Monetary policy responses to the post-pandemic inflation: What happened and lessons learned

two 3 4 5 6 7 8 9 10 11 12 13 14 15 16 good morning my name is Marcus Nolan I am the Executive Vice President director of studies at the Peterson Institute The Institute is delighted to again be partnering with C on significant research on a crucial policy issue we are grateful to Christen Forbes anhel ubid and Bill English for bringing together a wonderful group of speakers today and even more so for their great Collective effort uh of the scholar practitioners in the volume that they have produced these papers will be available for free download on both the institute's website pi.com and the CPR website I will now introduce anhel ubid who will in turn introduce the other distinguished participants anhel is a managing director and head of economic research for Global fixed income and macro at Citadel LLC after starting his career at the IMF onel has worked for almost two decades in the financial services industry first at tutor Investment corporation later at the de Shaw Group and Goldman Sachs most importantly for our morning he has been deeply involved in global economic policy debates most prominently as a senior fellow at the Peterson Institute for international economics from 2009 to 2016 his book The Paradox of risk was published in 2017 as director of studies I read it cover to cover twice and with that yes I learned that onel is smarter than I am and he's obviously spent a lot more time thinking about risk um and with that I will turn it over to anel to introduce all the other distinguished speakers thank you um good morning and uh it's a real pleasure to be here it feels a little bit like uh being back home uh at the Peterson Institute and like uh Mark was saying is a little bit like U like closing a chapter uh from uh when I when I presented my book here with uh recommendations for Central Bank how to get out of the law inflation environment to now um presenting this book this is uh as you know is a volume that has been jointly edited uh with Bill English from jail University and Christine Forbes from MIT what I'm going to do here is uh present our summary chapter uh to basically uh set the stage for the conversation that will come later in uh two panels uh the first one will be chaired by Christine Forbes and uh the second one by uh Bill English they will do the respective introductions uh in turn so let me just um set the stage here uh we did the the first volume A couple of years ago summarizing the monetary policy response es of central banks during the covid era and we thought that that was it you know it was a very successful response and we wanted to celebrate and document what central banks had done then it turned out that uh part of what happened after that was that inflation short price to the upside and central banks had to also react in in new and uh in some sense uh innovative ways to it and uh as the uh the slid say hopefully this is the end of the process so we had the shock that came from from the covid uh pandemic and then we had the reaction on inflation and the reactions by Central Bank so what I'm going to do now is walk you a little bit through what happened and what happened really was that this was a big Global surprise and both words are important it was Global and it was a surprise and in two steps so what that chart shows is the different evolution of the world economic Outlook projections starting from January 2021 which is uh the light uh solid blue line then the April 21 which is the dotted uh red line and then subsequent iterations of the whe of forecast all the way to October 2022 on the left you have advanced economies on the right you have Emerging Markets if you didn't know anything about what happened what you can see there is that both charts so similar shapes so it was common to emerging markets and advanced economies and there were two stages of the surprise right the first uh the first WIS in early 2021 show inflation in advanced economies going all the way to 2% over the next couple of years then there is the first initial surprise where inflation goes up and then it comes down and then there is the second surprise where inflation goes up a lot and then there is the hope that it comes down now why did this happen well obviously we all know this but I think it's important to remember there was a massive large Global Supply shock you all remember it was impossible to find a bike at the bike store it was very difficult to find computers it was very difficult to find a lot of goods so you see on the chart on the right the index of supply chain pressures that the Federal Reserve Bank of New York computes and you can see the scale of the shock that's measuring the standard deviations now if you look at the chart on the left that shows World um the world CPI uh calculated from the wi database uh the red line is the median and the uh shaded area is the inter quartile uh range and what is interesting is that there are two moments in the last three decades where inflation goes up and they coincide with Supply chains disruptions you can see the spike in 2008 which sort of coincides with the Wiggles in the chart on the right and then the spike in 2021 which also coincides with the Wiggles over there which is another way of saying over the last three or four decades Whenever there were demand shocks infl was stable Whenever there were Supply shocks inflation got out of the range and I think that's an important lesson that we are learning now the second thing that happened which is the second shock is that there was a very big a new which is also important energy shock and I'm going to explain why I say new on the left you have the evolution of commodity price inflation since the 70s from the database at the World Bank and you can can see there that there have been spikes over the last 40 50 years the last one was large and Broad all the all the lines basically are moving together in the spike in 2021 22 what made this instance difference is what you see on the chart on the right what you have there is the blue line is the evolution of the WTI uh price the oil price in the United States the orange line is the evolution of natural gas prices in Europe and what I want to see is not really the number is the order of magnitude right that's an index that is 100 in 2007 right and what you can see is that there is a big difference with respect to the past there was also an increase in oil prices if you remember in 2008 9 10 but it doesn't register as very different with respect to gas prices why is this relevant because gas prices affect electricity prices and electricity prices go straight into core inflation and this is the main difference between what happened this time with what happened in previous times now this is the result right it was a global shock to both headline and core prices now why do we say it was Global so here is one calculation that we did in our chapter we compute the percent of the variance of 12- month inflation that is explained by the first principal component now what is a principal component mean it means the amount of variation that is common now you can see the light blue lines is the period preo the dark blue lines is the period postco on the left is for all the countries in the middle for advanced economies on the right for emerging markets the one message I want you to take from this the blue line is almost double the of the light blue line which means the common component of the evolution of both headline and core double now it could be a common shock or it could be a lot of ideosyncratic shocks happening at the same time we favor the uh interpretation that it was a common shock now this was also Amplified by exchange rates and this is an interesting uh situation that also relates to the current situation today if you look on the chart on the on the left that's the evolution of the real effective exchange rate in the United States and that's the one chart that you need to focus on what happened was a very rapid appreciation of the dollar basically going from like 97 to around 115 say a 20% appreciation of the dollar in a couple of years that matters for the United States but that also means a 20% depreciation of the currencies on the other side of the dollar Index and that generat created more inflationary pressures and if you want more difficulties for the central bank that had to manage monetary policy on the other side of that now it was Global but uh as we have learned uh you know all families are unhappy but they unhappy in different ways and this chart uh shows that so what we try to show here is the difference in the evolution of inflation across countries by showing the peak inflation rate both core and headline across the sample of countries that we have analyzed and you can see that uh while Sweden uh had a peak C inflation around 2% and a peak headline inflation a little bit below 4% a country like Chile had a peak of core inflation at 10 and headline at 12 or the Euro area that had had inflation picking at around 10% so despite the fact that this was a global shock the country experiences were different a lot of it has to do with ideos syncrasy of each country I'll give you another data point right the Euro zone is a collection of countries sharing the same monetary policy the peak of inflation in France was 6% the peck of inflation in the baltics was at or above 20% the difference could be the structure of the electricity market for example and how those prices were regulated or not and how they affected uh the inflation indices so different central banks had to deal with this situation also uh in their ideosyncratic way now the composition of uh inflation also vary this comes from the chapter that Olivia lanchar and Bank wrote and I'm not going to stop in it because Olivia is going to explain this later I just want you to see the color palette of the four charts is different and that's the only thing that matters the composition of the shock is different across the different countries now of course it was a global shock of course it was a global monetary policy response but the response was also a little bit different across countries so how do we see that what you have in this chart is the inflation rate at each country at the time of the first interest rate increase so the horizontal axis gives you the country but also the time in according to the year so the first country to raise race was Turkey in 2020 a few of them in 2021 and the rest in 20122 but it also shows what the inflation rate was at the time when they started increasing rates so you can see that Brazil started increasing rates with core inflation around 2 and a half% and headline inflation around five whereas the FED started raising rates with core inflation around six and headline closer to eight there was a a difference in strategies right that it's explained and I invite you to read all the chapters of the book if you want to know why this was so different now the summary of what they did is in uh is in this slide right there were three stages of tightening and I want to say at the outset we believe the discussion about transitor and permanent is the wrong discussion and I'll explain why right what was the first thing that central banks did remember when this shock happened rates were at the effective lower bound basically Everywhere by definition right the worry at the time was this inflation or even deflation so the first thing that central banks did was O we need to raise rates very quickly towards a level that is a little bit restrictive that doesn't mean they were necessarily behind the curve it meant they had to do a lot of work right especially in an environment with it's possible possible that that star the neutral interest rate might have increased and they only realized that along the way then after achieving that they decided to fine-tune The Stance of monetary policy to a sufficiently restrictive level whatever sufficient means it's in the eye of the beholder but that's the decision that they made now there was a debate about you know what has been described in a speech by hu from the bank of England whether you want to follow the Table Mountain strategy or the matter horn strategy right Table Mountain being you raise rates to a level that is sufficiently restrictive and hold the matter horn is your race rates all the way up even if it's going to create damage to the economy and then they will come down as quickly as they went up most central banks decided to follow the Table Mountain strategy and then comes the third step which may be where we are now that is you hold it at that level until you have enough confidence that inflation will return to Target and then you can decide whether to adjust your stance of monetary policy downwards or not and the question really is for all these central banks do you need a weaker labor market to be confident or not and that also changes across central banks and again I invite you to read the chapters for that so where central banks the only game in time down no and this is important this chart comes from the chapter by P Olia kinas and his coauthors from the IMF where they show that fiscal policy did help there was a bit of lack in the help but it did help the chart on the left shows you the evolution of headline inflation in the Euro area so it's a simulation of what inflation in the Euro area was which is the blue line and what would have been without the measures that fiscal policy adopted to contain the increase in electricity prices as you can see the profile of the Blue Line seems to be a little bit better than the profile of the red line however remember the electricity shock was also short leaves so what they do on the right is to show an alternative scenario where Energy prices would have stayed high for a much longer period of time and if that had been the case then the message changes a little bit and the profile of the blue line which is in this case the dotted blue line is a little bit worse than the profile of the dotted red line so yes fiscal policy helped but we were also lucky now the next question that we ask is obviously where Central Bank late in raising rates you all remember the debates in 2021 about what are they waiting to raise rates right so one way to answer this question is to say well you know monetary policy is not just the policy rate it's whatever the markets do with the expectations and the pricing of interest rates and so one way to think about this is to look at this chart where we show in the case of the F the federal funds Target rate is the blue line but the two-year treasury yield is the red line as you can see it took for the FED until early 22 to start raising rates the market was already tighten in The Stance of monetary policy 6 months before that the same chart can be drawn for every single Central Bank in the book so at the end of the day where they late depends how you define late but from the point of view of affecting The Stance of monetary policy I don't think the answer is yes now the proof it's in the pudding right so if you look at the evolution of inflation it does not look like for now which is the keyword they were late in tightening monetary policy what you have in this chart is um the projections for CPI inflation for advanced economies and Emerging Markets based on the wio database up to October 23 we haven't updated this with the wi that was uh issued this week but in all of those cases what you see is a return to the Target or around the Target by the end of 25 so the Martian coming to the planet Earth and looking at this chart would say yeah there was a shock there but they managed to handle it sort of properly right in terms of returning inflation to Target now was there a cost on this did inflation expectations dislodge during the process well uh if you look uh if you look at the chapter by by Roberto Perle and his co-authors it looks like they didn't that much what you see in this chart is the uh Market implied expected inflation uh on the 5e rate uh 5 year forward and as you can see it went up but it only went up to the levels that prevailed during the 2000s so a question you need to answer is were the levels in the 2000 about right where to high where too low this is my personal view I'm not involving here uh bill or Christine I think this is a very good example of opportunistic reflation expectations were too low we had a shock expectations had reanchored up to the right level of course you can say well I didn't really like the scary process but uh this is a little bit what happened now has there been any cost the answer is so far no there has been very little damage to labor market markets uh what we try to show in this chart is the evolution of unemployment rates from pre-pandemic levels to again is the October whe and you can see that most of those lines slope downwards so the unemployment rate in most of these countries is lower today after the sharp increase in interest rates than it was in 2019 and in the cases where is sloping upwards it's basically at similar levels or at levels that are compatible with full employment so this is the you know this is one reason to give a a good grade to central banks that they have been managed uh they have been able to manage this process with very little damage and what is really surprising and if you go back to the discussions in 2021 is how well behaved real wages have been if you remember the conversations we had having at the beginning of 2021 was this is going to be a wage price spiral textbook case 1970s as St and the reality is that not if you look at the chart on the right and this is from the chapter that CLA lombardelli and her team at the oecd did the red bars is the evolution of real wages the average uh the comparison with the pre-o period And as you can see most of them are are below the zero line so there has been negative growth in real wages of course there has been growth in nominal wages but the reality is that real wages haven't really responded much of course you could say well they will and there is the catching up effect that uh is probably happening and it's going to continue to happen but I don't know if any of you discussing this two years ago would have bet that the red bars would be in the negative territory rather than in the positive territory of course then one can say all this is very good but listen racing Race by 500 basis points is going to break something could have we avoided this so this comes from the chapter by clao boreo where obviously shows that there have been macro Financial risks that things have broken along the way of course we know that there was the svb episode where where the issues in the UK uh with the spiking interest rates and others uh these are projections made by claudo and his team at the bis the de service ratio which is the panel in the middle is going to go up because the cost of Deb is higher his projections for real house prices are negative so there is a challenge there and there will always remain the question of could have this been done differently but we are where we are so what are the lessons that we have learned we have seven lessons the first one forecasting inflation is difficult yes though but we want to say it because it's very important when demand and Supply are moving it is very difficult to forecast inflation for those of you who are following the US discussion you probably know that the reason the latest CPI number surpriced to the upside was due to the cost of auto insurance which has to do with increase in the cost of used cars two years ago which had to do with the supply disruptions I'm giving you an example a real life example of how difficult it is to forecast inflation where everything is moving and not just the output Gap so this is something we need to be humble we need to think about how to forecast inflation but especially how to talk about the inflation forast when so many things are moving second lesson don't look through Supply sh again forget about the transitory of permanent is the wrong discussion is set policy at the right level right it always has to be that but we were a little bit lazy right early in 2021 saying this is a supply shock don't do anything about it well no if policy is not at the right time you have to react to it third lesson interest rates are the tool to tighten policy central banks have told us that right they have put quantitative tightening in the background passive manner fully uh predictable and they are modulating The Stance of policy with interest rates it seems that uh it's not the same thing to do QE that to do qt or to say differently QT is not the negative of QE it's a different process fourth lesson you do use forward guidance but be smart about the design and the use of forward guidance explain what it means the case of the RBA is an interesting example right as uh is discussed in the chapter they use jilk of control they use very strict uh or very very hard if you want forward guidance it should have been well explained that the success of policy meant essentially riging on some of the forward guidance because at some point you need uh to start moving rates so this needs to be explained fifth Point Embrace fiscal policy I know this is uh you know an ERC for Central Bankers but uh you are not alone and you are not alone if you don't want to be alone so there is nothing wrong in cooperating if that's the war or at least debating with the the rest of Economic Policy how to best handle uh the inflationary shocks sixth Point Beware of the difference between the interest rate and the growth rate and what that might do to political pressures right be mindful that uh in this environment the room for policy mistakes is much less and how you need to tune your communication and then seventh which I think is quite interesting plan for financial stability if you want to be able to manage price stability for example having a standing facilities that manage liquidity strength when the SBB situation came it was good that there were liquidity facilities already in place or that there were liquidity facilities that could easily be taken off the shelf modified a little bit and applied so think about how you can increase your insurance against Financial instability so you can be better at managing the price stability challenge final points and in part this comes from the chapter by by Charlie Evans what have we learn for the future in terms of do we need to change anything our monetary policy Frameworks robust to a higher RAR the last time central banks did the review of their framework the worry was RAR is going to be very low do we need to change anything if RAR turns out to be higher do we need to change anything on the flexible average inflation targeting framework or on the inflation objective some people could argue that this is a perfect opportunity of do opportunistic reflation and set the new new inflation objective at 2 and a half or 3% is that right or is it wrong and then the final point should the last mile be symmetric in the following sense a lot of central Bankers are now warning the last mile down could be very tough so we have to be persistent in our tightest stance of monetary policy my reaction to that is well that might be the case but we know that the last mile up during the decade before Co was quite tough so be mindful of that don't be confident that you can just let inflation go down to 175 or one and a half thinking you are going to be able to raise it back up because we sort of failed to do that for 10 years pre so yes keep that in mind and with that I will end and uh in the interest of time I think we should move to the first panel thank you [Applause] I guess wait one minute I think according to their instructions I'll do a quick introduction don't worry stay stay close Okay welcome everyone for our first panel today we have a series of Firsts we have a representative of the group of countries that was the first to identify the risk to inflation and raise interest rates then we have a representative of a group of advanced economies which is also among the first to identify the risks raise interest rates and the first country to reduce its balance sheet and then we have an author of the first comprehensive cross-country analysis of the drivers of inflation now if you couldn't guess who I was referring to is each of those firsts let me provide a little bit more detail our first speaker will be Jonathan Heath who is currently the Deputy Governor at the bank of Mexico before that he hit a career in acad IA and in the banking sector uh Governor Deputy Governor Heath will discuss how Mexico was at the Leading Edge of identifying the risk to inflation and raising interest rates Mexico along with Brazil and Chile were well ahead of most other countries in raising interest rates um almost an entire year before the FED in raising interest rates and the strategy seems to have been successful uh now Brazil Mexico and Chile have started to lower interest rates they have not h inflation as sticky as in some of the other advanced economies so they followed the the fifo strategy first in first out and we will hear more about that today uh our second speaker will be Dave Ramden from the bank of England he's currently the Deputy Governor of markets and banking before that he served as chief chief Economist at the UK treasury uh the UK was one of the earlier of the advanced economies to raise interest rates just edged out by Norway and New Zealand but still well well ahead of many of the neighbors but where I believe the UK truly stood out was its willingness to combine tightening monetary policy um by not just raising interest rates but also by shrinking its balance sheet um one meeting after its first interest rate hike the bank of England started to shrink its balance sheet started QT um and this was although now QT has sort of shrunk into the background is not discussed nearly as often this was a big move at the time we didn't know what the effects are the bank of England stuck with QT despite some turmoil in the guilt markets around the ldi crisis and it is one of only three central banks around the world that is actively selling bonds to shrink its balance sheet not just allowing passive unwinding um I believe uh Deputy Governor Ramson though will not focus on that today hopefully we can get to in the QA Q&A he will instead focus on uh the mech England's current stance for monetary policy and then last but certainly not least we have Professor Olivier Blanchard uh Olivier Blanchard is currently at the Peterson Institute he was previously the chief economist at the IMF but where he is probably best known for many of us in this room or at least for myself is his many years as a professor in the economics department at MIT uh Olivier will present joint work with Ben banki and a team of authors around the world where they have modeled the drivers of inflation in the post-pandemic inflation so well he will put the experience of our first two panelists in a broader cross-country context and this modeling framework is just the best of Olivier of what we all go to love in his classroom it it shows his ability to take a whole set of complex models complex explanations and boil it down to the core the fundamental principles and come up with some tangible understandable and insightful results so with that no further Ado could our uh actually I think we will have our panelists speak one at a time at the podium and then um jump up and we will all take some Q&A at the end so Deputy Governor Heath the floor is yours sorry uh uh good afternoon to everybody uh or good morning still uh thank you for the invitation the opportunity to uh talk about uh Mexican uh the Mexican experience um first said I think that uh definitely the way we uh viewed this inflation episode from the very beginning it was Global uh the pandemic was Global and the response was happened basically in every single country uh uh across the world and uh I remember at the very beginning somebody saying well yes in in the case of Mexico this was imported inflation but I don't see it as important Ed inflation uh it's Global inflation with Mexico being part of the global of the global process of the global Community Mexico is an extremely open uh country um we export More than 70% of all Latin American exports comes from Mexico we export more than all other Latin American countries combined um and so we have a very very important um uh place in this uh um global environment we uh saw inflation started to increase uh dramatically in the first months of 2021 our inflation ended 2020 pretty much at our um at our Target of 3% if I remember right it was like 3.1 and then by March April inflation had doubled it was already at 6% so I mean the the response was uh let's start raising interest rates and let's start you know let's start reacting because uh we hadn't seen inflation at 6% for for for quite a long time and it was definitely something that we we had to respond and I remember discussing many and many times why the US still is in that discussion of whether this is a temporary phenomenon or what and they're just not doing anything and they're just watching inflation go up go up go up um so we started nine months before the us we had increased um um our rate by remember 200 225 250 basis points before the the the US started to react and we always see our U monetary um posture in two in two uh time two dimensions in in in uh relative terms and in absolute terms for us the relative term is very important because of the relationship and the intertwining that the Mexican economy has with the US which is the interest rate differential between uh both monetary policy rates um that it had increased from 375 or 350 basis points all the way up to 600 basis point difference which was a very large um in uh Gap or increase and then the US started to increase at that point we considered that a 600 uh basis point differential was more than enough it was it was adequate we wanted to keep it there however our absolute posture our real exante rate or or just taking the nominal policy rate uh was still very very low in fact it was just barely entering into what we considered to be the neutral um Zone in terms of uh a neutral neutral posture so basically what we did in that next phase was just piggyback on the on the on the Federal Reserve so that our interest rate differential would remain the same and and just make sure that our uh our nominal rate uh would go up to where we where we wanted it to be we reached um 11.25 uh in March of last year and then that's when we decided that that's adequate enough that's the terminal rate uh and what we wanted to do was to keep our Rio Lake Sante rate somewhere in the neighborhood of 7 to 75 at the very beginning it was below that but let it increase passively as as 12 month expectations kind of edge down and try and keep it in that range for as long as possible one thing I think that was very very important for us is to understand and to realize that monetary policy Effectiveness in Mexico is much less than in many other countries obviously compared to developed countries but even to our peers to which they were always comparing us to everybody mentioned that Mexico along with maybe I think Chile at one point maybe one other country uh had had uh increased the rate more than anybody else and that we remain very very high much higher than almost all other countries but nobody mentions the actual reason why Financial Deen in Mexico is lower and because you we have a much lower Financial deepening we also have a much lower credit penetration and this is compared to our peers Chile uh Brazil uh Peru Colombia so that means that we have have to have a a a higher re rate for longer compared to our peers and that's why we've remained in in in the in in the range that we have right now between 775 uh for a while what what what what is next what what are we looking at um we did decrease our rate in in our last decision by 25 basis points but we don't really consider that to be the beginning of a of a downward cycle we don't see it as the beginning of a normalis ation process our inflation right now came down from 87 at its peak to 4.4 in our latest reading however uh it had reached the low of 42 in October so in the last five months we really haven't seen uh much more progress in terms of headline inflation core inflation had been coming down but now it's kind of getting to a point where it seems to be very sticky and pretty much in line with I'd say most other countries what we're looking at is Services inflation uh remaining very persistent and not really wanting to go down our services uh component of inflation has remained above five now for about two years and what we're looking at is basically kind of a resetting of relative prices at the beginning Goods inflation was much higher and services lagged behind and now that Goods inflation has been on on a very steady downward Trend Services is just kind of staying there and kind of setting um making relative prices kind of go back somewhere in the neighborhood of where they were before this means that we don't expect um uh Services inflation to come down uh to start uh showing a downward Trend in the very near future like let's say in the next couple of months but we do think by the by the middle of the year maybe we should start seeing this downward Trend and then once we do see that as a definite downward Trend in the service inflation then I think we'll be ready to start a more consistent uh downward cycle this cut that we announced in our last decision we've seen it much more kind of in line as a as a kind of a fine-tuning approach where we want to keep the real xant rate between 7 and 75 and it was edging up and it was just about to go through the upper threshold and go above 7.5 so we don't want it toh keep on increasing at at that pace when inflation definitely has shown some progress but we definitely don't want to start a real true down uh downward cycle yet because we still are not satisfied with the results and we still have a lot of risks the balance of risks for inflation is definitely still biased on the upside by quite a bit we still have a very tight labor market we've had a minimum wage that has increased about 135% accumulated over the last maybe four or five years this just this year it increased 20% um we still have a lot of pressures to deal with we have a fiscal policy which is completely going against us uh the government announced the highest fiscal deficit for 2024 that we've had over the last 30 years more than double the average of the last 15 years so obviously we're trying to step on the brakes but the government is stepping on the accelerator and that is definitely not helping us at all to achieve our results so I think that we are going to definitely uh remain on hold in the May meeting with with without doubt regardless of what the US fed does and then from June um going forward we're definitely going to be much more data dependent and it's going to depend more than anything else on whether we meet our projected path for inflation which we view as our intermediate targets which means that we want inflation to be at 3.5 by the end of this year if it is at 3.5 by the end of the year we will definitely see some Cuts in the second half of the year however if inflation remains a above four don't expect us to be um very happy about uh announcing any more Cuts thank you uh very [Applause] much good morning everyone and thank you very much indeed to The peton Institute for the invitation to participate in today's event focusing on the CPR volume which anhel did such a great job of uh introducing in line with the title of this panel I want to provide an update on my assessment of the evidence on what has caused the UK's inflation and this evidence covers the key indicators of inflation in particular persistence as well as Associated analysis and what this implies uh for the extent to which the risks from persistance are receding now throughout much of 2023 I was worried that the UK was an outlier among advanced economies in terms of inflation performance and the degree of persistence but over the last few months I become more confident in the evidence that risk to persistence in domestic inflation pressures are receding help by improved inflation Dynamics and I think that leaves the UK looking less of an outlier and more of a Bard in terms of recent inflation performance and one that is now catching up quickly now let me use my time to set out why I've come to that view all my comparison slides are with the US and Euro area in part to keep the presentation manageable I'll have to run through them pretty quickly in the time available but the slides and a fuller version of my remarks are now up on the bank's website so chart one here shows how you came inflation has evolved relative to the US and Euro area since the beginning of 2022 and as the CPR study documents well all three experienced the first round effects of the global shocks associated with the covid pandemic and Russia's invasion of Ukraine to varying degrees which primarily impacted on Goods energy and food prices and the FED ECB and Bank along with most other central banks tightened policy to head off the risk that second round effects in domestically generated inflation took hold in the context of tight labor markets the three central banks made historically large and Rapid increases in policy rates in successive increments of 50 basis points and more through much of 2022 and indeed into 2023 in the case of the bank and ECB for the UK the risks from above Target inflation becoming entrenched were considered sufficiently significant that having reduced the POC the pace of policy rate increases to 25 basis points last March and may the MPC stepped up the pace again with a 50 basis point hike last June the mpc's assessment of the risks emphasiz three key indicators of persistence labor market tightness private sector wages and services inflation and Trends in these indicators have also played an important part in the NPC's decision to hold bank rate 5 and a qu% since last August alongside Communications which have stressed the need for monetary policy to remain restrictive for an extended period of time in order to slow the economy and bring inflation sustainably back to the 2% Target The Table Mountain approach UK sorry us and Euro area inflation fell sharply through 20123 driven primarily by Falling Energy prices where their contribution to inflation turning negative in the spring and summer of last year respectively as chart three illustrates and the unwinding of firstr effects is also increasingly evident in the easing in core goods and food price inflation which are directly and indirectly impacted by Energy prices by last September headline inflation had fallen sharply to 3.4% in the US 4.3% in the Euro area but only 6.7% in the UK Le the UK clearly standing out the UK's Divergence at that point was broad-based but also in part reflected the timing of UK energy interventions relative to those across Europe second round effects are most evident is Services inflation which is relatively labor intensive direct labor costs are responsible for around a half of services costs in the UK and more domestically orientated in the UK Services inflation was 6.9% as recently as last SE September contributing to around a half of total CPI inflation at that time now based on its assessment of a range of evidence including the three key indicators of persistence the MPC judged that second round effects in domestic prices and wages were expected to take longer to unwind than they did to emerge in other words they were likely to be asymmetrical furthermore the risk to inflation both from persistence and from Energy prices following the emerging conflict in the lease were judged to be skewed to the upside in the November 2023 NPR for forecast shown in the table modal and mean CPI inflation did not return to the 2% Target until around the start of 2026 in the more recent February 2024 NPR in view of the of the improving Trends in the key persistance indicators and in headline inflation the NPC forecaster on the central case CPI would fall to 3.6% in 24 q1 and to 2% in 2024 Q2 the latest release published this Wednesday showed CPI inflation fell to 3.5% in q1 and 3.2% in March and given what we already know about domestic energy price setting in April we can be increasingly confident that inflation will fall close to the 2% Target in April now the upcoming coming NPC round will be an opportunity to revisit all of our forecast judgments when think about current UK inflation Dynamics and the interaction between first and second round effects I found it useful to distinguish four steps in the inflation inflation expectations wages wages Nexus and I'm going to run through them quickly Step One is characterized by the feed through of dissipating external inflationary pressures on Headline inflation as chart for show and chart 4 is just the UK bit of the chart of of the previous chart three this shows first round effects from external inflationary pressures primarily stemming from Energy prices were particularly prominent in driving the increase in UK energy food and core Goods prices in step two of the Nexus shown in chart five here Falls in headline inflation have lowered inflation expectations as headline inflation has fallen back materially since November 202 23 household and business medium-term measures of inflation expectations have come back in line with shortterm with historical averages Market measures of medium-term inflation expectations continue to remain more ele elevated though off their peaks but more recently I've started to focus more on shortterm expectations given the closer correspondence to headline inflation and importantly there significance in our understanding of wage Dynamics in the bank's most recent inflation attitude survey and that's shown in the turquoise line here year ahead expectations for inflation fell to 3% their lowest level for over two years in step three the easing in inflation expectations is a key driver in weakening pay growth annual private sector regular pay growth has fallen from just over 8% in 2023 Q3 to 6% in February 24 now drawing firm conclusions on the evidence from the labor market is hindered in the UK by the issues with the official lfs data on labor market quantities and separately also by the volatility and the official average we weekly earning Series so the NPC and other forecasters had to put more Reliance on a wider range of Labor Market evidence and alternative models of pay growth not withstanding these uncertainties and against the backdrop of a technical recession in GDP in the second half of 2023 the UK labor market has clearly continued to loosen this is Apparent from a range of indicators including official data and surveys and it's clearly evident in the decline in the vacancies to unemployment ratio the mpc's preferred measure of Labor Market tightness chart 8 illustrates that from early in 2023 earnings Rose by significantly more than could be explained by our three main models shown by the S here in response the MPC made a judgment to building more persistent in the wage forecast a judgment that got progressively larger peaking the November 2023 MPR projections in terms of short-term Trends our indicator based models of pay growth suggests that underlying regular pay growth has already slowed to around 5% from a peak of around 8% the mpc's forecast for annual earnings growth is expected to fall further from its current level of 6% as headline inflation and inflation expectations continue to fall against the backdrop of still weak activity and ongoing loosening in the labor market now in step four of the Nexus weaker pay growth has started to feed into weaker Services inflation which further broadens out the dis inflationary process this chart shows successive short-term forecasts for CPI inflation these are really built bottom up from the co components relatively mechanically now and the forecast from last November had Services inflation staying around 7% until the end of 2023 a similar path as in August then projected to fall to 6.4% by March 2024 in the latest data services inflation uh and you can see that again in the turquoise line continued to fall in March to 6% slightly above the short-term forecast underpinning the February NPR forecast now chart 10 provides a decomposition of one measure of underlying Services inflation that the MPC looks like it suggests that the fall from the peak last summer reflected moderating pay growth but also weaker producer prices for services the short-term projections are consistent with the February NPR and illustrate that large base effects from last year will drop out in 2024 Q2 the rationale for focusing on an assessment of Services inflation as an indication of persistence has been that Services prices more more reflected domestic inflationary pressures in large part from the labor market and that these pressures are inherently more slow moving or sticky particularly when labor markets are tied a recent bis paper supports similar line of argument based on cross-country comparisons but there's also analytical evidence that Services inflation has been determined to a greater extent by the energy prices shock for example by estimating effect using the most recent data and exploiting the cross-country differences in Energy prices my former MPC College Ana finds Energy prices to be more important in driving Services now this does not mean that the mpc's assessment that service inflation reflects stronger and more persistent domestic inflationary pressures doesn't apply as chart 11 here shows UK is still clearly an outlier When comparing 12- month Services inflation rate with the equivalent rates in the UK us and Euro area but from my perspective it does imply that while Services inflation continues to be more homegrown we should Place more weight on the likelihood that a greater part of recent Services inflation will dissipate more quickly and so lead to less persistence as the energy price shock unwinds the chart here shows that the UK's three-month annualized run rate for services inflation has recently converged on the equivalent rates for the US and Euro area and I expect this to be increasingly the case for the 12-month rates I think it's also notable that the inflation Dynamics implied by the ne Nexus are playing out against a backdrop of continuing weak activity in the UK reflecting the impact on demand of restricted monetary policy as well as the constraining influence of weak Supply UK Supply growth has been CH characterized by both weak productivity growth and low levels of participation UK GDP grew by 0.1% in February after 3% growth in January implying an end to the technical recession at the end of last year but GDP is still. 1% lower than it was two years ago in 2022 q1 when Energy prices surged after Russia's invasion of Ukraine over the same period US GDP has grown by a robust 4.3% to conclude the UK now looks like less of an outlier in terms of recent inflation performance and more of a lagard and one that is catching up fast similar disinflationary effects to those which started earlier in the US and Euro area are coming through leading to a pronounced reduction in UK inflation UK CPI inflation in March was below us CPI inflation and April and the April data is very likely to show the UK in converging and in line with the Euro area now they're going to be bumps in the disinflation process from one month to the next due to base effects and other oneoff factors but a more material distinction is that the disinflation process in the US is taking place against the backdrop of a stronger economy particularly on the demand side and is already proving to be less smooth now at the mpc's last meeting in March I was one of eight members who voted to hold bank rate at 5 and a qu% over the last few months I become more more confident in the evidence that risk to persistence in domestic inflation pressures receding helped by improved inflation Dynamics as we set out in our March minutes there's a range of views among the MPC on these risks and as I've explained today developments in the Nexus of inflation inflation expectations and wages including at high frequencies suggests the restrictive STS of policy and the more symmetric unwinding of second round effects are reducing the more persistent components in inflation such as Services inflation my assessment is that the balance of domestic risks to the outlook for UK inflation is now tilted to the downside compared to the mpc's February 2024 forecast with a scenario where inflation stays close to the 2% Target over the whole forecast period at least as likely as the February 2024 forecast which showed inflation Rising above Target to close to 3% by 2025 1 the NPC will have to consider collectively the degree of restrictiveness of policy at each upcoming meeting to ensure inflation return sustainably to the 2% Target I'm going to continue to take a watchful and responsive approach to my policy decisions as I've tried to do throughout this period of unprecedented structural shocks watchful in terms of assessing the evidence as it accumulates and responsive in terms of The Stance of monetary policy warranted by that evidence thank you very much very good um the the start of this project is the paper that I did with Ben beron last year on the United States that many of you have seen at the end when we presented the paper a large number of central banks came to us and said why don't we do the same thing and rather than having 10 separate projects we decided to actually make it one project which uh I coordinated and uh we finished the the work uh in mid late uh 23 and then cleaned it up until very recently so what is in the volume is kind of a teaser of the ultimate result and the full paper uh is now being edited and the replication team is at work and if you know anything about Patterson editing and replication are intense and take time so the paper should come out uh something like a month from now but you're going to get the essence of uh of what we did um the list of countries uh which decided to join is given here and you have a lot of Euro countries and there there is an interesting aspect to it which I'm not going to talk about which is we have the Euro view of things what was done by the ECB team and the view of a number of members and one of the questions is whether it coincides and not always is the answer U and then we have other important countries we have the US in the case of the us we didn't ask for fed to do it we did it ourselves because we had done it in the previous paper but we have Canada we have Japan and we have uh v v UK what I want to give you a sense of of the mall uh the mall is academically very non fashionable it is basically an undergraduate mod uh type of stuff that you would teach undergrads and they would understand and we thought this was the right vehicle at least to discuss with policy makers what was going on and to organize the data so I just want to go through it it's to some of you it's going to sound like the 1970s but I don't think that that makes it wrong uh the starting four equations a wage equation so wage inflation we thought of as depending on the state of the labor market there there's an interesting discussion which actually is an interesting one from the point of view of what we're discussing which is what valuable you use traditionally it was unemployment I think that many of us think that vacancy to unemployment ratios are better viable and we use that in all the countries so labor market uh short run inflation expectations one year uh thinking that when you set wages you actually want to know what prices will do next year and then a term called uh which we call catch up or which is called real wage gap which basically says if in the past there was an expected inflation and therefore your wheel wage went down uh you may want to recover what you have lost quite apart from your expectations of the future you just want it back U and we thought all three factors might play that gave the wage equation the price equation said well basically it's a market pricing equation so price inflation depends on wage inflation productivity growth this is the standard stuff and changes in relative prices uh which are the relative price shocks that we have been talking about so we had three of them in the empirical work we had energy obviously we have food and I think it's a very interesting aspect of of this episode is how much the price of food has played a role uh and whether we fully understand what happened there but it clearly moved a lot more so in Europe even more so in Japan for example than elsewhere and then a viable trying to capture these supply chain distortions uh the price spikes we come from the fact that you know you can't get a car and so on uh the interesting point here is that these are these are these price spikes are going to show up in core and that relates to what anhel was saying before which is typically we take food and energy out and then we have core because we think that's fine that's not where the relative price shocks are but in this case I think many of the shocks actually were went into core so we don't do a distinction between headline and core we just write a price equation with these variables so this gives you price inflation and the last two equations which also play an important role like expectation inflation expectation equations and here we decided not to go over rational expectations route but just use uh expectations measures uh that were available in the literature we didn't use the Michigan survey we used expectations from from markets or from forecasters the long run expectation is about typically depends on the country but 5 to 10 years where people think inflation will go back to and we made it we allowed it to be a function of just actual inflation plus lags but I'm going to talk about lags in a minute and then the short run inflation expectations we thought would depend on the longrun expectations and on actual inflation and we just estimated both the feedback is that the short run expected inflation feeds back to the wage equation which leads High expected inflation leads workers to obtain High wages so I think it's as conventional as can be but it can be taken to the data in terms of methodology we decided to have a what I would call a quasi V approach which is not to play with the lack structure have a very generous lack structure and just let the data talk this leads to more noise uh because when you tighten the light structure you get tighter results but we thought this was the way to go so this is the background and this is kind of a interpretative framework which we used and that was was used in the project by the Banks we in nearly all cases the central banks just use exactly the same mod there are some differences in the data used by necessity just a remark on this I think this was actually touched on by the previous speaker the wage series and there can be very different and particularly different in the current recent context are you going to use compensation per hour are you going to use compensation per worker when you have schemes which have partial employment it makes a big difference are you going to use uh newly uh new wage settlements or old ones and for some countries it makes a difference and I think again there are things to to to dig in and and and and and and find out more okay that was of the methodology to tell you so now I'm going to tell you the story as it comes out of these 11 country studies and it's a very I mean I think again uh previous speaker said a global uh inflation episode and it's true I mean basically uh we found a lot of commonality in the description of what happened in different countries U there are some differences which I come back to but the story is amazingly common so the first part of the story is that if you look quarter to quarter and we use quarterly data uh most of the movement The High Frequency movement comes from relative price shocks be it food be it energy or being price spikes price spikes we should have said this we proed through measures of shortages you don't observe price packes per se but if there's a shortage you can expect that the price will go up and two results absolutely dominates quarter to quarter and the effect of each shock is large and not persistent at all and that shows you what we call the impulse responses uh impulse response functions for the US and the Euro uh to an energy shock a food shock and a shortage shock and you can see big effect initially and then it basically goes to zero within two quarters or three quarters that's the fundamental difference with the 70s right there just no persistence and there basically there could have been persistence because uh expectations of inflation would react very strongly and therefore lead to more uh wage inflation there could be indexation but there is now very little only one country Belgium had indexation uh and the result is basically that these Shocks come and then they go they don't have long run effects or persistent effects so in that sense team transitory remember that discussion at the beginning team transitory and team permanent so team transitory was right in the sense that the shocks came and they went I think it was wrong in thinking there would be just a few shocks and we'd be done basically what happened was a series of shocks for close to two years and a half but the idea is still there so the short run completely dominated by Price shocks yeah just one more thing in relation to something which was said before when you actually look at the composition of the price shocks there are differences Energy prices being more important for Europe and for the US for reasons we all understand proximity to Ukraine uh food shocks been much more important than puzzlingly so in Japan most of the action in Japan is actually food shocks and it comes partly from the depreciation of a Yen and the fact that food is largely imported so different composition but price shocks in general okay so this is a graph that clearly you cannot see or at least interpret but it's just this is the same graph as before just for all the countries to show you that yeah it's true for all countries basically okay the second part and as important is that behind the scene the labor market first softened during covid large increases in unemployment or not than less than Full Employment and then tightened if we use the V of U variable it is higher uh at the end of our sample which is the middle of 23 second quarter uh than it was preo so basically a tightening of a labor market uh Stronger in some countries and in one country I think it's basically zero is Japan but otherwise clearly tightening uh leading to tighter labor markets today so this had kind of the old conventional Philips curve effect which is you have a tight labor market it puts some pressure on wage inflation and then the wage inflation leads to more inflation which leads to expectations which leads to more wage inflation so so this is kind of the old wage Phillips curve type story and it was playing uh you get here the impulse respond functions to uh of inflation to a onetime permanent increase in Vu so this is a mod which conceptually and analytically has the natural Rate Property so there's only one V of U which is consistent abs some shocks with stable inflation uh so when you increase this when you increase V over U then the mole predicts that wage inflation will increase over time forever as long as you're above natural value of Vu we find this but we find that the effect is fairly weak there is some pressure but it's not very strong and that's low frequency and what this means is that as inflation was happening this was not quite visible was there wage growth was increasing slowly but not very much now the issue is as the price shocks have gone away or are going away then what appears is that and that's what central banks are basically fighting today once the price shocks are gone you have the increase in wage growth due to a tight labor market the adjustment of expectations and this is uh what explains by inflation is still a bit high in most countries this again is just to show you uh the impulse response for all the countries and as you can see it's not I wish it look nicer for some countries but we didn't play with the lags uh basically it goes up right if you have a tight labor market it keeps putting pressure on on wage growth that's what happened so having done this uh we uh put everything together and we did a historical decomposition uh I'm going to show it to you only I think for for two countries it would be too much to to absorb if I showed you V 11 uh so let me just spend a minute and the Temptation is to go through these graphs which are complex ones too fast so let me let me just go step by step so what we did first we took them all and we said Suppose there had been no shocks so V of U would have remained at its two at the at its value at the end of two uh uh 2019 no energy shock no food shock okay so what would have happened uh is given by the gray bars so basically this is an implicit statement as where the economy is where relative to the Natural rate then but you can see it's fairly flat uh it looks like in the US we are probably a bit tight bit under the the natural rate of of unemployment uh but that's the case for the US and the EUR and then we took each shock we said let's take the series of energy shocks leave all of them all the others aside and just feed it in the mall and look at the uh contribution of that shock uh to the history of inflation we did this for each of the shocks and we did this for all the residuals of the equations and the sum of them by Construction is going to give you the actual inflation rate so that's the one way of thinking about what was behind and I think there are two striking uh uh aspects of of these graphs or two and a half actually the first one is the importance quarter to quarter of the energy the food and the shortage shocks right the yellow ones are shortages the dark blue is energy and the light blue is food and you can see that from qu to qu this is what moves inflation right by the end you see that the shocks become even smaller actually reverse sign and you get for example the price of energy to play on the downside now the interesting thing is the red which I think looks more Brown here but the red uh part the red part is the contribution of the tight labor market so initially it's negative because the labor market was lose but then it becomes Tighter and for the US you see it's never very big and that reflects the fact that the wage Philips curve is fairly flat you don't get a lot of action in wage inflation from uh a tight labor market or lose labor market but you can see that what happens when the shocks are gone is that we're slightly above we have this basically 1% value at the end now this is not today right this is at the end of sample would be roughly the same today and that says well now the price shocks are gone but we have wage growth which is too high how do we get back to Target and that's a discussion about the last mile our paper was not about that we all understand that if productivity growth is not great or remains what it was rather than what it is now uh it is going to be hard to actually eliminate this 1% if we're lucky and productivity growth is strong and wage growth happens to be weak for other reasons then we'll get there easily but we don't know but anyway this small red part is now what matters the rest is more or less gone the half uh conclusion is the comparison between the two which is if you have good glasses you can probably see some red part to the euro Zone but it's very very small another way of saying this is that in the Euro Zone of the EUR area uh most of the inflation was imported maybe you don't like the way it imported was maybe it was Global but it was not due to the labor market it was due right so this is an example in which you know there's nothing exceptional happening in the labor market but you get a lot of inflation and then it goes away now again that's better news in the at the end because indeed if you don't have a problem of a labor market then presumably you can hope to go back to normal uh without having to tighten and that's more of a the situation of a Fed now I I think I didn't show you uh other uh historical decompositions but in R respect I should have done it for Japan so Japan would look a bit different in the sense that the gray zone is much smaller the underlying inflation is much lower as we know it's too low over relative to their target but more importantly there is just no red absolutely no red and that comes from the fact that the labor market in Japan is exactly the same as it was at the end of 2019 so this is kind of a typical the extreme case of a country which suffered from stuff from outside and then went up went down and so this you know this is a conference about M policy so I should say two things the first first thing is that we don't talk about monetary policy because our MO is not a general equilibrium Mo we basically take V over U as given now what's behind Vu what's behind the labor market is fiscal policy monetary policy and so on but we don't go there so clearly somebody more ambitious would do about that so we don't have anything to say but I I still have something to say based on on on on on what I showed you which is suppose take the case of Japan uh no you basically your long-ter expectations are fairly anchored uh and then you get these large shocks and the labor market is not doing anything particular why on Earth do you increase the interest rate right traditionally the story you increase the interest rate because you slow down the economy and that's going to be good for wage inflation price inflation so on but but in this case it's all stuff that you really have no control upon right so why is it that you increase the rate I mean we got a very good argumentation for the case of Mexico but my sense is you do it not at all for the mechanical reasons because actually you don't want to slow down the economy I mean that's not there's no reason to do it but you do it to keep credibility of your target of long run expectations not being anchored so the question is then what should my how should myON think about episodes like this by how much do you increase the interest rate to keep credibility maybe you're very credible and then you don't need to do anything or maybe you're not very credible and then you need to do something but something is what is it keeping the real rate the same is it having a higher re rate is it just increasing a bit to show that you're not asleep I do not know but I think that's a genuine issue and the reason I insist on this is that I think we're going to see more episodes like that um you know the geopolitics being what it is I think it's quite likely that you know we'll get a straight of or Mo episode at some point and we'll get an Iran Israel war and so on so it seems to me that we're going to get these large price shocks and then what does myy do does it kind of say well you know it's going to come go don't want to do anything I don't want to kill the economy there's no point or I increase rates just to that I'm tough and uh I mean from an intellectual point of view and practical point of view I think that's a really interesting issue let me stop here thank you [Applause] so thank you all for those presentations you've covered a lot of ground so we have a bit of time what I'm going to do is to take one question and actually follow up on the issue uh you laid out Olivia that you ended on and then we'll open up the floor to questions um so Olivia I I think you you ended exactly the question that is on many of our minds as we saw in the presentations a key reason for inflation go up and then come down with global shops um there are some cross country differences but the global shocks were clearly the primary determinant of the big moves of inflation and behind that was an escalation of violence which drove up energy commodity and food prices um we could be on the verge of a similar situation an escalation of violence in the Middle East leading to a spike in energy crisis so how would each of you respond what would you recommend is the response of central banks um Olivia is you said you know shops come and then they go can we be a sangin this time around um but you also highlighted the role of slacking the labor market and in many countries the labor market is now tighter so it's not the same situation also you highlighted the role of credibility why shots can come and go but now that now that we have recently hit a period of high inflation uh I do central banks need to be more cautious about counting on their credibility so I was wondering if we could maybe start with you a little Olivia and then head to we'll go into reverse order Dave and then Jonathan so Olivia you can give the broad overview and then Dave and Jonathan you can talk more about the specific examples in your country of how you would think about a shock to Energy prices so I would I would do two things I would watch two things I would watch the output Gap and I would watch longrun inflation expectations uh if for example as in the case of Japan there's no output Gap coming uh then I would watch long run expectations as a Hulk and I would as soon as they moved I would basically move the rate and we don't know you know how long on expectations will react to the rate but I would basically move it and see whether the quiets markets and if it doesn't I would move it more and but it seems to me that relative to a teror w I would basically have the output Gap the usual reasons I think it's still there uh but I would put a whole lot of emphasis on just killing any deviation from long run expectations uh from Target let me ask one followup and they give these two a bit more time to think about their answerers you barely mentioned the exchange rate in your comments uh and now the dollar is quite a bit stronger so that could also aggravate some of these other inflationary pressures is that something that should be in there in the thought process sorry I didn't get the question you barely mentioned the exchange rate in your comments and for some countries the exchange rate is an important determent of inflation at least a longer term than Energy prices even if not as persistent as the labor market I've have not thought about it I have not been able to stump you in ages um so I think um Olivia's framing in terms of the output Gap and medium longer term inflation expectations is absolutely right I mean we we face this issue somewhat uh as uh the Middle East crisis unfolded last Autumn and at that point we we decided that you know the obviously there were risks compared to what our conditioning assumptions on energy prices conditioning assumptions for our forecast there were risks relative to those so using the Machinery we currently have and obviously we've just had the incredibly uh important review from Ben banki into our forecasting but using our Machinery as we have we built a a skew into our fan chart so saw that you know there was the potential for the mean to be above the mode in our forecast and that in turn for framed our policy if you like that's a way of indicating our reaction function but just to build on Olivier's point I think we I would also you know I would bring it back to what I you know this incredibly helpful uh piece of work that um Olivier and Ben sort of coralled amongst the central banks as it were in terms of trying to come up with a common framework and I think the emphasis that comes out of that on the role of the kind of your labor market context and conditions matters so I mean looking at the UK at the moment where I think I mean if if you'd asked me the question a year ago I was worried that medium-term inflation expectations were going to become de anchored that was the time when we were raising rates um you know and as I said in my presentation not only were rates going up incrementally 25 basis points but we then went back to putting them up because we were we were getting nervous about uh those um or certainly I was that was motivating some of my voting but where medium-term inflation expectations are now and where short-term inflation expectations are coming down against the backdrop of as I try to present you know using the V ratio what I think is a more obvious easing in the labor market than um than perhaps we've been seeing through the second half of last year I'd you you know I would I'd be looking at all of that in the round uh to to frame my policy response but I think the other point I'd make is I think we are in a we are in a in in in an age of of uh you know greater incidence of shock so we are going to we are going to be facing this world more often as as all continuously as policy makers Jonathan uh how would you respond unfortunately we don't have the breakout is uh from Olivia's is for Mexico well I think we have actually uh two experiences in terms of of uh energy shocks in in Mexico and both were very different and actually um interesting in towards the end of 2016 uh we had our inflation pretty much in line with where our Target um is and the government decided to adjust uh the price of gasoline but I think was like just a oneoff by something like 25% the response first of all the the the response in the population was riots and uh and looting and and it was a a massive demonstrations and and everything reaction to that but inflation more than doubled uh just in in that in in 2017 finishing the year if I remember U 6.4% or something like that and even though there was a monetary policy response to that and we showing that we were obviously uh uh preoccupied it came down on its own once that wore off and by towards the end of 2018 were we were more or less back to where we needed to be but this one single price and it caused a a tremendous inflation about and the other one is in 2021 and it was precisely because of the the reaction in the population to that huge um energy shock that we had in two th self-induced in 2017 in 20 21 the president promised uh to um make sure the gasoline prices did not increase at all so when prices were increasing all over the world uh we had it was a heavy fiscal cost but we had uh gasoline prices subsidized so uh gasoline prices did not go up but then when inflation started coming down in most countries which was induced by the decrease in Energy prices we were we didn't have that benefit and so our inflation didn't come down uh maybe as as quick as in others but we did in both cases uh respond with a very important monetary uh policy um monetary increase in our rates and I think that um that's basically kind of the The Experience from what we we drawn on what we would do open it up to the floor now why don't we start at the first table Phil and then beat why don't we take two questions and then we'll come back back to the panel and you can repeat thanks um Phil audri at Bloomberg it's it's one for Dave um the uh UK Market path for rates is being pulled up by what's happening in the US um and I think it the the communications from the bank here have been that it doesn't seem to think that um it does seem to think that the there should be some Divergence potentially in policy between the UK and the US um I just wondered if this is going to become a communication problem for you guys B from rocos um a little bit of a similar question here since we are at the IMF meetings and uh everybody and and we've had uh obviously this uh another big repricing of of the uh the US so everybody is talking about decoupling Divergence how much these things can can really you know differ from each other so I'm just curious yeah how what you see in terms of spillovers if let's say the FED indeed did not cut rates this year I mean Mexico is obviously a bit closer and and maybe more direct implications but I would imagine also for the UK there are some spillovers so it's just curious you know what what what you see they would be uh and how much they matter uh or not thank you so thank you those are very complimentary question so if each of you could address so this combined what is the important of spillovers for example um Mexico was striking how Mexico moved right about at the same time as Brazil and Chile there see and they were ahead of most other central banks so there did seem to be a regional effect is it similar shocks or do the spillovers between these countries matter and then of course the big spill spillover everyone has their eye on right now is the US the US is now on hold for an extended period of Time how will that affect each of your strategies we of course know that the strategy for every Central Bank is to do what is in the interest of their inflation Target and their domestic economy but you how important is it for you if the US is on hold for an extended period of time and then Olivier what can we tell from your models on this um Can the other countries simply behave differently um can they minimize the spillovers sir in the in the case of Mexico we definitely look and follow the fed and whatever the FED does it's obviously very important for us but actually we don't really look further south uh we don't really give much weight at all to what other countries like Chile Colombia Peru uh uh do uh they just don't really they're just not big enough or they're just not um uh important enough but the FED is definitely uh extremely important If the Fed uh does not cut in the short term it's not going to really make that much difference because we think we have a very strong very high interest rate differential that we can use and play with um but eventually there's no doubt about it we could we would never be able to uh go against or or have a really important uh cut If the Fed uh doesn't move at all so I mean we have a correlation and we need to have a correlation with with the with what the FED does but it's definitely far from a perfect correlation so um I mean although you kind of uh the way you framed uh the the central Banker maner Christen I mean I think in the UK we will do what uh makes sense in terms of our mandate and that is a 2% inflation Target a symmetric Target as you uh kindly pointed out in your introduction we we we did start to raise official rates at the end of 2021 uh before the fed and we were among the first countries to start unwinding our balance sheet so although as you rightly emphasized that's more in the background and maybe for another conference um but I'd be happy to contribute to that to that conference I think to I mean look to to Phil's Point around but but I mean and it's linked to be's point I guess um but obviously we will we will take account in our assessment of the drivers of inflation of what's happening to the exchange rate in terms of what it means for inflationary pressures but we're an inflation targeter through and through I mean on Phil's Point um you know we can you know we condition our forecasts uh again this is something that uh Ben bank's uh not not only been reviewing but you know raised a number of issues with we condition our forecasts on uh the market path for rates um I I say this at every every um or pretty much every NPC press conference I attend you know markets are entitled to take their position um there has been you know the the UK curve has moved up uh in recent um weeks and months um now that might be because the market is more worried about um UK persistence as I've tried to set out in my presentation I'm actually Bec somewhat less worried around the risks of persistence um but I'm not going to comment on on what that should imply for the curve you know we just need to try and be I think as or indeed for you know in in the way we present our forecasts and the way we talk about them which I think is your point about comms uh we will just have to you know when we get to to the next forecast Round it's actually starting on Monday and then presenting it uh publicly think how we communicate those differences um but as I tried to say at the end of my uh presentation I mean I think some of the fundamentals in terms of you you know us growth Dynamics are quite different at the moment from the UK's um and I think the UK's inflation Dynamics why I said that we've been a lagard it's taken a while for the various effects to come through but you know we're increasingly confident in our for said inflation is going to be back at Target um uh from April onwards I think the question is as I was trying to set out in my presentation for how long good now I think the questions that were asked and and christen's uh addition I raise a very important issue first I think of central banks as trying to get R to be equal to our star that's kind of how I think about it and my I'm struck by the fact that the r Stars short run AR Stars not the ones in 10 years um are very very different in different countries right in the US it's clear that private demand is strong it's clear that there is fiscal responsibility uh and all this means very strong aggregate demand and this means a substantial star I think the best guess is 2% something like that right um Europe is different uh private demand is weak we are going to do fiscal consolidation maybe too much of it but we're going to do it um and so I think our star is much lower the r hasn't quite been adjusted yet but it will soon and uh probably the relevant our star for Europe is probably zero or something like this and Japan uh basically back to where it was in 2019 uh with a negative R negative R star uh despite a very large uh fiscal deficit very strong fiscal push an extremely weak private demand so again I think the Central Bank should just try to achieve those Our Stars which means that they are going to be quite different and this clearly has implications for the things that you think about name the exchange rate uh I think that this really suggests that we're going to get a strong dollar and a weak Euro and a weaker y uh and uh that's the way it is but I would never tell uh the ECB to try to emulate I always thought this discussion was stupid um that the ECB should try to stay close or was was trying to stay close uh to the to to to to the US uh they should each do what they need to to do if if the exchange rate goes crazy then it becomes different but that's where I am and and would you say the latest movements in the Yen dollar count as going crazy if I knew enough about Canada I would give you an answer any last questions yes from just one comment or question but it's mostly for Olivia um so we talked about Supply shocks but we actually didn't talk about that much of a sectoral differences in the case of Co of course there's a good sectors and services sector and there was a large unbalanced demands for good sectors that then run into Supply constraints so even in a in an aggregate model if you consider the supply shocks you don't get this type of steepening of the Philips curves just with the supply shocks you need a multi sector model at least with two sectors with goods and servic IMF has a working paper also Ivan wning worked on this so I was wondering how how in the case of a model that Olivia mentioned um how do you see this as a more of an anomaly or or we should really focus on more of a sectorial dimension going forward also for monetary policy before hand it over you I'll also point out in the chapter on health summarized we do talk some about the importance of looking at sectoral analysis in the future when you get supply chocks that the sectoral effects were important and not captured in our standard models and that's where there is more progress to be made hand it over to you so this episode has me made me rethink the way of finger but inflation I I used to be of a traditional uh mind that strong demand leads to low unemployment which leads to wage inflation which leads to price inflation but that was focusing on the effect of strong Demand on the labor market and I think you know very is strong Demand on the Goods Market as well I mean the firms not only have to be able to find the labor but have to have the production capacity and uh I think that in most in kind of mundane recessions firms have enough of a buffer that they can do this without increasing uh prices given marginal cost um but I think this is a warning that if there's really a very large increase in demand relative to supply then marginal cost increases uh the kind of price spikes we saw I think is episode specific uh know maybe there are going to be episodes like this but it was really very different from from the usual what I'm struck by in the quantitative exercise that we did which I showed you is how the shortage variable still plays a ro today we're open to the idea that during covid you could get this or that but we're in 24 and uh the yellow part of the historical decomposition which was shortages is still playing a role uh so clearly these Supply disruptions can can have very very large effects again it takes very special events for them to uh to be so important but I would say now I I would be much more careful about looking at pressure not just in the labor market but pressure in the Goods Market as well and I think that's relevant for what comes next would you like to jump in there Dave I see you nodding well no really no I think I mean it comes back to why I think the the volume that's been published and why this event is so important um I mean it goes back to actually anel's first lesson um you know how you talk about inflation when so much is moving around um and I agree with Olivier that I mean the pandemic was an extraordinary uh shock um and so most you know the other shocks that we've been talking about though they have Supply consequences I mean it's interesting we're the effect the extent to which they'll actually affect economic structures I think is open open to discussion but I mean we're grappling in the UK I mean it's more on the labor market side than on the goods side but um Goods Market side but you know we still have this um issue where you know participation is still lower than it was preco we seem to be having some longer term scarring in terms of the impact on on our Workforce and there ability to to participate in the labor market so I mean again that's a more traditional labor market feature but it just shows you that many more things are moving around than we've been used to thank you very much to all of you and we will now shift directly to our final panel which will tackle the impact of all of this on financial markets and take a more forward-looking angle of what this all means for Central Bank mandates and Frameworks in the future thank you [Applause] e e e e e e e e e e e I think we're going to get get started so please uh make your way back all right welcome everybody uh to our second panel uh in terms of logistics it will look a lot like the first uh I'm Bill English I'm going to start us off with brief introductions for our three panelists then then uh each panelist will speak for 10 or 15 minutes or so uh then I'm going to ask them to comment on others uh on the others remarks if they choose and then we'll open things up for questions from the floor uh the title today is monetary policy responses to the post-pandemic inflation what happened and Lessons Learned so our first uh our first panel was mostly about what happened and the second panel is going to focus more on the the lessons learned so we'll begin with lessons from financial markets uh the theod shock and the subsequent very large very rapid adjustments in monetary policy were something of a of a stress test for financial markets and policy implementation and uh and we're fortunate to have with us Roberto Purley uh the manager of the system open market account uh to discuss these issues Roberto received his PhD from NYU he was a professor at the University of Pennsylvania then he was a colleague of mine uh in the division of monetary Affairs at the board then he went to this guy can't keep a job uh he went to the private sector most notably as a founder of Cornerstone macro and last year returned to the Federal Reserve System as the Soma manager uh second we're going to consider the implications of the of the pandemic the policy response and the high inflation for Central Bank mandates and Central Bank organization and governance uh happily on our panel we have Carolyn Wilkins who knows more about these issues than just about anybody else uh because she was on the committee that conducted an external review of The Reserve Bank of Australia uh that reported in last year uh Carolyn did her graduate work at the University of Western Ontario and then went to work for the Canadian government moved to the Bank of Canada in 2001 and Rose to serve as senior Deputy Governor from 2014 to 2020 she joined the bank of England's Financial policy Committee in 2021 and she's also a senior research scholar at the Griswald Center for economic policy studies at Princeton finally we're going to look further to the Future and consider the lessons from the post-pandemic experience for Central bank's monetary policy Frameworks uh in particular both the Federal Reserve and the ECB have promised uh framework reviews uh in 2025 and other central banks no no doubt will also be reacting to the recent experience uh so we're fortunate to have Charles Evans uh until last year the president and chief executive officer of the Federal Reserve Bank of Chicago on our panel uh he played a significant role in the development of the fed's uh earlier Frameworks and so is well placed to think about the implications of the recent history for uh for those Frameworks uh Charlie got his Doctorate from Carnegie Millan and after spending some time in academ moved to the Chicago fed uh where he served as director of research before becoming president in 2007 so welcome to the panelists thanks very much for participating today and Roberto you're up thank you Bill and uh good morning everybody I guess yes it is still morning um so thank you for uh inviting me to this uh uh to this uh discussion here um I think the volume that uh Christen Bill Andel put together I think is a terrific volume so Eric lur who is right here my author and I are certainly very happy to uh to have participated in that in that volume so before I start of course I don't want to forget I have to tell you that the views that will expressed from now on are my own and not necessarily those of the Federal Reserve System or the Federal Reserve Bank of New York I think I inverted the order but concept is the same um so look I think this volume is great uh and I think is as far as I know the first or at the very least one of the very first to look in a systematic comprehensive way at what happened how how the wave of inflation happened how it affected policy affected markets and a lot of other things so that's clearly an advantage and I'm pretty sure that future research there will be a lot of future research and I will draw on this volume a lot so that's the advantage of course being early sometimes comes with disadvantages as well the disadvantage in this case is that the inflation wave that had in uh uh earlier in the previous years has receded yes has not receded completely uh in particular as you know inflation is still above the Federal Reserve Target and uh for that reason alone many other reason I don't pretend to draw any definitive conclusions uh in this in this in this discussion but nonetheless I'll make a few points points that have to do with the the how sudden how suddenly the um inflation wave head have to do with the strength of the policy response the impact on markets uh the resiliency of markets and uh I will say I conclude by saying a few words on the um on the policy implementation framework which has worked uh very well um so this uh next slide I think everybody managed to advance the slide without any help but apparently I cannot uh any case um I was uh um got to be a secret okay so I it's my every time I I I I do some presentation something happens but that's okay um sorry uh apologies to the Peterson Institute here for breaking the system but uh look I think uh um let me say Obviously uh inflation came as a surprise it was a surprise to uh a lot of people policy makers for sure but it came a surprise to the markets as well uh and I had a beautiful chart here I wanted to show you uh the extent to which markets actually uh missed the the for the the the the coming of the inflation wave for about a year and a half uh markets were uh uh behind the market kept kept saying yes inflation yes there is inflation but it will subside soon uh and it took uh there it is for a second we had a chart but well I had it you didn't uh it's okay um so so the market were were where it's policy maker were not the only ones to be uh to be thank you there we go thank you for that um polic makers were not the only ones uh uh markets were behind the curve we used to call the bill is familiar with this the hay caterpillar chart we applied to the federal funds rate expectation the concept is the same that the actual inflation in dark is the caterpillar and the hair are the what uh markets expect inflation to do at any given point in time and of course uh again between uh early 2021 and uh late mid late 2022 Market were off right so so uh so inflation came as a surprise it's fair it's fair to say why was it so surprising because I think it's many reason but uh uh of course the inflation result as hell said think was a result of many confluent uh factors certainly uh once in a lifetime hopefully pandemic um the uh uh a demand surge induced by pant up demand after the shutdown uh was lifted and of course the role of the uh war in in Ukraine as well so these factors were hard to inter to anticipate exante uh but also uh were even after after they became known they were it was it was hard to assess what effect they would have because we hadn't seen something similar in a long time so models analysis in the past were not particularly trained for to this type of situation so policy response uh on the part of the FED probably other central banks as well some sooner some later but didn't come exactly immediately uh why uh because um well the FED as a dual mandate uh there is a uh was a need to pay attention to the second uh side to the to the other half of the Mandate unemployment but also because look there was a lot of uncertainty as to as as the markets uh this chart proves a lot of uncertainty about the extent duration of the of of of inflation and uh and also there was a risk management aspect say well we need to balance the the two mandates but uh and of course uh compound in all this was the fact that for many years before inflation had been uh at or below Target right so there was this sense that inflation had been weak for for a long time but you know uh eventually it became clear that inflation was uh uh bigger problems that he may have seen initially and uh and also became clear that the other side of the Mandate was doing just fine uh the the recovery became self self- sustaining the labor market improved very rapidly and when all this uh became clear uh I think the positive response uh happened and happened fairly quickly it happened uh in essentially two two ways happens via uh the balance sheet via interest rates of course uh the the FMC has made it clear that it considered still considers the uh interest rates as the primary tool for uh for for the policy response uh but uh but the policy response again started with communication uh about about the balance sheet about uh tapering of QE and then ending QE and then talk about QT and eventual implementation of QT um with with a beginning of rate hikes in the uh in the middle of that I think you know from a balance sheet perspective this uh sequence of steps had uh pretty noticeable effect on financial markets on interest rates in particular turn premiums uh between September uh 2021 and the final announcement of QT may turn premiums responded pretty uh pretty significantly uh to to to to this cresendo of uh of communications so that's was the the first impact that the balance sheet the balance sheet had but uh um after that um there was also uh the rat or uh the the the the rate response the main response and this chart shows you that uh the rate response started uh gradually 25 basis points in March uh but then uh it picked up speed fairly quickly and uh you know of course we had four 75 four consecutive 75 basis points rate hikes between uh June and uh uh November of 2022 and then as inflation began receding uh the progressively the pace of of hikes diminished and of course fromc has remained on hold since July uh of uh of last year but this chart I think shows fairly well uh the combination of policy response rates uh but also the balance sheet shrinking at the same time and those lines they're um they're all very fairly close to each other but uh in order the first one line a marks the um start of QE tapering at the end of QE just a a short few months later immediately after lift off line C and then uh the start of the balance sheet shrinking process line D at half speed and then full speed uh on line e which is already which is still continuing to uh to this day so uh pretty uh a significant policy response and you see it from this chart so leave leave the balance sheet aside for a second just look at at the rates the rate the rate cycle the hiking cycle was uh by far the fastest in recent memory the post vuler post vuler era right so and up until this cycle uh people especially in the market the private sector looked at uh the 1994 95 cycle as the epitome of a uh the aggressive uh even disruptive policy cycle well uh this time around the Federal Reserve went about twice speed so so very aggressive policy response and of course um uh you know whenever you have a tighten cycle of this magnitude you can expect that markets um will move and they certainly did uh prices de uh we saw some um disruptions fairly modestly I have mind the the spring of last year um kind of a mix of uh um uh fast consequence of fast rate hikes and probably uh subpar risk management on the part of some some institutions but bit as in May uh fed tightened uh aggressively and markets moved and I'll start by looking at treasury yields here as I show the three month two years and and and 10 year rates um so Yi moved up a lot as you would expect right because the policy rate moved up a lot lot and moved up fast uh yields moved up and the yield curve inverted um I'll say something more about the inversion in a in in a minute here but uh just for now I'll just point out that the curve has inverted near about two years ago and still inverted to this day so it's a long long period of inversion of of the yield curve um so while will measure definitely a sharp um increase in in interest rates you see um the brief pause around March of last year when uh the banking sector stress hit and uh uh and Market started thinking well maybe uh this is the end of the cycle or Interruption of the cycle it could be rate Cuts uh that did not happen thanks to the contain the fact that the episode was was contained thanks in turning part probably to the Swift uh and the siis of policy uh policy response um so these are here are nominal yields I think is very instructive to look at what uh uh inflation compensation did component of U of nominal yields so what I show you here is two lines so the blue line is short-term inflation expectation in particular I show you the one-ear inflation swap rate and that was extremely volatile and moved up a lot and moved pretty much in sync with actual actual inflation so in other words you know inflation happen in the short term a market realized yes inflation is probably going to stay here for a year or so um the other line is longer dated longer term inflation expectations and they were extremely stable sorry I should say inflation compensation were extremely extremely stable um so so that's good that's first maybe that's the first sign that uh um inflation expectations were stable as well in the longer term so how do we disentangle inflation compensation from inflation expectations well inflation comp compensation equals inflation expectations plus risk premiums liquidity premiums and other stuff so we need to isolate inflation expectation to do that the only way I know is to look at models uh and I think anel conveniently showed us a chart earlier because I don't have it here but uh if you look at those models and try to isolate inflation compensation and basically try to look at the green line the the inflation expectations component to the green line you see that it has increased uh a little bit uh back to levels of the mid late 2000s uh and if you consider the fact that uh um you know tips are indexed to CPI whereas the FED has a Target based on pce and you try to make the adjustment well we're not very far from 2% in other words inflation expectations are remain very well anchored around the Mandate which I think says something about the accumulated credibility The credibility of the F accumulated over the past uh the past many years um let me say something about uh liquidity and volatility so the chart at the left here panel 7even shows you um implied volatilities so rate moved up sharply there was a lot of uncertainty as to how much they will continue to go up or or how much it will stay up therefore implied volatility increased to levels that we had not seen since the financial crisis right so pretty significant uh increase in in implied volatilities there is a uh established I think relationship between volatility and liquidity uh and so the chart at the right shows you that uh uh Market liquidity deteriorated treasury market liquidity deteriorated over this period but it deteriorated no more and maybe actually a little bit less than than than what is implied by the increas in volatility in other words the important message here what I'm trying to say is that treasury market remained extremely remained functional Market functioning was preserve liquidity diminished yes but Market function was preserved uh what does it mean it means that trades could be done uh even in size of course at a higher price uh but also means that uh the uh um uh the market response to the news flows was uh in the direction you would have expected given the news other words was not a situation like we saw for example in March March 2020 where no matter what kind of news we getting treasure yields were going up well March 2020 mostly got bad news but treasury yields were were going up right so clear example of dysfunctional Market nothing like that happened here so what less liquidity yes uh dysfunctionality no um so obviously uh talk about treasury market here let me say a few words about other markets but I show you here A A compendium of those markets index of financial conditions I show you the Goldman Sachs index of financial conditions because it's what Market participants look at most um could have showed you the board uh Federal Reserve board index fairly similar concept it's an index aimed at assessing the impact of financial conditions on the economy on growth on GDP growth on economic activity in general um there are other Financial conditions index that are more aimed at Market functioning and those don't don't show a lot of uh um of uh of action precisely because Market function remain good so that's why I'm showing you this index but the the financial condition bottom line Titan restrained uh economic economic activities or at least economic activity forecasts much more than in other circumstance of course we saw Equity prices uh declin declining initially why because uh rates were going up so lower valuations but also remember the yield curve inverted Equity Market participants or Market participants in general chose to um uh interpret that as a sign of imminent or forthcoming recession luckily after two years that hasn't happened yet so the market chose to interpret it that way when it became clear that maybe uh there is at least a possibility that the inversion of the curve was simply a consequence of the fact that the FED had to raise rates above a neutral level as a result of that it would also have to come back to neutral eventually so when that realization sank in equity market performance started to become again solid was pretty good last year continue to remain positive uh positive this year but also you know we saw obviously impact of higher rates in mortgage markets much higher mortgage rates uh for new mortgages of course uh very few people refinanced the mortgages uh which which kind of means that if you look at the weighted average uh uh Co on on outstanding mortgages it moved up yes but very little in other words U uh the the the impact of the tightening on the housing sector was very strong on housing activity but because a lot of people retain their mortgages uh the impact on on cost uh was much less and probably we haven't seen yet the full uh the full impact of that so probably slow transmission of monetary policy in in that sense um of course uh uh something similar can be said about the corporate um uh corporate sectors uh corporate bonds rates went up but uh there wasn't an imminent need to refinance a lot of a lot of existing bonds and therefore limited impact there as well um in any case Financial conditions tightened but I would say markets remained very very resilient throughout throughout this period And I think it's that this testifies to uh a lot of things including I guess risk management practices thank you Bill and I'm just about to conclude with a uh um look or a few just a few words on um on the mon policy implementation framework which I don't know any other ways of describing that's saying that it work very well uh as you can see here the blue line is the federal funds rate um uh relative to the target range which is the gray area and the administer rates the GRE the green and the brown areas feral funds rate has been uh very stable very little volatility of course is a consequence of there have been a lot of reserves in the system we're still operating we have been operating probably still are operating on a abundant Reserve regime uh but uh but the monetary policy framework has worked really well it has been subject to a number of tests including the very fast increase in in the in in the in the minister rate in the in the target range but also uh uh different test right so the the banking stress test of uh um of U of March of last year the run up to the de limit um the with the treasure general account diminishing to very low level and then the rapid rebuild of the treasure general account after June of last year all this were pretty eventful uh times in Money Market the implementation framework worked uh worked really well I'll stop here but uh thank you for this and uh hopefully I made it roughly on one well let me start by thanking um the Peterson Institute for the invitation uh it's just a great opportunity to talk about uh a review of a central bank at a time when they're under the microscope not just in Australia but everywhere else and I hope that by the time I've done this we'll see just how much correlation there is between the lessons that we drew from the review and the lessons that an was talking about this morning and so and so um I just need to say that this is in my capacity as the reviewer uh at the RBA and not in my capacity as a a member of the financial policy committee at the bank of England um so so just a little bit about the review our report was was um tabled last year and in fact it's it's in gendered already a number of changes at the RBA and also uh a whole host of changes or proposed changes to the RBA act which are in the process of going through Parliament right now and so this is a very live topic the review was was commissioned uh to be independent by the treasury and so I think that's pretty important because the RBA was very Cooperative but they weren't in charge and we certainly were not given instructions about what we were supposed to get and the Wii here are the three people that did the review uh there was um Gordon de Brower there was K fry M McKibben who's actually sitting right over there uh and then and then me and you know what's really interesting is you might have thought when it was commissioned in July um 2022 that it would have been the co thing that was the motivator but in fact it it wasn't the motivation for the RBA review came much before that and in fact the concern was really that that inflation had been too low and given that the RBA has an a flexible inflation Target with a full employment mandate that involved some you know discussions about the tradeoffs and whether they were made in the right way and and I think just because of the fact that the the review there hadn't been a review of the RBA for a very long time um and certainly not one since they adopted inflation targeting in 1993 the Mandate was astonishingly broad um and and you can see it here there were the monetary policy goals and governance that included the interactions with fiscal and macro provential policy that in itself is huge uh there was performance in meeting the goals um including the use of the policy tools not just over the co period but over the 30-year history uh and then and then there was a piece on RBA culture and and the management uh I'm going to focus on the first two objectives just because of time uh but I wouldn't want that to um make it looked like I didn't think the other one was was important so um and so you know I think what was absolutely clear from the get-go was conf confirmed by all the people that we talked to was that the RBA is an institution that is highly respected not just domestically but internationally and you know that respect was earned me much like other central banks over that long period they had in their inflation Target largely met it and you can see from the chart on on the right here that of course headline inflation is pretty volatile but if you look at their trimmed mean kind of core measure uh it was much less and if you do the arithmetic you can see that over most of the period uh that inflation came in pretty much at the midpoint of their of their ban which is is 2.5% so their band's uh two to three uh and it's a it's a fat line it's not meant to be a specific Target but they certainly were pretty much in the middle and that's something that's very similar to other central banks that are inflation targeters um you know where the trouble started to happen in terms of the public perception and the academic perceptions were was in the 2016 to 2019 period where inflation was under Target so over that period it averaged around 1.7 uh since the midpoint of their thick point of two to three is 2.5 that's quite a uh quite an undershoot for for quite a while and the communications around that weren't very clear uh in the sense that uh there might have been some sense that it was for financial stability reasons to lean against house price uh house price growth which was quite strong at the time um but then there was not a lot of explanation about how those tradeoffs were being made Visa the Full Employment mandate um it looks astonishingly small I mean you're squinting to see that undershoot in the in this the red circle I bet just because it was followed by such a large overshoot uh in Australia the headline peaked at 7.8 uh not that much off headline in other countries but certainly um in real in real time A Cause from uh for concern and you know this the assessments are very similar in terms of where it came from obviously Supply chocks and and supply chain uh disruptions were a big part of that um but that didn't change the fact that in real time people are very concerned about about the inflation they're feeling it no matter where it comes from and so um a way to approach just the more recent period uh to give a sense of at least for that period where did our recommendations come from I think it's useful to think about the assessment of the response in three phases and our assessment wasn't to say did they do the right thing or did they do the wrong thing but are there any lessons to be learned in those different phases and so the first one was just the kind of initial response that was pretty similar to other central banks where it was kind of whatever it takes let all hands on Deb fiscal policy monetary policy and so they lowered their cash rate they um instead of implementing uh QE they implemented yield curve curve control which was basically a yield Target uh at the three-year level uh they paired it with some forward guidance that was State dependent so and the state was based on forecast inflation and in Full Employment and so uh and when you look at that period kind of up to when they took new decis decisions in September of that same year it looked like it did what you would have hoped it would do which was SL stabilize the economy stabilize markets and create the conditions uh that would not only help them meet their inflation Target and their full employment objective but also created an environment in which fiscal policy could could do what it needed to do uh and and finance that in in well- behaved markets um I think where the where the Divergence in views about about the success here come starting in in October of that year where they basically doubled down and and there was of course a lot of uncertainty at that time uh we knew that you know maybe there might be a vaccine but not quite uh you know we knew there were New Waves uh and there were still shutdowns it was just so hard um to tell what was what was needed but clearly um they they extended the yield Target by another year they changed their forward guidance to be time based and also based on actual inflation outcomes not forecast inflation outcom so we want to see inflation the whites the eyes and you know there was a lot of uncertainty so the point that that we're trying to make in that we commissioned some studies so Anastasia did one uh there was enough there though to think that you could have had a better debate than we saw in the board documents in as they were making the decision so the comment here is really about the degree to which they were talking about um upside risk to inflation upside risk to the Outlook at a time when it felt like that that was a reasonable expectation um and then of course they went through the taming inflation phase as everybody else did I think what distinguishes the um the the RBA and and I'll get that is really the exit from uh QE is is quite different from the exit from a yield Target and and it's fair to see that the the exit from the yield Target was pretty dis uh dis disruptive um you know hindsight is a is a beautiful thing because it's 2020 but it's also very humbling and so let's just keep that in mind when we say you know like other central banks uh those feather charts have changes and forecast look pretty similar for the RBA lots of large and correlated errors uh that were P persistent errors um quite similar to what we saw in the report we saw this morning but also um Ben baki's report on the the bank of England and the reasons are obvious we've discussed them I think the one thing that hasn't really been said is the objective function of the central banks and some people might say it was fighting the last war I don't know but clearly uh there's there was a desire to really avoid or ensure against the downside risk to inflation because because of the possibility about how hard it would be to get to get back up and getting back into the Trap that that we thought we were in before um and it was also very hard and particularly hard to modify forward guidance in the rba's case because it was tied to the Y old Target uh and so I think that created a a bit of um stickiness in their approach the the you know I talked about the disorderly uh exit it was uh it was um basically forced on the RBA because of the way that the yields actually moved in markets and so they faced a difficult choice either we don't defend the Target or we give it all we've got to defend it we know what they they ultimately decided um but but in the board documents and in the discussion there was very little um about what alternative exit strategies would be uh the exit strategy was that it would just expire and so um of course there they also had introduced a a Government Bond purchase program um and there has been some consideration about whether or not that actually had any effect uh that was worth a substantial cost uh again those cost benefit analysis weren't really discussed in in the board taking the decisions as well um there was unclear governance and and you know it feels like that's kind of a technical bureaucratic comment to make but when you're an you're an unelected official that has considerable delegated power uh it's quite important to be clear about how decisions were made and and that governance needs to be watertight uh and in this case um it there were some questions in the fact in the sense that um not only did the board not get as much information as they might have they didn't ask for it but also they weren't consulted for some clear decisions that uh for example having a timebase element in Yi in in the forward guidance or um extending the yield Target uh or dropping the yield Target those were not brought to the board those decisions uh which is which is um rather awkward expost um so so it leads us to um I'm just checking the time make sure I'm okay y it leads us to um some some recommendations that shouldn't be that surprising and that are the subject of some of these these um legislative changes and the first one is just you know if you have a board of directors like they do at the RBA that that's got a lot of really really successful people kind of titans of business but not necessarily experts in monetary policy well maybe you should change that and so not surprisingly we asked them to constitute an expert monetary policy board uh that had a clear set of um skills that and knowledge that were related to monetary policy and macroeconomics that would help provide that challenge function uh we also wanted them to have support of the staff in a way and time in a way that they didn't now to actually input into the kind of analysis that was done uh we wanted a separate governance board that did the administrative stuff because their board today does both and we thought that was a distraction for monetary policy um um the second thing was just clarifying the monetary policy framework it should have been clear but in fact there was a lot of confusion about what was the role of Full Employment in this particular uh in this particular framework uh and so it was really more about not changing the framework but saying communicate how you're making those trade-offs what do you think full employment is when do you think you're going to get back and that sort of thing um clearly uh we we know that there are other potential Frameworks out there uh we thought that it would be best to study those in a five-year review and like other central banks do like the Bank of Canada and think about things like nominal GDP targeting or a higher inflation Target and take into account that in fact we might have more Supply shocks than we had in the past um more transparency uh on the decision- making uh and that would include actually publishing unattributed votes of the board members um having press conferences which the RBA did not typically do on a regular basis we wanted them to legislate a financial stability role and make it clear that Financial stability and monetary policy are maybe they're related but the tools should be different uh they should uh coordinate with APPA which is their credential regulator on macro peden tools that will reduce the Reliance on monetary policy to lean against Financial imbalances um and then and then finally uh just you know if we're look we're saying you should look at upside wris and downside risk you need tools to do that and so we thought that they should use regular more regular use of cost benefit scenarios uh stress scenarios and to do that they needed to have better models uh not only just to do the Baseline forecast but to do meaningful scenarios and that would take um I think Ben beri has made exactly the same point for the bank of England that takes data that takes resources and that takes uh that takes expertise and a lot of time and so uh given that it felt for Australia that relying a little more on the academic Community uh and integrating their research uh would be would be useful so the last thing i' I'd say is that I don't think we're even close to being done in terms of understanding what's you know what the final um full cost of benefits of this episode are and I and I think that's partly because we haven't gotten past that last Mile in terms of getting inflation back I think the other reason is we don't know for sure all the macro Financial costs and risks as clao boio has um put out because they're on they're they're they're still unfolding right now um and so I think if we had a priority on the assessment it would be on the tools uh and how effective they actually were given the financial costs that were ultimately incurred and the last thing I'll say is we really need to understand better the optimal policy mix uh between fiscal policy and monetary policy in particular um and uh and uh uh because there are trade-offs about which policy instrument you use and the relative effectiveness of each [Applause] okay well um uh thanks for including me in this uh terrific conference let me um congratulate the organizers and the editors for putting together uh a second terrific volume apparently and I certainly it will be a reference for quite a long time per period and hopefully there will be no need for a third uh volume I picked up on that uh let me before I lose my lead just say that uh uh my task was to uh think about long run Frameworks I focused on the Federal Reserves upcoming fiveyear review and uh my take on this is that the 2020 longr run framework review that J Powell commission uh continues the framework itself continues to be a sturdy framework for the Federal Reserve uh I think it's been a sensible Evolution uh of strategies over the last 20 years for the Federal Reserve and I think it will be able to withstand strong objective scrutiny during uh the review process but there will be a lot of scrutiny indeed okay now I retired from um the Federal Reserve in January of 2023 and since then I've realized that um I I can say things a bit differently than I did uh before um same messages but uh perhaps a little less nuance and so one message uh that I've shared with people is that um you know in 2022 was inflation was extremely high you know the Fed was embarrassed that inflation Rose So High um Olivier uh threw another uh charge out there this I my heart skipped when you said Team transitory but that's another example of the embarrassment that uh I think central Bankers sort of experienced um as inflation Rose so quickly during in the time of their September 2020 implementation of flexible average inflation targeting they were actually trying uh to be extremely accommodative February 2022 the CPI Rose to 7.9% that's the report that just sort of focused my attention on how far things uh had gone now I think embarrassment is actually a positive aspect of humility if you're asking for a central bank to be humble and display humility I think the fact that you know you display embarrassment at some level uh is an example of that and chair J Powell and the fomc repositioned strongly uh monetary policy beginning uh they lifted off in March of 22 but by June of 2022 they really uh took charge of tightening uh and seeking a restrictive stance of monetary policy as the upcoming fed framework review approaches later this year I think this High inflation experience and embarrassment is going to be hanging over the fed's head and I think it's going to important to remain objective and dispassionate in assessing the learnings and implications for the next 2025 framework um if it attended other conferences on this subject it would not be hard to hear commentaries along the lines of let's just rip up the last long run framework and start from scratch and uh think about this completely differently I think that would be a bad thing to do but objective scrutiny is very important now to think about the next framework review I think it's reasonable to remember how uh how this came about uh the evolution from Greenspan to uh what I'll refer to as banki Yellen to pow Clara I think was a natural one and um you know and in the context of the Dual mandate for maximum employment and price stability remember um Allan greensb didn't prefer an explicit inflation objective he wanted a qualitative inflation objective and he you know if press would sort of say price stability is when business and households really aren't thinking about inflation and their financial planning everything is uh perfectly fine and they don't really get excited about that b beran came in and had the idea that being explicit was um best practice for a central bank would pay dividends in terms of uh anchoring the inflation um expectations with Janet Yellen convinced the committee to adopt a 2% inflation objective within this framework mainstream Central Banking uh practices were preserved and you would raise the interest rate when you need to be restrictive and you would lower it when you needed to be accommodative and so they were just explicit uh about the inflation objective so very much along the lines of the Greenspan tradition but by being explicit now that J pow comes in his chair and thinks that it's good hygiene to review the framework plus we've learned a bunch of things about how difficult it is this inflation uh targeting is and so with Vice chair Rich Clara convinced the committee to pursue uh 2% inflation on average over time recognized that the effective lower bound was a risk with the attainment of the Dual mandate uh objectives and that um overshooting 2% actually uh can have some benefits in terms of uh moderately uh can have some benefits in terms of good monetary policy so uh back to the 2025 framework review um in light of the recent experience I think the learnings um you know are pretty clear anchored inflation expectations are a big deal Olivier with Ben and his paper mentions uh the very important role of anchored inflation expectations um I think that's I think that's right we experienced uh substantial increase in relative prices uh energy uh food uh housing um inflation went up a tremendous amount and then and then it started to come down and it could have really become embedded if inflationary expectations weren't anchored but uh it seems like they were so that's uh very important uh we realized that raising the funds rate worked to contain inflationary pressures so we avoided uh many of the second round effects in the US and around the world it seems again it's possible to implement restriced monetary policies within the current long run framework and um you know we have to remember that uh providing accommodated policies can be difficult when you're at the effective lower bound uh it became very clear that the uh fed's implementation of flexible average inflation targeting in September 2020 in the fomc statement uh contain some challenges in terms of what happens if things go off the rails and inflation uh starts up very quickly um I think of this as everyone was expecting inflation to come in through the front door via uh Philips curve types of effects and so you were trying to maintain uh combinated monetary policies to keep the economy going you would expect a gentle rise in inflation with a flat Phillips curve but in fact relative prices uh increases were uh really tremendous and so that led to uh substantial inflation um Chris Waller and Jane erig have written about this in their nice chapter on the usfed policy here and they also mentioned some thoughts about uh how this could have been uh addressed differently I view this as tactics of monetary policy are going to be very important to think through in terms of the review process and less so strategic aspects and also I think the effective lower bound risk will continue to be tangible we don't know what the future rstar is going to be relative price volatility is uncertain and so maintaining flexibility is going to be very important okay with this background in mind some thoughts for uh the upcoming framework review you know I think a lot follows from an inflation objective of 2% you know with 2% the effective lower bound risk uh you know is tangible unless there's a big change in the structure of the US economy uh the setting at 2% um you know crystallizes EOB risk if you had a different inflation objective it would be different you're likelyhood of uh using quantitative easing also goes up if you're going to the effective lower bounds so when I whenever I run into somebody who says they don't like quantitative easing can't you get away from that I think you have to remember that you know the choice of the inflation objective is really important for that so if you were to change upwards the inflation objective maybe you wouldn't have to do QE as much why to I think the FED would be well served in all central banks by making an affirmative case for why 2% is the right inflation objective chair Powell said not too long ago in an interview I think it was 60 minutes where he said you know we've been well served by a 2% inflation objective I agree uh an explicit inflation objectiv has been very important it's crystallized inflation expectations whether or not two itself is the right number continues to be uh a matter of debate so I think an affirmative case for two would be a very uh productive thing we shouldn't just blame New Zealand for how we got to 2% 40 years ago um of course another learning has been uh reinforcing uh the idea that the public dislikes inflation dislikes inflation uh intensely I'm a monetary Economist by training Ben mcallum was my dissertation chair and um you know I'm not an industrial organization Economist a microeconomist I think you know a careful assessment here is really important um households businesses they dislike High inflation but they dislike high in volatile inflation relative price VAR uh you know variability is really a big deal so when gas prices go up a lot food prices go up housing goes up uh a lot that that's really important in the face of large relative price shocks should other prices be squeezed lower to average 2% if you're a monetary Economist and you're really thinking this is monetary are you supposed to set a restrictive stance of of uh monetary policy so that other prices fall so you can still get close enough to 2% so you say you're living you know by your mandate as opposed to that 7.9 % where you kind of go oh this is this is not right at all I think having an appreciation for that's important I think it's kind of a losing battle because anytime gas prices go up you know the Public's going to be unhappy with Central Bankers this is probably part of the bargain that was made for fed Independence which is you're independent that means we get to complain about everything that you do or everything that goes wrong so that that comes with the territory if you don't like it you should stop uh playing uh that game but I mean it's a different question to ask is steady 3 % inflation very costly would steady 3% inflation lead to more volatile inflation I'm unaware of theory that links the level of inflation with variability in inflation except when policy authorities mess up and it becomes really a monetary phenomenon in that regard uh next living with 2% is your inflation objective I think uh more work there is important enhancing the symmetry of the inflation objective is good um but it only goes so far I do like the Viewpoint um where you know if you could bring yourself to sort of say inflation should be above but close to 2% to limit the idea that 2% is actually cealing because I worry that when you say 2% is your inflation objective everybody gets very nervous when inflation goes above 2% and you sort of back off very quickly whereas if you had an attitude where you acknowledge it can be above 2% but we're going to keep it close that could be uh helpful lastly maybe inflation undershooting to isn't really a big deal I struggle here because I had a lot of conversations with my colleagues over the years when we were under 2% and we should be going to 2% but you could have a forecast that you're going to be at 2% in a year so you know what's the big deal or or the you know 1 and 3/4 isn't so bad if we were ever above two by two and a quarter i' feel the same way to which I'd always go I don't know we'll have to see if we ever get there um and then we got to seven so um we haven't really run that experiment yet it might be fine as long as inflation expectations aren't reduced but if that's the case I think you should say it explicitly maybe a range for inflation would be a tactic for an under Runing strategy where it's okay to be below two I think these are some important issues that are going to come up whether there's a range whether point target what it is uh but my bottom line is I think the 2020 long run strategy remains a sound and sturdy one uh adjusting the tactics for any future flexible average inflation targeting episodes is likely an improvement opportunity everybody's aware of that um that's that's on the list to be looking at so thanks very much so we' running a little long so we have only a little time but uh but I thought it would be good to take at least a couple of questions from the floor so I'll ask you please give your name and affiliation and please also be sure you actually have a question so uh questions please yes Rich Miller of Bloomberg uh thank you very much for having this conference uh uh Olivier earlier mentioned uh the possibility of our star being higher I'm wondering uh especially in the United States I think he said I'm wondering how um all of you are thinking especially Charlie thinking about that and if our star is indeed higher is the zero lower bound as much of a problem as we thought before and how how should that sort of um affect the framework um discussions that the fed and others are going to have thank you could take another and and group them if there is another question Patrick H and Peterson so we had a 20% cumulative inflation in different countries over the past three years it was a sort of surprise inflation and it affected debt value of of nominal debt was that a good thing or was it a bad thing okay uh yes I believe the the second question was was asking about the implications of surprise inflation for debt right reduced real debt burdens presumably and and you could view that as a good thing or as a as a bad redistribution of wealth not quite on on our topics necessarily but uh but an interesting question uh Charlie do you want to start us off go in reverse order sure um what if our star is higher I think that would be a good thing I mean if our star was higher you'd expect the neutral level of the funds rate policy rate would be higher uh you'd have more capacity to you know cut rates if you actually needed it presumably higher R st start well um I tend to think of it as being related to Trend growth and so if it was a case that Trend growth was higher than what we're looking at right now that would be good that could be through higher productivity higher labor now if you're thinking it's due to uh Premia coming to do with debt issuance and things like that's uh that's going to induce more uh challenges and and all of that um 20% cumulative debt and uh uh inflation and debt I don't know I never would have touched that as a central bank or I don't think I should touch it now I will simply mention that it's probably the case Chris Sims I think others it's like you know the you know what's the optimal price level when you've got a lot of debt sometimes the answer is to to have a big un a surprising increase in the the price level that's a market kind of thing no Central Bank could engineer that uh presumably or would choose to but they get into a lot of issues there yeah the only thing I would add on the rstar is even if it is higher I mean mechanically the probability of hitting the zero lower bound would mechanically all else being equal be lower but we don't know what the size of the shocks are going to be in the future and so and so if we think we're going to have a more volatile world because of the geopolitical risk or climate change or whatever forces um then it's not clear to me that a small increase in the the real rate really solves your Z lower bone problem on the yeah the debt one's hard just when you think about the the value of uh flating your way out uh it's a repeated game and so you would think at one point it would show up in Risk premiums I agree with both with both uh with both of you actually yes see look the artstar is a very uh it's a slippery concept right uh so it probably takes uh many conferences dedicated conferences to to answer the question is it higher how much is it lower um but I I I think what Charly said I think is very very important um you know it depends so suppose it's higher and I'll say a few words about that in a second but suppose it's higher is it higher because of better productivity uh or better Trend growth better yeah a better economy better potential growth in general that's fantastic right or or sometimes though you hear the argument well the higher debt uh brings together brings with it a higher AR STAR that's a that's a premium story it's not good right so so I think we need to be careful uh how how we Define that um you know is it higher or not I mean ask uh uh 10 Economist you get probably 20 answers um you know by the near fed we maintain uh models laak Williams and Holston laak Williams models and uh if you check uh that that web page you con you see that those models suggest that we are somewhere a little bit below 1% or a little bit above 1% of course there are models that so this these numbers are not far different from what they were pre- pandemic other models come to different results and I let um you know Economist addressed that that question but uh also I would point out to the FMC own longer run dots kind of not the same thing but but but closely related in those I believe the median is 2.6% in nominal terms right so not that different either last question yes thanks I think you have said nothing normative about the size of a balance sheet and is it because this episode hasn't told taught us anything or you actually have a view as a result of what happened yes um I didn't tackle um the the balance sheet issues those are very important I kind of ultimately decided that was outside of my expertise and Page limit for what I was doing um you know I think the strategy that the FED pursued certainly mean you know J Powell is the chair that's had to deal with bringing the balance sheet back down to you you know uh some steady state level and letting it Grow from there and it just has been very challenging in order to find the right level of reserves to maintain the liquidity uh you know making Roberto's job manageable for uh everybody and and things like that but what the fomc seems to have advocated is round tripping uh you know QE and and the balance sheet so if you find that you need to do uh quantitative easing in order to meet your dual mandate responsibilities you also expect that you're going to bring the balance sheet back down to what its rightful relationship is with the size of the economy and financial markets um you can get more prescriptive than that that you might say I really don't want to do QE in which case I think you have to tackle what the inflation objective is in the interaction there but I think those would be at least some of the issues and it gets uh the Optics on this the political CR criticism has just been uh tremendous on this I think that's another reason why round tripping has been an important part of uh the FED strategy at least informally not written down Roberto what do you think I you have experience here I think so a little bit uh but uh so no doubt right the balance sheet uh grew to uh above what was necessary the to implement monetary policy the committee has said that it intends to operate uh with a balance sheet with with a a level of Reserve that is ample right so basically operating either in the flat portion of the demand curve or Reserve or or right at the beginning of the inflection point so which means uh that the uh ultimately the right quote unquote level of the balance sheet will be determined by the demand for Federal Reserve liabilities demand for reserves but also demand for treasury deposits demand for currency right so so I think those are factors that need to be taken into account so we were clearly above that level we still are because it is still shrinking right but uh but uh you know the ultimate level will be determined if you want EXO exogenously by all this other compon the demand for these other components all right many many interesting things to discuss I have questions for the for the panel but I think we need to stop because we're over time so let's thank the [Applause] panelists e always delighted to help CPR and partner with c and there have been several occasions we've had events based around things they published but in particular we want to thank Bill and anel and Christen who generously made sure that we got to do this um and uh which leads to my second point I'm going to say something I rarely feel and even more rarely say um this is a project I wish we had done uh usually when other think tanks other groups do projects I'm like we could have done it better or it's not that interesting this one was really good and really interesting and that's accommodations to all the authors I think Olivier set and Ben set a interesting starting point but also especially to the editors to anill and Kristen and Bill um just a couple substantive points I think one of the things this project shows um and it's something that's been recurrent in Practical research is that comparative studies cross National studies that go more in depth more case study like are worthwhile uh when Tom Thomas laach and I did a bunch of case for our inflation targeting book 20 some odd years ago that was uh derided by some people as uh Loosey Goosey and not very useful um as was seen in this volume and in the previous CPR effort after covid a monetary policy and a lot of other work this can be a very rich way to do economics and a very good collaboration and so I I again I commend the study but I also just want to say I hope we both we Peterson but more importantly we the community of Applied monetary macro people continue to do work in this vein and it's great that the central banks have been so supportive of this um that said uh I'm old enough to remember that the ECB for example Commissioned I don't know a dozen different networks over the course of 20 years to do uh you know nominal wage rigidity real wage rigidity various other things and we still don't know how the monetary transmission mechanism Works um that is to me joking aside uh one of the very striking things that we've seen in in all these studies and recent experience that uh a lot of things happened that seem to be Immaculate or contrary to logic I mean in the US the one I always fixate on is we raised rates 500 basis points and the interest sensitive residential housing sector continued hiring whereas we used to think that was an early piece of the monetary transmission mechanism so there's a lot of work to be done and maybe the comparative studies don't do it um second thing just substantively is it is striking not just in in Ben and Olivier's work but and the work inspired by that but in general just just how much commonality there was across the advanced economy central banks and for that matter the large em central banks uh commonality of results commonality of approaches there actually wasn't that much variation here um which in some ways is a more powerful statement than you might have thought um because that means that in essence um what was in our inflation targeting book with banki laak and Michigan a long time ago in which I was the only one of the authors at all skeptic is really all you need is a credible inflation Target in independent Central Bank and you'll be fine I mean that in a sense if we take the one sentence version of what we've seen and that may be too comforting and too easy and I'm paranoid it is but that's really what it says that the the central banks could make some mistakes on timing some mistakes on communication some mistakes on the forecast but in the and once they got going so everybody was reminded hey they have a credible commitment boom inflation came down at pretty low cost and a lot of places and perhaps more importantly differences in labor market structures differences in energy Market structures prove to be transient I mean they matter but they prove to be transient in their effect so that's actually in some ways a reassuring but uh to me I'm still kind of scared by it it's it seems too good to be true but maybe that is is in the end true um and so with due respect to Carolyn and Dave in particular Dave's presentation today I mean I have to say I'm totally wrong I've been out there saying I thought the UK was going to have more persistent higher inflation than some of the other countries because it was smaller because of brexit because of fiscal policies because of Labor markets because of the NHS you can make a long list and it turns out you know there are some differences but to a first approximation when the bank of England got going inflation came down these things didn't matter as much as I and maybe some others thought um now I don't mean to pick on my my alma the bank of England but just to say that you know I thought that was one case where there might have been a bit of an outlier and it doesn't seem to have been so maybe I'm going well beyond what what Kristen and Bill and onel probably would say but maybe the conclusion of all this is we have something very right and that's kind of in the spirit of Charlie's assessment of the framework so my final point is Let's Not Be complacent um having spent the last few days talking with officials hosting them here and uh our fabulous conference on structural change that Peta talova and mor Obel organized with the fund um you know we have a different set of shocks and Trends coming we're going to have ongoing fiscal deficits rising and as anel's written about we're going to have to live with them because nobody's raising taxes a lot in the US or Europe or Japan anytime soon we have very large industrial policy commitments that may get worse in the dynamic of tidt for Tat we have desirable but intermittent relative shocks upward in Energy prices that maybe in y they will successfully just have a steadily Rising carbon price but the rest of us n it's going to be a policy here a policy there a change here and there and one thing which we've been emphasizing this week and is going to continue emphasize there are going to be inflationary pressures coming out of De globalization and against this backdrop we may have warn geopolitics and we may have a 1985 like dollar overvaluation so again if the lesson of this is have a credible explicit well-measured inflation Target do a few things to tighten policy when you have to to keep it credible and keep on your your Central Bank Independence and all will be fine it may be but I'd encourage the editors and my team as well to think a bit more about how much as scary as the pandemic was this was actually an easy case for monetary policy not a hard one one and with that thanks to everyone for participating enjoy the rest of your week

Channel: Peterson Institute for International Economics

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Length: 186min 25sec (11185 seconds)

Published: Fri Apr 19 2024