- Good evening everyone. Welcome to the John F. Kennedy Jr. Forum at Harvard Kennedy School. I'm Doug Elmendorf, the
Dean of the Kennedy School. I'm glad to see all of you here tonight. We are presenting the 2017
Malcolm Wiener Lecture on International Political Economy. We are honored and delighted
that the lecturer tonight is Lael Brainard, a member
of the Board of Governors of the Federal Reserve System. Let me briefly introduce
this lecture and our speaker. The Wiener Lecture is one
of the Kennedy School's most prestigious lectures. It was established nearly 30 years ago through a generous gift
of Malcolm Hewitt Wiener. Malcolm is an amazing person
whom I've had the chance to get to know over this past year. He was an economics
concentrator at Harvard College, and then founded and led a very
successful investment firm. But Malcolm is also a widely
recognized, respected, and published author
on Aegean pre-history. Malcolm sends me his papers sometimes, the latest of which is
titled The Population and Depopulation of Late Minoan Crete, which describes, analyzes
the dramatic swings in the population of that society. Malcolm has a very touching
belief that I will understand this work when he sends
it to me, and I try, although alas I think is
confidence is a little misplaced. But among Malcolm's many
interests and commitments in his life we are very
fortunate that the Kennedy School has been quite important one. He is one of the most steadfast
and important supporters of the Kennedy School
now for three decades. Without his generosity we would not have the tremendous work of the
Wiener Center for Social Policy, now led by David Ellwood
and my predecessor as Dean. We would not have the Malcolm
Wiener Professorships, the Wiener Auditorium, or this lecture. So my colleagues and I
are extremely grateful for all that Malcolm has
done to advance the mission of the Kennedy School. Unfortunately Malcolm is
nursing a temporary illness and cannot be here tonight. I'm very pleased though
that his daughters, Kate and Elizabeth, could be here. They are students in other
parts of the university, and are very accomplished
in their own rites. We're glad to have you here to represent your father and your family. (group applause) The past Wiener lecturers
have been very distinguished. They include Muhammad Yunus,
the 2006 Nobel Laureate, and founder of the Grameen Bank, Gordon Brown, former
Prime Minister of the UK, Mario Draghi, the president
of the European Central Bank, and Hank Paulson, former
Secretary of the U.S. Treasury. Tonight we are thrilled to
have another distinguished policy-maker and public
leader here to give the Wiener lecture, Lael Brainard. I met Lael in graduate
school here at Harvard. You could tell then that she
was destined for great things, which has turned out to be true. After graduate school Lael
went on to join the faculty of the Sloan School of Management at MIT. She then served as deputy
assistant to President Clinton, where she was his personal representative for the G7 and G8 meetings. Lael later joined the
Brookings Institution. She was a vice president
and a founding director of the Global Economy
and Development Program. Lael went to the Treasury Department in the Obama Administration where she was undersecretary for international finance. In that role she was
the U.S. representative to the G20 finance deputies
and the G7 deputies, and a member of the
Financial Stability Board. Lael become a governor of
the Federal Reserve in 2014, nearly three years ago. We cannot ask for a
better person to present the Malcolm Wiener lecture on
International Economic Policy than Lael Brainard and I
will close my introduction with a personal comment
that I feel very lucky to have been Lael's
friend for many years now, and I feel very lucky to welcome her to the Kennedy School tonight. Lael Brainard. (group applause) - It's a real pleasure to be here. It's nice to see friends here. Boy, that was incredibly kind Doug. Doug was one of my
favorite graduate students and I was not destined for greatness. I would not have made it
through graduate school but for his assistance and coaching. I'm also very honored
to be invited to deliver the Malcolm Wiener Lecture, and I am sorry he can't be here in person, but I think you should feel proud that he is so well
represented by his daughters. Today I wanted to talk a
little bit about the outlook for the economy. The economy appears to be at a transition. We're closing in on full employment. Inflation is moving
gradually toward our target. Foreign growth is on more solid footing, and risks to the outlook
are as close to balanced as they have been for some time. All told, it will likely
be appropriate soon to remove additional
accommodation continuing on a gradual path. As normalization of the federal funds rate gets further underway,
monetary policy too, is approaching a transition, prompting increase focus
on the balance sheet. How the federal funds
rate and the balance sheet should be adjusted
individually and in combination depends on the degree to
which they are substitutes, their relative precision,
and the degree to which there are effects on the
economy are well understood. Let's start with the outlook
and then turn to policy. In recent quarters we've seen improvement in inflation and activity
both at home and abroad, following a period when the
drag on domestic activity from abroad was considerable. Between the middle of 2014 and 16, a combination of notable fragilities and risks in large foreign economies elevated sensitivity of the
dollar to policy divergence, a sharp decline in oil prices, and heightened financial
market sensitivity, combined to slow progress
in the U.S. economy and the adjustment of
monetary policy to an extent few had anticipated. Today the external environment
appears more benign than it has been for some
time, even though risks remain. Recoveries are gaining traction
in China, Japan, and Europe in part reflecting greater
confidence in their respective policy environments. The improvement in the global risk outlook was also helped by the continued progress and the gradual pace of
monetary policy adjustment in the United States last year. In recent quarters market
participants appear more confident that China has
the will and the capacity to maintain it's exchange rate regime, while achieving it's growth targets, although there's a tension
with high credit growth that will eventually need to be addressed. In response to weak
growth, downward pressure on the currency, large capital outflows, and financial market
volatility early last year, Chinese authorities boosted
the supply of credit, ramped up fiscal stimulus,
initiated new communications regarding the exchange rate, and clamped down on capital outflows. These actions appear to
have stabilized growth and calmed fears of financial instability. Capital outflows, while still
significant, have moderated. Activity in Japan has
also picked up recently and monetary policy has
remained supportive. In Europe the recovery has proven to be increasingly resilient. Monetary policy has continued
to provide crucial support, several challenges, including referendums in the United Kingdom and Italy. And liquidity in capital stresses faced by German and Italian banks
have so far been navigated without significant damage to growth, financial stability, or
inflation expectations. Financial markets have
functioned reasonably well, and risk spreads have stayed contained, although uncertainty
about upcoming elections has likely led to some
increase in French and Italian sovereign spreads in recent months. Measures of inflation
compensation have also improved, suggesting fears about
disinflation have diminished. Of course concerns regarding the medium to longer run remain. In China the price of near-term stability has been an increase in leverage, particularly in the corporate sector. In Japan, core consumer price
inflation is close to zero, well below the central
bank's two percent target, and limited scope for
additional monetary policy accommodation leaves the
economy vulnerable to shocks. In the Euro area growth in
inflation may remain low for some time, which would
pose challenges for banks with low capital or high
amounts of nonperforming loans, and for highly indebted sovereigns, and political events
raise some uncertainty. Going forward it will
be important to continue monitoring these developments. Here at home, the economy
is at a transition. The past few months have
seen continued progress in the labor market and we appear to be closing in on full employment. The unemployment rate, after
remaining relatively flat from the third quarter of 2015
to the third quarter of 16, fell one quarter percentage
point last quarter to four and three quarters percent. The labor force participation
has been about flat on net over the past two and a half years, which indicates considerable
cyclical improvement given the underlying demographic trend. In compensation per hour
in the business sector, the most comprehensive measure of wages, increased at a three percent
pace the past two years, noticeably above the pace
earlier in the recovery. Even so, there may be some
room for further improvement on some margins. The prime age employment
to population ratio remains depressed relative to pre-crisis. The share of workers who
are working part-time who would prefer full-time
jobs is still elevated. Some measures of wage growth, notably the employment cost index, have increased relatively little. We're seeing welcome signs of progress also on the second leg
of our dual mandate. After a protracted period
below the FOMC target of 2% inflation recent months have seen a step up in longer term compensation, which had dropped to worrisomely
low levels last year, both market based and some
survey measures of inflation expectations remain low but
there's been some movement in the right direction
in the past few months. Inflation has also moved up lately as the effect of past
decreases in energy prices, and increases in the dollar has faded. Core PC inflation, which
strips out volatile food and energy prices, and is a
good gauge of future inflation, has increased. Still, core inflation has
been below our two percent target for almost all
of the past eight years, and further progress is necessary to reach and sustain our symmetric
inflation target. Recent indicators of
aggregate spending suggests we will continue to edge
closer to our goals. Consumption growth has been encouraging supported by continued
job gains, rising wealth, and greater confidence. Business investment changed
little the past two years, but there are some signs of
renewed growth currently. This is a sharp contrast with
the situation just a year ago, when risk spreads on corporate
bonds had risen noticeably. These are often a precursor to downturns. Measures of business sentiment
were relatively depressed, and corporate profits
had declined over 10%. In recent quarters risk
spreads have moved back down to more normal levels. Business sentiment has rebounded. Economic profits look to have turned up, and new orders for capital
goods are moving higher. The partial rebound in
oil prices has also given a boost to drilling activity. Of course there are some
crosscurrents that could weigh on activity. Recent increases in
longer term interest rates could restrain interest
sensitive areas of demand, such as housing, and a
further pickup in the dollar could weigh on net exports
and business investment. Upside risks to domestic
demand have increased. Equity prices are up
around 10% since October. Sentiment has increased,
although the spending data don't yet show a noticeable acceleration. Some of the increase in
sentiment and changes in asset prices could be tied to expectations of more expansive fiscal policy, which is another upside risk. In addition, the progress that
we've made over the past year with the economy closer
to meeting full employment and inflation objectives,
has contributed to the favorable shift into the balance of risks. This increase in upside
risk to domestic demand and the diminution of foreign risk, suggests that risks to the
outlook are more balanced today than they have been for
the preceding two years. Even so, the nominal
neutral rate of interest, the level of the federal funds rate that's consistent with output growing close to its potential
with full employment and stable inflation the rate
that's neither contractionary nor expansionary is expected to remain low in the near term and below
it's historical average, even once it reaches its
longer run normal level. This means there will be
less room to cut the federal funds rate so that the
likelihood of returning to and operating near the
effective lower band will remain higher than we're
accustom to historically. Prudent risk management
suggests that policy should take that into account, this asymmetry in risks posed
by the greater likelihood of being at the effective lower bound, where conventional
policy can't cut further. Given the progress we've seen
and the positive momentum in the incoming data, additional
removal of accommodation is likely to be appropriate soon, continuing at a gradual pace. But unlike in previous tightening cycles, the FOMC currently has two
tools to remove accommodation, the balance sheet as well
as the federal funds rate. The December 2015
decision by the Committee to continue to reinvest
principal payments, and thus to rely solely on the
federal funds rate to remove accommodation until
normalization is well under way, serves a very important
purpose in my view. With asymmetry that I talked about earlier in the scope for
conventional monetary policy to respond to shocks, there's a benefit to enabling
the federal funds rate to rise more quickly than would be possible if the balance sheet were
shrinking at the same time, and sooner reach a level
that allows for significant reductions if conditions deteriorate. Even so, recognizing that
the median of the committee projections places the long-run value of the federal funds rate around 3%, which is a very low level
by historical standards, some could judge normalization to be well under way before too long. So monetary policy too
could be approaching a transition point. Once the short-term rate
is comfortably distant from its effective lower bound, there are broadly two
types of policy strategies that could be contemplated. One type, let's call it a
complementarity strategy, might actively deploy the balance sheet as an independent second
tool complimentary to the short-term rate. Under this strategy, both tools would be actively used to help the
Committee achieve it's goals. This strategy would seek to take advantage of the way in which the balance sheet might affect certain
aspects of the economy or financial markets differently
than the short-term rate. Any such difference might
derive from the fact that the balance sheet more directly, though not necessarily more precisely, affects term premium on
longer-term securities, while the short-term rate
more directly affects money-market rates. Although it may be tempting, in theory, to operate with the balance
sheet as a complementary additional tool we have
virtually no experience with how such an approach
would work in practice away from the effective lower bound. For this reason, one might
instead prefer a strategy, let's call it subordination strategy, that would prioritize
the federal funds rate as the sole active tool away
from the effective lower bound, effectively subordinating
the balance sheet. Once federal funds
normalization meets the test of being well under way, triggering an end to the
current reinvestment policy, the balance sheet would
be set on autopilot, shrinking in a gradual, predictable way until a new normal has been reached, and then increasing in
line with trend increases in the demand for currency after that. Under this strategy, the
balance sheet might be used as an active tool only if adverse shocks push the economy back down
to the effective lower bound. The case for this strategy
is straightforward, and I think compelling. This strategy recognizes
that the two policy tools are broadly similar
away from the effective lower bound in the ways
that they effect the economy by indirectly changing the
level of interest rates used to finance purchases by
households and businesses. Relative to balance
sheet policies, however, the influence of the
short-term rate is far better understood and extensively tested. We've had several decades
and many business cycles over which to measure and analyze
how the federal funds rate affects financial markets
and real activity. In contrast, experience
using the balance sheet as an active tool has
been largely confined to a highly unusual period around the Global Financial Crisis,
when short-term rates were constrained by the
effect of lower bound. So predictability, parsimony, precision, and clarity of communications
all would seem to argue in favor of focusing policy
on a single active tool that's most familiar. In short, it makes sense
to focus policy on the tool whose effects are better
understood by both policymakers and the
public in circumstances where the tools are largely substitutes. Even with this subordination strategy, there may be limited
circumstances in which the balance sheet might be employed in a manner that's supportive
of the short-term rate. Most obviously, during the
period when the balance sheet is running down,
if the economy again encounters adverse shocks, it
may be appropriate to commence the reinvestment of principal payments again in order to preserve
conventional policy space if the federal funds
rate were to drop below some threshold level,
perhaps similar to the one that we determine is well under way. More broadly, although the
two tools can achieve roughly similar effects, they are different, and there may be special circumstances under which these differences
may be particularly valuable, such as when the transmission of changes in the short-term rate to long-term rates and other financial market variables and the real economy is impeded. Moreover, in addition
to directly affecting longer-term rates, changes
to the balance sheet could serve to reinforce
policy communication associated with the short-term
rate through signaling, as some had suggested during
the Global Financial Crisis. Assuming that this subordination
strategy is adopted, and the balance sheet is set to shrink passively and predictably
once reinvestment ceases or is phased out, there
is some uncertainty around the size of the balance sheet when it returns to normal. There are good reasons
to expect the new normal balance sheet to be considerably smaller than its current size, but
larger than its pre-crisis level. Of course, trend growth
and the demand for currency gradually pushes up the size
of the balance sheet over time, but in addition the
structural demand for reserves may be considerably larger now than prior to the financial crisis
because of changes, such as new regulations that
favor safe liquid assets, and changes in financial
institution's attitudes toward risk. If the demand curve for
reserves has shifted out, then a greater supply
will be needed to attain any given interest rate. And the supply of reserves
will need to be set far enough above the
structural level of demand to accommodate unexpected shocks. Because of changes since the crisis, it's difficult to know with any precision how low reserves can be allowed to drop while still maintaining
effective interest rate control. So as the balance sheet
gradually declines, it will be important to
carefully monitor money markets for indications that
any further reductions in the supply of reserves
could put upward pressure on money market rates. Let me just quickly sum up. Recent developments
suggest the macro-economy may be at a transition with
full employment within reach, signs of progress on inflation, and a favorable shift in
the balance of risks at home and abroad, it will
likely be appropriate soon to remove additional
accommodations continuing on a gradual path. As the federal funds rate
continues to move higher towards it's expected longer-run level, a transition in balance sheet
policy will also be warranted. These transitions in both the
economy and monetary policy are positive reflections of
the fact that the economy is gradually drawing
closer to our policy goals. How the committee should
adjust the size and composition of the balance sheet to
accomplish it's goals and what level the balance sheet should be in its new normal are important subjects that I look forward to
discussing with my colleagues. With that let me conclude
and open it up for questions. Thank you. (group applause) - Thank you so much Lael. The floor is open for questions. There are microphones on these
two sides on the ground floor and microphones part way up those stairs. As usual, as the Kennedy School Forum, we like people to identify
who you are when you start, to ask a short question, and
to make it really a question. So I'm just going to point,
but Lael will have to do the hard part of answering the questions. - Hi, thank so much for coming. My name's Eric Hollanberg. I'm a senior at the
college studying economics. I'm just wondering last
time there was significant fiscal expansion interest rates were low, and they had been low. They seemed they were
going to be low for awhile. Now with this new talk of a
possible fiscal expansion, it seems like rather than it
going into an easing cycle, which the Federal Reserve
is actively doing in 2009, it seems like the balance is more towards a tightening cycle. So I'm just wondering how you
and the rest of the governors view that, view fiscal
expansion in the face of different interest rate cycles. - It's a really important distinction. How fiscal policy effects the economy depends on a lot of things. Of course, there's a lot of uncertainty about precisely what the magnitude
of the policies might be, what there composition might be, and what there timing should be. One of the things that matters rightly for the effects of fiscal
policy on the economy, is how far the economy is from its goals of full employment and inflation. As I think I laid out in
very extensive detail, I'm sure you don't want me to repeat it, I do see the economy as approaching, it's in the vicinity of full employment, and we're starting to see
some progress on inflation. In that kind of a context fiscal policy that operates primarily
to expand aggregate demand might lend itself to an
expansion in fiscal spending. It may improve the outlook
on inflation, for instance. But if there is not much
change to potential growth or to aggregate supply all else equal, it would tend to push in the direction of being consistent
with greater inflation, and thereby with greater
increases in the trajectory of the interest rate. In those circumstances, the
fiscal space is the real issue, of whether that fiscal space, how much fiscal space there is, and how much fiscal
space will be maintained to cushion the economy, should at some later point
it encounter adverse shocks. But again, these are pretty
theoretical in the sense that right now we don't really know when, or what, or how much,
fiscal there might be coming down the pike. There's a lot of steps in that process. - Hi, my name is Ryan and I'm
a sophomore at the college. I was wondering what your
thoughts are on the Fed's current level of credibility
and whether you think this could be a problem moving forward. - The Federal Reserve has a very clear set of statutory requirements
that it operates under. Congress essentially determines
how the Fed operates. We get from Congress very clear objectives for monetary policy. A lot of clarity around
what instruments we use to achieve those. And then we operate under, I think, the highest transparency
practices and standards, really of any central bank in the world. As I'm sure you know, every
word we say in the FOMC is captured for posterity
and it's summarized, first in the consensus
statement, then in the minutes, and then finally released in transcript complete with pauses and
laughter five years later. We tend to come to places like this and try to give the public a sense of how we're thinking about where the economy is relative to our goals and how that affects our policy outlook. Of course, we testify quite
a bit in front of Congress. So I hope that our
messages are pretty clear and I hope that will help undergird strong credibility as well. - Hi, my name is Vince. I'm a junior at the college. This is a little bit more
of a theoretical question. You mentioned in your talk about issue of the zero lower bound. A lot of people think of the obstacle to negative interest rates
is the ability of cash. The same time we'll have
economists talking about how cash enables a lot of crimes like tax evasion, money laundering, and drug dealing. Theoretically, why wouldn't
the Federal Reserve want to limit the amount
of cash in circulation, at the same time allow
them to push negative interest rates lower
and potentially kind of solve all those crimes that
are facilitated by cash. - It's a really interesting debate. In fact, some eminent economists
at this very university have proposed something along
the lines that you suggested. I will say that, I can speak for myself, first of all, my great preference is to give sufficient support
to the economy and be sufficiently patient when
the economy encounters shocks as it did over the last two years, to ensure that we
continue to make progress towards our goals. And because conventional policy space using the federal funds right
above that zero lower bound or the effective lower bound
is so much better understood, more familiar, easier to communicate, and something that financial
market participants have many years of experience with, my inclination is to be
very cautious from a risk management point of view,
and to try to remain in that realm. The discussions about
negative interest rates I think have been given
a lot of additional real-world testing over
the last few years, which we have followed
with great interest, as we should, because these are policies that other central banks have undertaken. I think we have learned
that many economies have found that moving somewhat negative, not deeply negative,
but somewhat negative, can be effective at
extending that policy space. But it's not something
that I think we need to be contemplating now. The issues associated with
electronic issuance of currency go well beyond issues simply of creating additional policy space, and have a lot of very
complicated considerations associated with them. - Thank you so much for
speaking with us today. My name is Martin Trosembaugh. I'm an MPAID student and if I may, I'd like to ask a question,
not about monetary policy, but about one of the other
specialties of the Fed, which is financial technology, and the way that you envision the role of the Federal Reserve
versus and in collaboration with the other regulators in the system, like the OTC moving forward
to take on the challenges of changes in structure
and regulatory adaptations that need to happen for these changes. - The area of financial
technology, I think, is an area that we as regulators, as responsible for some
parts of the payment system, with responsibilities
on financial stability, and for overall safety and
soundness of the banking system, as well as for some consumer protection for parts of that system, for all those reasons the Federal Reserve really has a responsibility
to be very engaged in learning everything we can about what's happening, both in the consumer and
small business facing side of financial innovation, but also on the backend
where distributed ledger could ultimately be
transformative in terms of the way that wholesale
financial markets operate. We have people all over the country because of our 12 bank system, so in some of the most
innovative parts of America, so we get a lot of really good marketing intelligence from that. I think it's early days yet. It's hard to look around
the corner and see exactly how structure is going to evolve. One thing that does seem
clear is that people of your age will probably
go to a branch once in their lives, if
that, and will do almost all of their financial
interactions on their smartphones, and already many people are there. So the questions are how
do some of the financial technology companies interact with banks? What's the safety and security of that? What's the role for
applications programming interfaces in that? It's all very early stages. What's the responsibility
of the various regulators? We're not, I don't think, in a place yet because this is so early
stages of being able to come to firm policy conclusions. It's true also of the
other bank regulators. You're right, they've
put out some proposals, but I'd say it's good to
have a very robust debate. But it's still pretty early to know what the right answer is for some of these very complicated issues. - Hi, Zack Dannon, a
senior at the college, studying economics. You mentioned that the
long-run federal funds target is three percent, which
is much lower than usual in normal times. Is there a fear that come
another adverse shock the economy, we're going to be
back at the zero lower bound? And given our lack of
experience using the Feds balance sheet in dealing
with these experiences, is there any talk of
potentially giving more power to using the short rate
to provide stimulus to the economy by increasing
the inflation target, to say three or four percent? - It is true that the median
projection for the committee is around 3% now. Obviously, there may be
some dispersion about individual member's views about that. But there's also a lot
of research out there which would suggest that we may be seeing the neutral rate remaining low for some protracted period of time due
to a whole variety of things. Demographics, low productivity growth, maybe changes is risk, attitudes as well, as some global influences there. You're exactly right,
in that kind of a world, if you just had the same
severity and frequency of shocks as we've experienced historically, you would be bumping down against
that effective lower bound more frequently so it
does raise questions about how adequate our tools are for responding. Where it leads me personally
is to be somewhat cautious, and to be very mindful
of the assymetry in our conventional tool kit,
again I have a bias in favor of sticking with what we
really understand well. For that reason, I have
been somewhat asymmetric in my risk management approach
over the last few years. - First of all, thank
you very much for coming. My name is Nick. I'm a
freshman at the college. I'm undecided but heavily
leaning towards economics. My question is less macro-economic
and political I guess. The President has indicated
that he's strongly considering replacing Chairwoman Yellen at the end of her term. I was just wondering how you
anticipate that effecting, if that does come to pass, the Fed's work, and it's approach to macro-economic policy in the next decade. - I hope my remarks did not deter you from pursuing undergraduate economics, because it's much more interesting than monetary policy speeches. In terms of potential personnel changes at the Federal Reserve,
we have a very strong institutional framework. Again, our objectives are extremely clear. They are given to us by Congress, and we operate under statutory authority. There's a lot of guardrails in the system. As you know, it's a voting institution that votes with a great
deal of transparency. But there are very clear voting rules, which means that you have
collective decision making to a certain degree. We look at the same data. We have phenomenal staff
who present the forecast and do a lot of analysis
that is given to all members of the committee and
helps inform our thinking in a similar way. So for all those reasons the
Federal Reserve, I think, has been set up by statute
to essentially ensure quite a bit of continuity over time. Now, I can't predict with any certainty what particular changes might lead to, or whether there will be any changes, but again, just from an
institutional perspective, there's a lot of guardrails that push in the direction of continuity. - Hi, I'm Avi from the business school. The DOW hit 21,000 today. If you were to look at the
Schuler Price to Earnings Ratio it's hovering around 30 versus
the long-term median of 16. My question is, a lot
of folks would attribute this to the long-term, or a
long time of protracted low interest rates. If we do find ourselves in a situation as we're trying to increase interest rates that we are an asset bubble
and that bubble were to burst, do you see that as a legitimate risk? What kind of room would
we have for accommodation given how low interest rates are today? - First of all, one
thing I have learned over many years of working in this arena, is it's very hard to predict. It's impossible to predict
how financial markets are going to move over time. Since the crisis and in part
due to statutory changes in Dodd-Frank, the Federal Reserve Board has more explicit responsibilities for financial stability. I think it's always had responsibilities for financial stability, but they have been much more
explicit since the crisis, and I think for good reason. As a result, we now have
a committee that focuses on the kinds of issues that
you raised on the board, but we also have a division, a new division that's devoted to it. They do systematic proactive monitoring of risks in a way that
we really didn't have in the lead up to the crisis. So we look at precisely
the kinds of things that you're asking. Our valuation's looking
a little stretched, and to the extent they are,
is it in particular markets? As you said, some asset
valuations have been rising. But we also look at the
combination of factors that seem to be important
during the crisis. So it wasn't simply asset valuations leading into the crisis. It was a combination of
that along with leverage, and maturity transformation. We are carefully monitoring
across that spectrum of risks, and we're doing it sort
of market by market. What I can tell you from that work is that maturity transformation and
leverage are very different than they were going into the crisis, and really are not flashing
any kind of concern signals. But we will continue to watching that. In terms of what tools do we have, we are better equipped and
less reliant on a single tool of monetary policy. We have a counter cyclical buffer that gets turned on when
many of those metrics start flashing signals of concern, and can build over time. But we also have through the cycle structural kinds of safeguards. As you know, the largest banks have much larger capital buffers. Those are stressed every year. They're doing much more risk management. They are husbanding their
liquidity much more carefully. We have living wills, so
there are a whole variety of safeguards that go along
with those counter cyclical measures that would also
move in the direction of helping us contend with
any financial stability risks without relying on that
sole policy instrument of the federal funds rate. - Can I build on that and
interject a pair of questions? - I thought you were going
to make some observations. - No, no. This is for you. Can we talk about Dodd-Frank a little bit? You just referred to some of the changes in the way the Federal Reserve
operates since the crisis. Obviously, there's been very
important changes by law and Dodd-Frank and Dodd-Frank
is explicitly on the table for changes from the new
administration and the Congress. Two issues I wanted to ask you about. One is, the importance in your mind of orderly liquidation authority. Former Chairman Ben
Bernanke just wrote a piece emphasizing how important he thought that authority was in his view. The second piece is, are
you concerned that the extra restrictions on lending that
came about through Dodd-Frank and other changes, have made
getting credit unduly hard? There's often a pendulum that's discussed in terms of credit availability. Do you think that pendulum
has now swung too far? - Let me just say that first of all, we just got more data yesterday that shows that credit conditions are really good, that banks are lending. Banks of all sizes are lending,
have been for some time, and that conditions in
credit markets are at least as good as they were pre-crisis, without some of the riskiness. And that profitability has
also been improving over time. What we see is a group of the largest and the very large most
complicated institutions have built substantially more capital. They're are managing
liquidity much more carefully. The derivatives markets
are much more transparent, and there's been a lot of
very important changes there. Those banks, which have made
the most fundamental changes, since the crisis, because
I think the U.S. regulatory system moved quicker in
the wake of the crisis, and our standards are at least as strong as anywhere else in the world. Those banks are lending
more, are more competitive, and more profitable than banks in any other part of the world. So I think it does suggest that
the more better capitalized, better risk managed, better
liquidity managed institutions can actually lend and
succeed and be profitable. In terms of the particular
aspects of Dodd-Frank that you asked about, I do think that orderly
liquidation authority is one of the absolutely
most critical pillars of Dodd-Frank. Now, it goes hand-in-hand
with the enhanced credential standards, the tougher requirements, the surcharge and other
things that have been imposed on the larger institutions. It does absolutely depend
on those institutions having credible living wills. And those are pretty tough tests that those living wills need to pass. But if there's one thing
we learned from the crisis, it is that that risk of having
multiple large institution failures at the same time
is one of that is incredibly damaging to the economy
and we need a mechanism like orderly liquidation
authority to ensure that tax payers are
never again on the hook for those kinds of failures. - Thank you. Please. - I'm Julia Arnus. I'm a 2011 graduate of the college. There are various
academic efforts underway to evaluate and analyze
crisis interventions and develop a toolkit for responding to financial crises and fire fighting. What guidance do you have
for academics who are trying to develop resources
that would actually be useful and that central bankers could
turn to in times of crisis? - I think one of the other
important lessons from the crisis is that, at least in the U.S.
and other major financial jurisdictions, wholesale
financial markets are really the nerve centers of the financial system. Just as the central bank
has a long tradition of playing a role of lender of last resort through the banking system, so to being able to intervene, again, as with classic
lender last resort doctrine against good collateral
with solvent institutions to liquefy those wholesale
financial markets is a critical lesson from the crisis. The ability of the
Federal Reserve to do that during the crisis, I think,
was vital in ensuring that the crisis was contained, that the fire essentially was contained. Doug's question about
orderly liquidation authority also goes to that essential
toolkit for moments where very large complicated
interconnected firms that have cross-border
operations might together be on the verge of failure. Their being able to liquidate
them in an orderly way, again, without taxpayer funding,
is critically important. But perhaps the most
important thing is preventing that crisis to begin with. That's why massively
lowering the probability that any of those institutions
ever get to that point is sort of job number one. - Thank you, yes. - Hi, my name Kassia and I'm
a student at the college. My question is what do
you find most exciting or interesting about your job? - Well, I am, as you can tell, an enormous wonk. There is not a subject that you ask about at the Federal Reserve
where you do not find 10 members of the staff
who have written original really interesting research on it, and they are only too
eager to come and tell you everything they know. So that's the best thing
about the Federal Reserve. It's just this incredible group of staff, whether it be in the supervision area, it's really payments,
financial technology, of course monetary policy,
financial stability, how the wholesale financial markets work, how the international spillovers work through exchange rates, I mean, you ask any question
and you get incredible depth and nuance so that's probably the most exciting part. I find it very exciting when
young people like yourself come and do internships and
I would really encourage you to think about that. It's a phenomenal place, I think. Really, you get great access
and that also helps keep, it can be a bit stodgy,
especially in the hall on which I sit, which is
marble and old and quiet. So I would really encourage
people of your generation to apply and to come kind of give us a little jolt of energy. Let me ask one more question, if I might. Which is about the cost and benefits of running the economy hot. The unemployment rate is
now a little below 5%. It's at roughly what many people think is the natural rate of unemployment. So there's some sense that
maybe we should stop this there. But you noted that during
the past several years, labor force participation rate, which has been trending down, has actually leveled, been roughly level. So there's been a real
increase in participation on cyclical terms as you said, I think, because the unemployment rate has been fairly low
and falling wage growth has started to pick up. So if we let the unemployment rate, if you and your colleague
let the unemployment rate fall to 4% say, I think
that would draw more people into the labor force, or keep more people in the labor force. Even if the natural rate is 5%, unemployment rate of 4%
isn't going to push inflation up very far very fast. So I think the modeling of
the Federal Reserve staff, of whom I was once a member
and did the sort of work that Lael's talking about, the staff would say you could
run the unemployment rate at 4% for a number of years
before the inflation rate would actually get back to 2%, borrowing other sorts of shocks. You said 2% is symmetric target. You also said that the Fed
has watched the inflation rate been below that target, almost continuously now for years. So why not the unemployment
rate go down to 4% and stay there for the next several years? - I think I don't view
it from that perspective. I think there's a lot about the economy that has changed. Perhaps it was changing
going into the crisis, but it certainly appears to
have changed since the crisis. We don't really know what the natural rate of unemployment is. As you said, many people
thought we had reached it a year ago. Instead of seeing
unemployment moving lower over that period, it flattened out, and many people who
thought that labor force participation was tapped out, and that the demographics
really were going to lead to structurally much lower
labor force participation, found that, in fact, people did come back into the labor force. So we saw a flattening out
rather than a continue decline, which would have been more consistent with the demographic trend. The part-time people that
are working part-time, but say they want a full-time job, I don't think we fully understand, is that a cyclical phenomenon? Are they still looking
for that full-time job, or is it that the nature
of work is changing, with a lot more contracting out, a lot more temporary arrangements, some smaller, but some of
these gig-economy arrangements, so I think there are a variety of reasons to think that we aren't
actually as knowledgeable about the natural rate of
unemployment as we think we are, and as you said, because
inflation has been so, for such a protracted period
of time below its target, there hasn't really been any tension. Now going forward, obviously,
those dynamics could change. So that's what we'll all
be watching very carefully. I certainly will. But again, I think,
the economy is at a bit of a transition point. The international environment
poses less downside risks. The domestic environment
poses more upside risks, so we are going to be in a
slightly different posture I think, going forward. - Thank you so much. I think we've now run out of time. Lael, thank you so much. (group applause) We've learned a lot tonight. We really appreciate your coming.
