to why should we worry about the debt and the federal deficit given that interest rates although they've risen remain relatively low ten-year at ten to nine and the rest of the world seems willing to lend us unbelievable about some money what does it do makes you think we should worry about the debt the deficit I would worry about the flexibility to fiscal flexibility so it's now with low interest rates despite the fact that debt GDP ratio is higher the share of our budget which is paid in current interest it's actually not unusually high but if interest rates rise or debt continues to grow relative to GDP which seems very likely on current scenarios the share of our government budget which is devoted to paying interest is going get higher and higher reducing the possibility for flexibility in a future recession or future war or to deal with long term trends like the ageing of the population so I'm not particularly alarmist about this I don't think we're looking to some kind of near-term crisis because of federal debt I just worry a bit about the medium term to long term loss of fiscal space fiscal flexibility which will come in handy when evitable e there will be some kind of challenge that that we want fiscal policy to respond to a couple more as a gentleman here and a woman over here DeLand can you stand up Kevin murine from sth macro for Janet just one day if you could touch again on the mystery of inflation low inflation there's an assumption out there that inflation is returning soon or even quickly but how certain can we be that our hope for wage increases or wage growth this year automatically translates into corporate pricing power okay thank you come on you helped tell us who you are I'm sorry Leon from CNBC Chairman Bernanke you helped pioneer more transparent communications chair Yellen you continue that commitment as well but when you look at the recent volatility in the marketplace do you guys question the progress or success you've made in communications are the markets still misinterpreting the Fed mark is still misinterpreting misinterpreting the Fed do you want to take the inflation question are we ever gonna get inflation so you know my view has been that the shortfall of inflation from 2% is something that's likely transitory with now with unemployment as low as it is and having fallen below most estimates of its longer-run natural rate with neither the dollar and nor oil prices holding inflation down the central the median of the SE p in december expected that in 2018 inflation would move up to 1/9 and reach 2 in 2019 so although we've had a shortfall and I think the most recent 12 month change in the core is still running at one-and-a-half percent I do believe that it's going to move up in the coming months as some onion outsized declines in inflation that occurred a year ago that were associated with plummeting mobile phone prices and some other idiosyncratic declines and prices that occurred a year ago as they drop out of the index I expect that this spring inflation will move up not to two but a little bit closer to two so I guess what I've said is that I see the standard framework that sees inflation as being largely determined by inflation expectations slack labor markets slack a variety of supply shocks as a reasonably sound framework for thinking about inflation and I don't think that it's exhibited massive failures in recent years so yes inflation has been now for many years below two percent such a framework would have attributed that to first a lot of slack in the labor market then that plus plummeting oil prices and an appreciation of the dollar so for many years low inflation has not been mysterious in terms of its causes 2017 the model saw no reason for inflation to be as low as it was so that was a negative error term in 2016 exactly the opposite was true inflation hit two percent the model didn't expect it to be at 2% of course there are errors I'm not saying that we have a perfect understanding of inflation there are a whole variety of shocks that cause actual inflation in any year to depart from the predictions of the model but it's not as though the errors have all been one-sided in a way that would you to say this model just isn't working we really need to rethink it so my scenario book well having a very open mind and knowing that perhaps this framework needs to be amended in some critical way my baseline assumption is that the shocks that held down inflation last year are likely to prove transitory and I would see inflation is moving up I guess I interpret I you should never make too much of any month or two of data on either prices or wages but I see incoming data is not inconsistent with inflation moving in line with the committee's assessment that it's going to go back up to 2% wages I think don't have you know wages to my mind if you look broadly at most wage series help them gradually edging up their rates of increase and the relationship between wages and prices is not tight and as the recent volatility in the market have anything to do with the degree of transparency from the Fed I think that was a longe question is that right and is there anything that we are we should we welcome or fear this recent volatility so recent volatility is nothing exceptional on a historical basis as the veterans here are quite aware the purpose of fed communication is not to eliminate or suppress volatility the purpose is to eliminate unnecessary misunderstandings unnecessary communications problems that lead to extra volatility more than otherwise would be would be coming from the fundamental economy so I think you know I think that communication has come a very long way it's only been the quarter century since the Fed even began issuing a statement after its meetings and now we have far more information provided about the outlook for the economy about even what the Fed thinks or the FOMC members think are going to be the path of interest rates so it's been it's but obviously the you know it's a work in progress I would compare Janice handling of the balance sheet with my the balance sheet as an example of how technological progress exists even in central banking so I think there's still a lot to be learned there but I do feel that transparency communication I've been very positive and it's continuing to improve and I would just note you know we all we're meeting this afternoon center this morning because chairman Powell's inaugural testimony this morning and he emphasized very strongly his commitment to expanding transparency and explaining what the Fed does which i think is good not only from a policy point of view in a markets point of view but also good from a democratic accountability point of view I wanna ask you one question before we have to close a mother for short answers here so the economy's in good shape GDP is growing not as fast as we'd like the unemployment rate it's at 17-year low inflation is gradually moving up to target if you're right what is it that we should worry about most that might bring an end to this remarkable expansion I think they're they're you know I would call them broadly speaking international political or geopolitical risks in terms of the international geopolitical situation concerns about trade concerns about International Cooperation and the like I think you know the economy itself did you say is is growing in a pretty healthy way but I don't know if markets are fully incorporating the risks that might exist you know in the global system so I would certainly agree that those are significant risks that could cause a future downturn I guess as chair Powell mentioned this morning in this testimony what the Fed needs to do at this point is guard against a risk of overheating while recognizing that inflation continues to run below 2% we have an economy that's operating below estimates of its normal longer run unemployment rate job growth has been running at about a hundred and seventy-five thousand a month you know it's important to stay on a path where the economy doesn't overheat to the point that the Fed is forced into rapid increase in interest rates that could cause a recession and I don't expect that to happen there's no reason why it should happen but it is important to guard against overheating of the economy thank you Janet Yellen and Ben Bernanke thank you all for coming [Applause]

Channel: Brookings Institution

Views: 34,317

Rating: 4.4621029 out of 5

Keywords: Brookings Institution, Glenn Hutchins, Ben S. Bernanke, Janet L. Yellen, Federal Reserve, interest rates, inflation, unemployment, job growth, US monetary policy, US economy, 2008 Financial Crisis

Id: BXqkC5-prV8

Length: 84min 38sec (5078 seconds)

Published: Wed Feb 28 2018

Reddit Comments

[u/[deleted]]

‘Duet’ was in the title yet neither at any point began to sing. 0/10 my day is ruined.