Federal Reserve Chair Powell discusses key issues in monetary policy and the economy — 5/19/23

foreign foreign all right I guess we can get started thank you all for being here of course it is a true honor today to have chair J Powell and former chair and Nobel Laureate Ben Bernanke with us today thank you very much for being here I've very much been looking forward to this conversation I'm sure our audience has too so let's just get to it um this conference uh as everyone knows is dedicated to the memory of Tomas laubach and earlier this morning we heard some personal Reflections on working with Thomas from secretary Janet Yellen also former chair of the fed and from President John Williams and both of you worked closely with Tomas as well so I'd like to give you both an opportunity to share your own thoughts about Thomas's contributions as an economist as a central Banker as a colleague then maybe we can start with you sure and it's great to be here I was Thomas's thesis advisor and he worked with me on a book on inflation targeting when he was still a graduate student and that was a long time ago and he was not yet in his exalted position at the FED when I was doing Jay's job so I don't have any short little anecdotes to give but I do want to say that I think there are sort of two kinds of accomplishments a person can have they can have curriculum vitae accomplishments and they can have what I call eulogy accomplishments curriculum vitae accomplishments are things like published papers and promotions and awards and recognition eulogy accomplishments are the things your family remembers you know your your kindness your your support helping other people and so on Thomas was one of the people who few people who uh scored high on on both dimensions um on on the CV side uh you know beginning with his work with with me he had a tremendous input into the federal reserve's framework uh working on inflation targeting working on the more recent fed framework uh he did work I'm sure John Williams talked about his work with Tomas on the on the on the natural rate he worked on the effects of deficits on interest rates again another contribution so a person who made a lot of intellectual contributions at important points but as a person he was just a very warm kind friendly helpful person and he was just a joy to work with and uh you know I'm glad to be here to you know say to say this about him thank you Jay thank you Trevor um so first of all let me say this this conference is a very fitting tribute to Tomas and I'm really delighted and honored to be part of it and let me add my thanks to those of us who made all this happen here today so I I first met Tomas when I joined the board as a governor in May 2012 almost exactly 11 years ago and in preparing to join the board and then in the early years at the board I I was very focused on developing you know a deeper background in macroeconomics and monetary policy many people here at the board supported me in that process too many to name here but I will say Tomas really stood out and it was during the process of reading you know the literature And discussing it that I really started to get to know him he had this great ability to communicate complicated ideas he obviously loved talking about economics and he his great enthusiasm and willingness to engage with me a you know a new governor was immediately evident he was very gracious to me and we had a lot of informant informative discussion so rather than being his teacher I was really his student in those early years as you know by the time as you noted by the time I became chair in 2018 Tomas was the head of the division of monetary Affairs and in that role he was a trusted advisor to me and to the fomc his leadership ship was particularly important as the fomc conducted our first ever public monetary policy review he played a major role in organizing that identifying key topics and organizing the staff all through the Federal Reserve System he also played an absolutely essential role during the critical period of the pandemic at the very beginning when we were marshaling our forces and our tools to stabilize the financial system and protect the economy from even more dire consequences and through it all he he did come through as not just for his dedication his great intellect and his his Mastery of monetary economics but also just for his kindness as a human being and just as in being a terrific great colleague and a great person thank you I think there's a lot of agreement for the sentiments that both of you have expressed appreciate that um before we get to some questions on some current issues I did want to ask you both about any formative experiences that you may have had that have shaped your views particularly about your thinking about monetary policy Paul volcker in his oral history interview tells the story of his mother who was adamant that he received the same dollar value monthly allowance when he was in college that his older sisters did 10 years prior and of course he was not too happy about that because inflation in the interim would obviously eroded the real purchasing power of that allowance so as The Story Goes that was the beginning of his personal commitment to price stability so Jay do you have any such uh stories to tell maybe maybe not quite that on point but um so I graduated from college in 1975 during what we now call the great inflation and at same same College year as Ben and I started working as a lawyer in the financial sector in the late 1970s I recall from that time a growing sense that high inflation was essentially a permanent part of the landscape just something that we all had to accept and deal with and that the cost of getting rid of it were too high so you just were getting used to it of course ultimately the FED did step up and restore price stability and uh one lesson from that era is that price stability is really the foundation of a strong economy and that the economy doesn't work for anyone without price stability another is that high inflation is it is when we have high inflation it is the responsibility and the obligation of the central bank to restore and sustain price stability so today while inflation isn't as high as it was when I was in college it's nonetheless far above our two percent objective and many people are currently experiencing High inflation for the first time in their lives it's not a headline to say that they really don't like it you know so we are um very aware that high inflation uh imposes significant hardship as it uh as it reduces purchasing power especially for those who are at the margins of the economy and uh living paycheck to pack to paycheck and need to pay use all of their incoming income to pay for food housing and transportation and other uh other Essentials and that's why the committee is so strongly committed to returning to our two percent goal we think that failure to get inflation down would would not only prolong the pain but also increase ultimately the social costs of getting back to price stability causing even greater harm to families and businesses and we aim to avoid that by remaining steadfast in pursuit of our goals thank you thank you well I had mentors uh Dale Jorgensen at Harvard and Stanley Fisher at nit in particular but I'm going to tell you about something that happened to me when I was six years old I used to visit my grandparents in Charlotte North Carolina during the summer and I would sit on the front porch of their house and listen to my grandmother tell stories about her life and she told about how she raised her family in Connecticut in the 1930s during the Great Depression and it was a town that was specializing in shoe manufacturer and during the Depression a lot of the factories were shut down and she told me that uh you know it was a very hard time a lot of the kids went to school and tattered shoes or maybe no shoes at all and I said Grandma why would they do that and she said well because their fathers lost their jobs why did they lose their jobs because the shoe factory shut down now I was only six years old but I could see the problem with that argument I said well why didn't they just open the shoe factories and make shoes for the children and she said it doesn't doesn't work that way but I think it really was a puzzle to me that you had the same productive capacity in 1933 that you had in 1928 and in 1928 people were dancing to Charleston in 1933 they were in bread lines and that really impressed on me you know that that economics can make really big difference in people's lives and monetary policy is like that I mean it's as Jay of course and all of you well know that the decisions made in this building have a very Broad and real effect on people's lives and uh for that reason besides it's intellectual Fascination it's it's worth studying and understanding thank you I know that's certainly a key motivation for many people in this room to be working so hard um okay let's now turn to some uh topics of more current interest and I'd like to start with the Nexus between the financial system and the macro economy both of you during your 10 years as chair have faced very significant historic Financial crises Ben obviously you confronted the global financial crisis and Jay the global Pandemic those episodes were clearly acute very Vivid examples of the connections between the macro economy and the financial system as well as I think a good illustration of the role of central banks in such episodes but Ben your research importantly and the research that you have inspired has really demonstrated that understanding the connections between the financial sector credit markets and Banks and the real economy is critical for even understanding traditional the Cycles so with that as background we have just experienced a period of stress in certain parts of the banking system here in the United States so I want to get your take on those developments how you think they they match up compared to some previous episodes and what they might mean for the economy well in some Dimension the recent crisis has followed is the standard sequence I don't know anything about Silicon Valley Bank other than what I read in the paper so please don't misinterpret this but it was a classic situation where they had assets that were subject to risk in particular as interest rates Rose the value of their long-term assets fell and their Capital fell they had hoped to hedge that by their deposit franchise where as interest rates Rose and interest rates move more slowly on deposits that would partially compensate but they were dealing with customers who were very media social media Savvy and that didn't really work so after the decline in capital you had the second stage which is runs people taking out their money um which ultimately LED uh to the collapse of the bank despite I may add the good efforts of the fed and the FDIC to provide liquidity and provide support for depositors the third stage of the banking crisis is Contagion and people looked at other Banks and said oh they look sort of vaguely like Silicon Valley Bank got the same number of letters in their name and all kinds of things like that and and that caused for caused people to begin to remove you know deposits uh elsewhere and and finally the the reason this is important is that It ultimately affects credit conditions and the Federal Reserve is of course looking at the effects of of Bank problems and and other Financial issues on the extension of credit and therefore on on on on the real economy um so you know in that respect I think it's uh very similar to other crises I think it's different from the global financial crisis in many ways including its scale and scope of course but I would mention a couple of things a couple of important differences one is that the impaired asset in this case was U.S treasuries uh which are very different Assets in kind from subprime mortgages in that U.S treasuries can always be valued accurately and so there's not the uncertainty that was associated with uh subprime mortgages and secondly as the economy declines if it does decline uh U.S treasury has actually become more valuable rather than less valuable and so there's this kind of a counter-cyclical effect so that's that's one very important difference I think and then the other uh worth mentioning and but very important is that relative to say that GFC or the Great Depression overall borrowers are in much better shape you know than they were in these previous episodes and that makes a big difference both in terms of the stability of the banks and also in terms of the impact on consumer spending and the economy in general well I guess a major reason that situation didn't get worse and I think the contagion was very much contained were the forceful actions Jay that that you and the Federal Reserve took through through the use of your liquidity tools including the creation of the bank term funding program um however in deploying these liquidity tools that is common you know against this backdrop where the preeminent monetary policy concern is high inflation and that's of course a little different from some of the earlier episodes and has raised uh renewed discussions about the so-called separation principle right and so I wanted to ask you how you think about the use of financial stability tools and liquidity tools as opposed to more traditional monetary policy tools and how they fit together it's an interesting question but I want to start by saying though that the overall the banks and the banking system are strong and resilient and well positioned to deal with the challenges they may face now or in the future so as you pointed out we do have separate tools monetary policy to achieve our macroeconomic objectives liquidity supervisory and Regulatory tools to address Financial stability issues but I see an important distinction between separation this is the separation principle separation and Independence our tools can have separate objectives but their effects are often not entirely independent so the tools are complementary almost all of the time because financial and macroeconomic stability are so deeply intertwined in fact our consensus statement notes that sustainably achieving maximum employment and price stability depends on a stable Financial system so because they're so intertwined to me there's not likely to be an absolute and complete separation of the tools nor is that possible or desirable and I think as Ben's research research and the global financial crisis demonstrated Financial stability affects macroeconomic stability and vice versa we saw that clearly at the outset of the pandemic as a result the tools that we use to address concerns in either Arena can and will affect both especially during extreme circumstances that said yes the tools are separate they have individual purposes and most of the time each can be used for its intended purpose without comprising compromising the other for example as you pointed out when banking stresses emerged in early March we used our liquidity tools discount window and the bank term funding program to make liquidity available to banks that might need it and that liquidity supported the stability of the financial system without restricting the use of our monetary policy tools to promote price stability while the financial stability tools help to calm conditions in the banking sector developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth hiring and inflation so as a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals of course the extent of that is highly uncertain so thank you and of course that I think the effectiveness of those tools is reflected in in the fact that the fomc um has actually raised interest rates twice since the emergence of the banking strains uh of course and that the purpose of that is to uh confront the inflation issue which brings us to our next topic which is in fact inflation um you know in the pandemic in the aftermath we've had many renewed discussions of the important and classic textbook distinction between Supply shocks and demand shocks and in particular the particular challenges that Supply shock can present to to a central bank um and that's also raised a lot of questions in in Academia and in policy circles as to whether or not the inflation process post-pandemic is going to look quite different than prior um Jay maybe we can start with you a number of folks have uh argued that we are entering a new period where Supply shocks will be more frequent we'd love to hear your views on your whether you think that's a possibility and what that might mean for central banks so it's it's a great question and it's one I think we'll be dealing with for for quite a long time and I'd say it's certainly possible that we'll see continued Supply shocks I also think it's just very hard to forecast that with any confidence as Yogi Berra is thought to have said Ben you're the baseball expert you can you can confirm or deny this but it is difficult to make predictions especially about the future um so I think that the best we can do at this stage is probably to just identify the factors that we think can lead to further uh negative Supply shocks I will say that though that's positive Supply shocks related to globalization largely probably contributed significantly to the period of low inflation that either ended or was interrupted by the onset of the pandemic and I'm thinking there of the vast increase in global labor Supply the development of efficient Global Supply chains you know facilitated by technological advances and things like that and I would say those positive Supply shocks do not seem likely to be repeated at the same time the drivers the current inflationary surge certainly included a sequence of large negative Supply shocks to the global supply chain for goods which also experienced a large and persistent shift in demand from services to good to goods and also the supply of workers on top of that Russia's war against Ukraine brought shot further shocks to Global Supply chains particularly supplies of energy non-emergy Commodities so we can't know how persistent those shocks will be or whether further negative Supply shocks will come along will the globe will globalization be partially or or fully halted or reversed will it resume again as the pandemic mercifully recedes into memory we can't really know that now um but for policy makers the bottom line is that central banks will continue to be responsible for providing providing price stability and that will require us to navigate navigate whatever additional Supply shocks do occur so as Tomas and Ben and their co-authors wrote in the inflation targeting book what a central bank can do is control inflation and that is true over time even in the presence of Supply shocks should they come Ben would love to hear your reviews on this so unusual events which disrupt normal economic functioning often are followed by inflation examples are World War One World War II the Korean War and now the pandemic and the pandemic just makes it harder for policy makers to understand what's happening and to react appropriately and in particular the pandemic scrambled the labor market made it harder to judge the state of the labor market it the opening led to a very extended rise in commodity prices which was difficult to deal with we had supply chain issues which was a pretty much a new thing which was also a contributor to inflation so there are many features of the pandemic that made this an unusual episode and a difficult episode to address that being said I think that and I've done some research on this this was Olivia Blanchard that we're presenting next week the the basic mechanisms I think are still the same if you but you have a bunch of bad shocks that's going to give you a problem but the underlying mechanisms of Supply shocks and tight labor markets and so on are really the same so I think you know I don't think it's been a major change in the underlying process that generates inflation only a series of shocks related to the pandemic that gave us this uh this episode going forward I agree with Jay that we we can't predict um you know what new shocks will come we've got new technologies out there that might you know make big changes in our economy we've got uh you know Green investment things like that that might affect the price and availability of fossil fuels and so there are many many things that we can't can't predict but I I think that broadly speaking that uh the inflation process has not changed and it's one aspect of that which is very good news is that the federal reserve's credibility has helped keep inflation expectations particularly longer term inflation expectations reasonably well anchored which is always sort of the first step in getting control of inflation you mentioned the role of the labor market tightness in the inflation process um I think it's quite striking that prior right on the eve of the pandemic the unemployment rate was around three and a half percent you know five decade low yet at the same time inflation was kind of struggling to get up to two percent on a sustained basis here we are in 2023 the unemployment rate is roughly at the same level as it was prior to the pandemic but of course inflation is far above uh two percent um so in that context should we be thinking about the relationship between slack in the labor market and inflation differently do we not have the right measures of slack is it the problems with understanding what the natural rate of unemployment is or is that really or slack really not the key to understanding inflation in the first place okay you want to take that one first as I was talking about before I think that the pandemic to some extent scrambled the usual signals from the labor market and the Federal Reserve over time has begun to put more weight on things like the vacancy to unemployment ratio which seems to give a better signal in a period of change when the labor market matching processes is in change then the unemployment rate so there has been scrambling of those signals that being said it's a simply not true that you know even in people who understood since the 70s that there's not a simple inverse relationship between inflation and unemployment in particular what can break that relationship is Supply shocks and so during the 70s we didn't particularly have tight labor markets most of the time we had high inflation a because we had oil price shocks which the FED did not respond to adequately be because inflation expectations were not well anchored and there was a strong tendency for uh price increases to feed into wage increases to feed into price increases so because of the presence of Supply shocks and inflation expectations Dynamics there's no reason why you know low unemployment and high inflation can't coexist but the remedies might be you know depending on the situation might be somewhat different Jay how are you thinking about that so I'm very much in agreement with that you know it's certainly true that we had both before and after the pandemic inflation very sorry unemployment very low close to three and a half percent but that we only had high inflation after the pandemic does that mean that our understanding of the relationship between slack and inflation is badly wrong or that it has changed fundamentally after the pandemic and my answer would be tentatively no to both of those questions I think what what really is different this time was the series of unexpected and persistent Supply shocks that featured in the inflation process I don't think labor market slack was a particularly important feature of uh inflation when it first spiked in Spring of 2021 by contrast I do think that labor market slack is likely to be an increasingly important factor in inflation going forward in particular inflation in non-housing Services is showing signs of real persistent in this highly diverse sector labor costs are a high proportion of total costs and and that sector happens to account for more than half of of of the core pce index but all of this the point is all of this can be explained I think using our standard framework for understanding labor markets like you could say it this way that the natural rate of employment probably Rose sharply as the pandemic severely disrupted the labor market and the implication of that would be that an unemployment rate of say four percent uh indicated a much tighter labor market in 2021 than it did in 2018. um and as Ben mentioned of course after the pandemic we began looking at much more closely at alternative measures particularly vacancies but also quits which have been signaling even greater tightness than the unemployment rate alone might have been might have thought to him to signal I mean to to put some numbers on it um we at the end of 2018 and the end of 2021 we had four percent roughly unemployment in both cases in 2018 the vacancies to unemployment ratio was one to one essentially in 2021 it was two to one and that was a much better indicator obviously at that time of the simple stand-alone unemployment rate although as I mentioned you could also think of it as the the natural rate being highly elevated the other thing is you know the it may also be the case that the Phillips curve has steepened meaning that inflation has returned at least for now to being more responsive to changes in the labor market in labor market select but you know the Phillips curve was once thought to be fairly steep after flattening relationships in the economy like the Phillips curve evolve over time so I would not characterize that as a problem for our understanding of inflation very good thank you maybe we can pivot here to the topic of Central Bank Communications it's widely understood now that the better the public understands the conduct of monetary policy the more effective it will be but fostering that type of understanding really requires a lot of communications and of course that can be hard both of you have been powerful advocates for advancing monetary policy Communications both with an eye toward making policy more effective but also for the purposes of promoting transparency and accountability Ben you've obviously played a critical role here advancing the fomc's communications including the introduction of press conferences after flmc meetings the introduction of the summary of economic projections so what changes over this period since the communication say Revolution began would you highlight as being some of the most effective most important and where does some remaining challenges exist well let me talk about communication because I think you need to understand that it serves multiple purposes I mean one of its purposes the narrow purpose is to try to align Market expectations with the fed's own thinking um I think that goes back to Alan Greenspan and go back to 1994 the first fomc statement I mean since then uh you know the FED has tried at least to give some indication of what's thinking and what it sees as the risks to the economy but beyond that you mentioned transparency and accountability this is a powerful institution it's very important that it be accountable to the Congress and to the public and best way to do that is explain what we think what we're doing you know and how and how we're going to go about that there's other reasons for uh communication one I would talk about is feedback we're having a conference Here If the Fed puts out the issues that it's concerned about um economists will write articles or or tweets and respond to that or in the case of the FED listens program maybe it would be more ordinary people who are explaining you know how monetary policy affects them uh one final thing I would mention is uh is diversity of views because the FED has a consensus culture and there are very few dissents normally uh the outside perception is the Fed is the subject to group think which of course is possible but with people talking about you know their own views and explaining why they you know why they see the economy as as they do it does I think at least to some extent show that there is a range of opinion on the on the committee uh in terms of of uh tools I I guess I do feel proud about the press conferences which I introduced four times a year after the um summary of economic rejections in which chair Powell has taken to an art form and the uh I think also you know just the uh the inflation Target the uh the the forecasts that we release and there's a cultural change which some people don't like but I think I know net is is good which is it used to be if you look back at speeches in the Greenspan era the president of the Federal Reserve Bank of Minneapolis you know would talk about you know harvests or something wouldn't talk very much about the global or national economy now you have a lot of people talking about you know the different aspects of the federal reserve's views and uh again that contributes uh to both uh Market transparency and also to accountability to the local constituency into The National constituency Jay you of course have continued to push forward on the communications and transparency fronts welcome your thoughts you know I think the broader setting is that um transparencies especially important today polling data show that many important public and private institutions globally have struggled to retain The public's trust and support in recent years now we're an institution that serves a critical public Mission but to to be here and work here is to know that the particulars of what we do and how we do it are not generally top of mind for for most people um and on top of that we have a critical and a rare Grant of Independence and all of that to me means that we have a special obligation to explain ourselves clearly what we do why we do it to provide transparency to the public and their elected representatives in Congress so that we can earn and deserve their trust and support and that's that's a critical task if we are going to sustain our Democratic legitimacy through this this uh interesting period my colleagues and I really take that as a primary and affirmative proactive obligation and not something we see as a burden or a sector second order importance so in that Spirit to your point we have followed the example of chairman Greenspan beginning in 1994 with the first post meeting statement through Ben's you know Innovations and Janet as well and looking to Foster greater transparency and accountability and a couple of examples we now do a press conference after every meeting not just every other one we have greatly expanded our Congressional Outreach to be certain that we hear directly from lawmakers on an ongoing basis so that they and also so that they have the information that they need to conduct appropriate oversight as I mentioned in in 2019 and 20 we conducted a public review of our monetary policy framework seeking input from a broad range of people and groups all around the country we've also significantly expanded transparency Beyond monetary policy for example we now publish semi-annual Financial stability and supervision and regulation reports of course there are always uh communication challenges especially I find about communicating the uncertainty that attends our assessments of economic conditions and the Outlook and a good example of this is despite our persistent efforts to explain otherwise the policy policy paths from the SCP seem regularly to be taken as a firm plan or a committee decision rather than what they are which is a compilation of individual participants best assessments on a particular day of appropriate policy under the assumption that conditions evolve in line with their base Baseline forecasts so that's just the challenge that we we constantly face in the context of great uncertainty despite that I would say though that the that the summary of economic projections has actually been very useful during this tightening cycle as markets have looked ahead and priced in future rate hikes you know long before they're actually implemented your last Point really brings up the idea of communications as being an effective policy tool and I guess the key element of that is the use of forward guidance Jay in one school of thought forward guidance is a tool that is should really only be deployed when interest rates are at the effect of lower bound and so you can no longer provide accommodation by lowering rates further and so you do so through communicating about the policy path in the future but another school of thought forward guidance should be just a regular part of communicating with the public to convey the committee's policy intentions even far away from the effective lower bound where do you come out in that debate well I think I do think it depends on circumstances I I do think that forward guidance can be useful when policy makers have a materially different or clearer view of the likely path of policy than does the interested public I would agree that the effective lower bound when we need to provide more stimulus by indicating an intent to keep policy accommodative longer than the look expects there's there's a use case there I I also would say though that communication comes with a cost of misrepresent misinterpretation and it also May limit flexibility so I think we should use forward guidance sparingly when the course of policy is either reasonably well understood or on the contrary is so dependent on uncertain future developments that little really can be said constructively about the future and a good example of that was the March 2020 FMC meeting the pandemic shutdowns were just beginning the level of certainty was almost unimaginable and we'd chose not to issue an SCP at that point really our view was that releasing a forecast at that time might have been more of an obstacle to clear communication than a help in contrast as I mentioned a minute ago Ford guidance has really been a useful and effective tool during the current tightening cycle as Financial conditions have tightened well in advance of actual rate increases you know the two-year Titan between the September 21 meeting and the and liftoff in March of 20 it tightened by 200 basis points before we ever actually lifted rates and that's significantly because of our communication so in the current context until recently it's been relatively clear that further policy firming would be warranted and our forward guidance has said so has said so now however we've come a long way in policy tightening and The Stance of policy is restrictive and we Face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses so today our guidance is limiting limited to identifying the factors we'll be monitoring as we assess the extent to which additional policy firming may be appropriate to return inflation at two percent over time as I noted at the last press conference that assessment will be an ongoing one as we move ahead meeting by meeting having come this far we can afford to look at the data and the evolving Outlook and make careful assessments thank you Jay you mentioned the guidance can be useful at times when the public may expect a very different policy path than policy makers how do you think about those sorts of situations you're right so recently it has sometimes been the case that markets appear to be pricing in a different rate path than the committee expects will be appropriate but I would say that that disconnect does not seem to reflect a misunderstanding of our reaction function or a lack of belief that we'll do what's necessary to bring inflation down rather it appears to reflect simply a different forecast one in which inflation comes down much more quickly than the committee committee participants think is most likely perhaps due to a significant downturn I would say also so far the data can have continued to support the committee's view that bring inflation down will take some time moreover something we we often don't remember to think about is that market prices always reflect both expectations and compensation for risk and what Martis what Market participants say in surveys of their expectations is actually closer to the views in the sep than what is reflected in market pricing so ultimately my colleagues and I have our forecasts and Market participants have theirs our role is not to advocate for our forecast what we can do is be clear about our expectations for growth unemployment and inflation and the likely implications for for policy as well we want the public to understand how policy would react if the path of the economy were to differ materially from our expectations and of course we do lay out our individual forecasts quarterly then what would your takeaways be for the past couple of decades use of forward guidance as a policy tool well Charlie Evans the co-authors have made it useful distinction between what they call ludician and delphic forward guidance so Disney and forward guidance is a commitment forward guidance which is rarely used but some typically at the lower bound where the Central Bank promises to do something it's credibility on the line that it will follow a certain path going forward and that's a way of getting more stimulus and I think again that goes back again to Alan Greenspan I think to to indicate that a certain path was very likely and that actually helps achieve the objective stealthic forward guidance is basically just a forecast here's what we think tomorrow we might think something different but we're just trying to as part of our transparency we're just trying to give you a sense of where the economy is going and how we think policy will will react now as Jay points out there there are some problems in practice one is people don't understand the difference all the time between a commitment and a forecast that's something that Jay has emphasized and I think should be emphasized another is people underestimate the amount of uncertainty involved which is enormous so I I don't think you can do without some form of forward guidance because the idea of transparency says here's what we see uh and here's how why we're thinking and so the idea that there's no guidance at all most of the time I mean I I take March 2020 as a counter example but most of the time you do want to give at least a sense of where you think uh the economy accordingly policy are heading I think uh just if I might editorize one more minute the I think one of the issues is that the fomc is so large and geographically dispersed that it's been difficult to come up with a collective committee forecast we tried to do that when I was chair uh the Dot Plot is a compromise which is not ideal uh other central banks do other things sometimes they have Collective committee forecasts that are voted on or they use Market rates or they publish the staff forecasts some of the different ways to go about this but again I think that forward guidance is both an instrumental tool but again letting people know sort of how the Central Bank sees the evolving situation even if there's lots of uncertainty which you can say uh normally is is part of transparency so you highlighted uncertainty as being a key factor in in dealing with some of these issues obviously uncertainty is a pervasive feature of monetary policy making um and often invokes uh you know the so-called risk management approach to making monetary policy um maybe we start Jay with you on this topic the fmc's raised the federal funds rate by five percentage points in a little more than a year that's a very rapid Pace by historical standards as we all know how do you view those actions in the context of the uncertainties that you and the committee faced about the economic Outlook and how did risk management considerations factor into your decisions so I'll start by remembering that Alan Greenspan famously said that pervasive uncertainty was the defining characteristic of the policy landscape it's worth remembering that he made that comment during what we now think of as the great moderation so that statement has never been more apt than it is today if you look back the pandemic the global shutdown the historically forceful response and the reopening all of that had no modern precedence so it has been a time of historically elevated uncertainty and of unexpected outcomes no Advance economy had ever faced a shutdown in a reopening and now all of them would face it at the same time so no matter what happened the outcome was going to be unprecedented so this level of uncertainty poses pose real challenges for policy and policy Communications on the one hand we wanted to be we had to be nimble to be able to respond to the evolving situation on the other hand we wanted to be as clear as possible about about what we were doing the lest we add to uncertainty so I would say policy certainly has been Nimble um consistent with what without our expectations the data did actually show declining inflation through September of 2021 but then turned decisively against that expectations thereafter and we in response we accelerated our policy firming ultimately as you noted raising rates by 500 basis points in just over a year over this period we communicated that the object was to reach a stance of policy that is sufficiently restrictive to return inflation to two percent over time but we also communicated that the level of rates that would ultimately be required was highly uncertain now until very recently it's been clear that further policy firming would be required as policy has become more restricted the risks of doing too much versus doing too little are becoming more balanced and our policy has adjusted to reflect that fact so we haven't made any decisions about the extent to which additional policy forming will be appropriate but given How Far We've Come As I noted we can afford to look at the data and the evolving Outlook and make careful assessments then when you became a policy maker you were well versed in sort of the academic literature yeah I moved from that side to this side how does it work uncertainty when your academic is trying to decide whether your error term is gaussian or not um in uh in in actual policy making you don't even know what the current quarter GDP is because it's going to get revised you know several times down the road I remember uh when I was sitting uh on the just as a member of the board and and Greenspan was in in the chair and uh we had responded to some inflation data and a little bit later it turned out that that inflation change had been revised away and I asked the chair do you think we can revise our interest rate policy um it is very difficult I mean this got to laugh with that but uh you know just trying to make policy it involves not just uncertainty about you know the data about the model about all the things that can happen about the social and economic and political environment um so it's very difficult and unfortunately or fortunately the given that monetary policy works with a lag given that there are risks on both sides of the of the modal forecast there's not much choice but just to accept that uncertainty and try and you know do the best you can being ready to adjust as new information arrives very good thank you we are getting close to the end of our allotted time maybe we could wrap up with just a question looking ahead um Jamie we can start with you what do you what would you point to with some of the key issues that will be most relevant to the research Community as well as to the policy making community so I guess I guess I would start with the labor market and you know what we talked about earlier of um vacancies in particular and the beverage curve and and the whole discussion over over whether the extraordinarily high level of surplus demand in the labor market can be lessened through the vacancies Channel without a significant increase in uh in unemployment that would be more akin to what has happened in all prior Cycles or most prior Cycles so that's that's going to be a question that we will resolve empirically but I think we're learning new things about the workings of the labor market at least in this one situation I think on on monetary policy it's going to be interesting to look back and try to understand how inflation spread from what was very uh at the beginning very focused on the good sector due to the rotation of demand from services to goods and and the tremendous amount of support that that Goods purchases got from fiscal and monetary stimulus how did it spread then through really into the service sector where where it now significantly resides I think we're seeing much progress on on goods and we are we have progress in the in the pipeline on Housing Services but where we see persistent inflation is now in the service sector so what is the mechanism by which that happens and what are the implications Ben you have the last word well I think one of the things that I would urge researchers to look at is the relationship between monetary policy and financial stability very very difficult relationship um if you read the papers you see that everybody has a very strong opinion about this subject but they don't necessarily correlate as Mark Twain once said the things you don't know can hurt you as much as the things that you know for sure but ain't so um so uh you know I think that we really do not understand to the extent that we need to uh the relationship between different aspects of monetary policy risk-taking balance sheet Behavior Etc and it's just something a lot of good work being done don't get me wrong but uh I think we need to understand much better uh you know what the you know what the channels are and to quantify the relationships so that we can think about what extent we need to take that into account in modern policy very good well let me thank both of you tremendously for sharing your perspectives with us today it's been a highlight of our conference honoring Thomas lobach and so thank you very much foreign [Music] that wraps up the morning portion of our conference we're now going to take a lunch break and we will resume our program here at 1pm thanks everyone hey Johnny did what happened to work

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Id: 7OwauW8dA3w

Length: 51min 5sec (3065 seconds)

Published: Fri May 19 2023