Surveillance Special: A Conversation With Chicago Fed's Evans

A moment to Chicago Economics and to Mr Moscow the Researcher Department. There are now and it was important duty. So let us dive in right now. And I within the many speeches you've given, have to go to the speech in Frankfurt, Germany where you speak about mid cycle and about the dynamics at hand. Let's first define this new phrase. I don't believe I read it in Ring

Bush Fisher Stars. What is mid cycle? Well, um, you know what what the Federal Open Market Committee sort of identified in uh early you know, twenty nineteen is that the you know, state of the economy and financial markets and inflation were behaving somewhat differently than we thought, um, you know, going into the end of eighteen and so we had been raising the short term policy rate, the

federal funds rate target for you know, some time. We were never on a preset course for anything, but we were basically increasing the federal funds right by twenty five basis points every um, every quarter. And then we got to the point where it's like, there seems to be

more uncertainty. Um, there were a lot of things in in play the Chinese economy, and it looked like the path that we had expected, which in my own estimation would have called for probably three more rate increases in twenty nineteen, all of a sudden that didn't look like that was appropriate. So in the middle of this you know, economic cycle, as we had been taking the funds right, we thought to a more neutral setting, and then just a little bit beyond that, we decided, I'm not even

sure what neutral is anymore. I think it may have mowed down on a short term basis, and we need to make an adjustment so that policy would be and I would say moving from leaning towards a restrictive stance as a path to leaning towards an accommodative stance and that's pretty much what I think we've engineered with our third rate cut. At our last meeting. First the distinctions of this Vice Chairman Fisher would speak of ultra accommodative.

Where where we are now within accommodated. I love the phrase Hawker's rate cut. Please explain that to me when we get a chance, Hawkers rate. Don't use this language like that. It's explaining somebody else, not appropriate for long relations. But within this is this path of accommodation that we're on right now. We're at the stasis point now waiting from were But how accommodative is accommodative right now? That's a great question. Um, so you know, so so, um.

You know, at some level, monetary policy can be very detailed, very technocratic. You can look at a lot of data, you can try out different models, you can look for a robust response. But at some point you're always basically searching for do I want to be neutral? Do I want to sit in the background and just let the economy go? Let businesses do what they do very well, you know, capitalism and uh they employ people and they

deploy capital and they put it in play. When the government is behaving in a nice, responsible value added manner than the economy does very well, and you sit in the background, and then sometimes, uh, there's a shortfall of aggregate demand, a weakness, and you know, providing more incentives for credit intermediation is helpful or the other way around. So you know, you're you're sort of trying to find

out are we neutral? Are we accommodative? And I would call the mid cycle adjustment as one where we were clearly on a path headed towards slightly restrictive historically not that restrictive at that point in an economic cycle, but slightly restrictive. And now, in my own mind, I was searching for something that was definitely accommodative, not hugely accommodative, but definitely on the accommodative side of neutral. And I

think that neutral rate probably moved down. I mean, on a long run basis, my assessment of neutral is two and three quarters per cent, and so we were still below that when we paused, and now we're at one and a half to one and three quarters. I think we are definitely accommodative, but I'm not entirely sure that the short run UH neutral funds rate isn't a lot closer to two. I want to get to them this moment.

But you mentioned the foreground right now, and there's times where a central bank and for the luxury of being not in the foreground is the central Bank of the United States of America right now? Too much in the foreground?

Are we asking too much of the eCos building? No, I think at this point in the cycle, as we made that judgment to move towards something more neutral and and and the short run neutral was moving up during that time, we still had a lot of work uh to do, even though um we started thinking about raising rates. But you know, I would say that UH policy is uh not that far off neutral. I'd say it's accommodative. That's a point where Um, there are other factors you

know working. There's there's businesses or you know, working very hard to take advantage of the tax reform UH that they enjoy now to focus their business investment. Of course, business investment right now has been following a little bit, so that's that's been a weakness. And now the other factors the weak foreign growth, trade policy, uncertainty and things

like that. So there's a variety of external factors that have acted to be restrictive, and so it makes sense for us to I don't set that a little bit in a risk management setting, but basically we're not in the foreground, I would say, And and I believe the Frankfort speech you mentioned is one measurement here two with added to the two percent inflation added to the real our starret and it migrates within your text from five down to four down to two and a half percent.

How our story are we are we slaves to this calculation right now? I said, this is just a technocratic way of describing what I was just discussing about. Are you accommodative or are you restrictive? And so you know, if if you're completely comfortable and talking about you know, I think we want to be a little more leaning towards uh UM, incentivizing, helping, credit intermediation so people can take on some investments and consumer spending a little bit.

Then that would be you know, below this neutral right, So you can go as technocratic as you want and say, our stars moved down. The short run version of our stars moved down, and I'm just trying to catch up to it and be a little below that. But in my mind, we're just trying to be a little bit accommodative, and it's very artful. I mean I could pull out all kinds of you know, technical assessments, slowback williams uh other measures of that, but there's a lot of uncertainty

around that. So we have to make what's so interesting here and I will speak of Michael Ferro at JP, Morgan Mr Powers where this from a city Bank Ellen Center with Morgan Stanley and others have a glide path down a terminal rate and potential GDP it's under two percent. Let us begin with the idea that's not politically acceptable as well, GDP growth, GDP growth. There's politics got to do with that. What has nothing to do with politics,

we understand. But but but the the the distinction here is you people are dealing with demographics, nominal GDP what you've been handid and that's unacceptable to so many. And I would suggest the impatience of the president as well. How do you deal with that politics buttressing off you

every day. I don't feel alone in this. I think business has have been dealt this environment, demographics, households have been dealt this, you know, environment, the ability of the economy to grow at some at some level, it's it's you know, very simple, it's a matter of arithmetic. Growth in output is going to be equal to the growth and labor input hours plus what those hours are able to accomplish with the capital that businesses give them. That's

labor productivity. That's just identity. And then you sort of look at what determines that labor hours. Demographics are a big part of that. Well, the aging of the population, mail attachment to the labor force diminishes as they get older. Female increases in labor force participation have run their course. That led to very strong growth in labor hours in the eighties, but now are much weaker and younger people don't have the same attachment to the workforce that they

used to, so they don't work as much now. If you add on top of that the fact that you have a particular attitude towards uh immigration, which would add to labor employment and hours, then you've got a big hold that you're looking at. So that labor hours component is not going to be very large. We estimated to be half a percent each year going forward, half a percent. Now, labor productivity, what are you expecting from that? I'd love to think that technology is going to improve us labor

productivity a lot with technology. You didn't mention technology technology in any of that discussion, which is fine, But now we're all living with technology. Does that lead to an inequality? Does that lead to a Barbell outcome where technology a vanage? Just let me finish, let me let me finish the low growth, just to complete the thought right, because because the labor productivity might kind of go. We got a tax reform, we've got disruptive technologies, we've got new digital technologies.

We oughtously really strong growth. When did we see really strong growth the eighties? In the eighties, we saw really strong growth when we were growing, not not in a decline. We grew three and a quarter percent. Why was that labor input? Labor input was really st long during that time period. How about labor productivity? They call that the labor slow the productivity slowdown period. We had great growth,

low productivity growth. There was a whole bunch of things going and it wasn't until nine to two thousand five that we really saw an acceleration of productivity. Is very difficult to predict when labor productivity is going to accelerate. It takes a very long time. Computers hit the factory floor, uh in a digital fashion in manufacturing durable goods in the late nineties, and so you get this, but it's very difficult to predict. You could hope for it to

be really strong. You can hope a long time. I just don't know how to predict. We're predicting one and a quarter percent. I think that's a pretty good great rate of growth. And that's how I get the one and three. And that's what the economy has dealt that hand. We're looking at it. The politicians are dealt that hand too. If they want three percent, if they want four or five percent, then you've got to think about public policies

are gonna have an effect on that. Call it fiscal space this year with new name for labor employment practices. All kinds of things tell me about nominal GDP. With the lower demographics, with the new lower potential GDP, do we need to have a reset in our belief of the animal spirit we need to get Are we going to be sustained under four percent? Or could we do

okay the current GDP? Yeah? I don't spend as much of my time thinking about nominal GDP, you know, as as he's thinking more about how you cut out a car, about the real GDP growth in the inflation, and I would say inflation has been on the light side. It's been under our two percent objective, and we've said that

we should be pursuing a symmetric two percent objective. So that means, you know, it would be good if the FM clarified that a little bit more, and some of our discussions about our long run strategy, I think clarifying what we mean by symmetry would be important to me. It means we should average two percent over some reasonable period of time. We should probably spend half our time above two percent, But we've spent our entire time below

two percents since we uh called this out. So being willing to go above two percent is something that I think conservative central bankers have a lot of trouble with. I think the ECB historically has had trouble with that. Bank of Japan has really had problem with that. And so if you limit yourself, if you say our objective is two percent, but you really act as if it's a ceiling, that reduces the monetary policy space that you have when you need to provide more accommodation of during

the downturn. So that's why I think it's important to achieve our two percent symmetric objective. In Evan's speech is responsible until it's not and the words come out here, I have mild comfort with two and a half percent inflation. Perseverance is crucial, a powerful, full throated commitment to this a symmetry you speak of because it all centers on outcome based monetary policy. Let's dive into this. Olivier Blanchard and others many years ago said, look, we need to

really pop inflation. We need an aggressive approach. Here you follow on as a public official with really a strong statement that we have to jump start this search for a higher level of inflation. Explain what a powerful, full throated Evans commitment is. Ah, so you've you've, you've you've interwoven two different policies. I would never do that. So so, um, I believe you were probably referring to Olivier blanche Shard.

I think he was research director at the I m F and he sort of said, you know, there's really because what we have said is on average, the federal reserve when we go into recession we cut the short run policy rate by at least five hundred basis points

five percentage points and more. If we start at two and three quarters per cent, we can't do five percentage points, and so we don't have a lot of ammunition and capacity that's premised on a real rate of three quarters of a percentage point and two percent being at two percent inflation. If you don't get to two percent, you start lower than that if you had a higher inflation objective.

And this is where Olivier Blanchechard was musing, if we had four percent for plus a one percent real rate, you know that gives you five percentage points, and then you've got more capacity. Central banks have sort of settled on two percent um. People get very nervous when you talk about two point one percent or more than that, but any rate, So I think most people have backed off in our own long run framework. Cher J. Powell took off the table resetting the inflation objective before we

even got started that type of things. So so when you are trying to hit two percent symmetrically, I think you need to hit it. And so if you say symmetric, we need to say what we mean. That is, if it's averaging. That just means it some of the time

you're going to be above it. And since we've been down at one percent and one and a half percent one a corner for a very long period of time, two and a half just does and seem that outrageous, except that they're an awful lot of people who kind of say, as soon as you go above two, you're probably headed to eighteen on a big number um, and it just sort of presumes that it's not possible to operate in a parallel environment around that two per set.

We need to discuss that, we need to communicate what we mean. I'm comfortable with two and a half percent inflation um, and in fact, trying to get to two percent with momentum full throated harder than many would try to make sure that we actually get there head for two and a half. Half the time we don't get to two. So maybe that would get us to two, and then maybe the other half we go over a little bit. You know, when I get to two and a half, I'm definitely gonna be Look, what's my forecast?

Am I expecting to go to three? Or their special circumstances that are gonna make us go further. It is very difficult to generate inflation in the current environment. And in fact, we just agreed to tax reform and a fiscal policy and government spending that increase the national debt um by a trillion a half dollars over tenure. That's not enough to get inflation going either. So I think, um, you know, we need to we need to work harder. I was talking to her, Michael McKie this morning about

the outcome of your Frankfurt speech. How do we affect the as you say, momentum the physics to get above two even two point five, three months of two point seven, how do you affect that process? You know, I'm trained as a monetary economists, and most of the time your training is you know, inflation is the monetary authorities concern. If you're Paul Wolker, you know, if you're g. William Miller back in the seventies and you kind of go or Arthur Burns, well, you know inflations double I can't

do anything about that. No, do some way down you can do something about that, and Paul Bolker did that. It's the responsibility to deal with that. If inflation is

under your objective. It's your responsibility if you don't understand all the other factors that at work to make you think you think low rates are accommodative, when in fact they're actually still restrictive if you're not hitting there on the interst rate lower Young mois with that summer piece out of JP Morgan, not a forecast, but a model of how you bring the tenure yel down. Is that where we could be heading as we affect and evans

like two and a half percent inflation jump. So I think they're kindling to I think there are a lot of details. At any point in the process, we could have a discussion like that, and I'm willing to have it as guy. But at the moment, I'm thinking more about strategy and how you go about operationalizing to get to your strategic goals, and I think an enormous part of it is communicating we are we are headed for symmetry, we are willing to go over. We must go over

two percent. If we are going to average two percent, you've got to be above two percent when you've been below it. When you think about the effects of the U zero lower bound, we now call it the effective lower bound. I guess because some people think we might go to negative interest rates. I think zero lower bound is probably more accurate. But you know, when when when interest rates fall a lot and we're at the zero lower bound, our expectation is inflation is going to be

pretty low. Then we get out of this in the second half of the cycle, we get back to a more we should be there now, and then if you're gonna average two, you've got to be above two for that second half. Well, maybe you need to, you know, be be targeting something more like two and a quarter or two and a half on the second half of an economic cycle just to get to an average two percent.

Talking about that strategy, making sure that everybody is totally comfortable with it or not, and admitting what your operational approaches, but communicating what you're going to do after being very clear about that, and not kind of getting nervous and twitching when you get to two point one or one point nine, Because I confess I'm about as outspoken as anybody in terms of I'm okay with inflation above two.

But then I start talking about inflation at two point two, and maybe my maybe my voice breaks a little bit. I think it's part of the DNA of central bankers, and we really need to break out of that if we're going to be able to achieve two percent symmetric inflation. I mentioned Gerald Ford today on television. I realized nobody on my staff kneho. He was what about whips United States whip disinflation? Now, I mean, that's that's really the

strategy we're talking about. How big a constraint is trillion dollar deficits. You mentioned the fiscal response to the vogue this moment is fiscal space. Whatever that means. Are you constrained by the fiscal challenges of the nation. I mean, as we look at conducting monetary policy, you do it over a particular horizon and that you know you can have some effect on three to five years. You look at that forecast, there seems to be uh no constraints

from um accumulation of fiscal debt. I would expect that to emerge from very high treasury rates, long term bond yields. That is not what we're seeing. Even though we've seen a little bit of a turnaround, they're very low right now, so there doesn't seem to be any pressure there. This is a different world than the seventies. There's an intense desire for safe assets. Um, you know, people used to kind of go tee. Have you noticed that the German Bund is negative? Who in the heck would want to

own the German Bund? And I say a lot of people, because most people who see the negative yield don't see the point that the price is very high because people want that. So are are low long term interest rates indicate that people like holding that there's a demand for that. You could argue that there's, you know, a need for more supply and this would be one way for it, but it doesn't in any as I can tell. Constraining our forecast carnigu melon with the heritage of Allen Meltzer

Marvin good friend there as well. He wrote a Jackson whole about negative interest rates. There was a modest uproar about that paper. Your thoughts on the experiment of negative interest rates and with that the idea of Japan to Europe to a US slowdown? Do we have should we have a fear of a trajectory towards negative interest rates in America? I think the central banks that have used negative interest rates have found them to be helpful for them.

I think that, um, if you let me just take the e c B d c B and in the Bank of Japan. They came later to the um broad asset purchasing programs that the Fed head embarked upon with our open ended QUE three in September two thousand twelve. We did quantitative easy before that, but we did the open ended in twelve, and that sort of changed things. I think for guidance was helpful, but the combination was useful. Um,

the Bank wage Fan did that. ECB did that, but they also added negative interest rates, so I think that helped them a little bit. If you look at the level of negative interest rates, they sort of pale in comparison to the actual need for accommodation. Back in two thousand nine, according to many interest rate rules, the Federal reserves should have been seeking to set the nominal Federal funds rate at about minus four percentage points. That's what

the tailor rules straight reading would have indicated. We can't do that, because you know, got zero minus seventy basis points is probably a very low down payment on something like that. Other policies would have been you know, at some point also fiscal policy and other policies. You know, I, you know, I think that the central Bank has to address inflation and has to help the economy as much as we can. But as you know, long term treasury

rates go very low. If you're concerned about that, that seems to indicate that it's not very expensive to run expansionary fiscal policies, and maybe the trade off there is better so negative interest rates. I don't think that we can achieve enough with that tool. I worry that financial institutions and UH savvy investors who would find themselves at risk would organize their resources in a way to make

their exposure more limited. That would be a natural thing for them to do, and so I would expect it would be even less effective in the future. I would much prefer to get our communications strategy more in line with achieving our objectives. Financial institutions and savvy investors have gone after you, guys over You mentioned the balance sheet, and the critics would say quantitative using, and there the

new quantitative using that's under process now. Bill Dudley, of course, with a firestorm, wrote about this with Bloomberg Vice chairman Clarative spoke to me the other day and made clear this is not a new que about just lightly touched. Given the time on the repo uproar and the efficacy of your solution away from being quantity of easing forever. Sure, so we spent a long time at the zero lower bound.

We've got a very large balance sheet. We went up to foreign half trillion dollars at some point, and so it was clear that we needed to bring the size of the balance sheet down. There were a lot of people who kept telling us, yelling at us that we should have a lower balance sheet. At the end of the day, we're going to do what we think is best. But reducing the size of the balance sheet was always

part of our plan. And so as we embarked upon a plan to reduce the size of the balance sheet at some point, and you know, you realize this very early on. How big is the balance sheet going to be when you settle down and then start growing it again. Because cash starts to grow in the size of the economy, the balance sheets going to grow. And so we had

discussions about that. And this is gonna have an implication for when short term policy rates all of a sudden might start to um uh tighten and all of that, and so you know, we made a judgment that we could reduce the balance sheet to a certain point, and then then early September we kind of learned that looks like the markets need on a short term basis because of tax policies where checks are written, funds are put off to the side and aren't used for repo and

things like that other things, there wasn't as much liquidity there. You've also got a change in regulatory policies so that some of the banks and dealer brokers that previously were in the business of arbitraging these rates between um uh you know, repo rates and you know other depository rates, they might uh provide that, and then it's kind of like, you know, the regulatory incentives now aren't as attractive for that.

So we kind of decided ultimately that the balance sheet probably needed to be larger than where we were at that time, and so we embarked on, um, you know, buying sixty billion dollars a month at the moment short term t bills. So this doesn't add duration to speak of to our balance she It's not like the QUI where we're buying long term assets, and so it's in

that sense. This is not QWI. This is just trying to provide liquidity, and we're gonna be searching for the right level of liquidity so that we can hit our funds rate target, keep the funds right within the target range, and not have it um, you know, go of that because of a lack of arbitrage with other treasury rates. One more question and then I'm going to go to questions from the floor of a wonderful audience here today.

Just as a warning, the first question we'll go to the gentleman from Cedar Rapids, which I haven't talked to before this, but we'll figure out who the gentleman from Cedar Rapids is here in a moment. One final question. This is all great, and it's great for the elites, and it's great for the suits and ties, but the bottom line is America's savers have been crushed by this collapse of the real interest rate and for even that matter,

the nominal interest rate. Speak to the savers out there, Speak to the have nots of investment who haven't articipated through all of this economics. Um. Yeah, I talked to somebody, you know, you know, every morning before I go to an f o MC meeting about this exact problem. My wife is always telling me, make sure that you don't cut that interest rate. I need a higher There we go, right, you can see what effect that's haden. Riley, could you Riley? Could you get her on radio? Will want her Mrs

evans Um. You know, so that's definitely the case. One thing about monetary policy. When you're raising interest rates, there are some people who benefit from getting higher interest rates. There are some people who don't benefit because they've got higher borrowing costs and things like that. So it's extremely natural for us to you know, be paying attention to that. But at the end of the day, it comes down

to how the economy is gonna do. I think that everybody is going to be better off when we pursue monetary policies, even when that means low interest rates. So our market determined, I mean, we set this uh short term policy rates, and then the market determines all the other rates. And if it's not in line with that, like if there's fiscal policy see problems the yod kerbel Steepen and things like that. So we we can't do

everything that's golden. But you know, in this case, I think getting the economy going so that the job market is very strong, labor markets are very strong. I think the consumer right now uh is supporting the economy in an enormous way, in a way that the business side at the moment is not, even though the architects of tax corporate reform indicated it should be stronger than that. And I think that are we're still waiting to say, well,

there's so many other things going on with reform. Ah, well yeah, but anyway that much trouble right now, you know. But but I think that getting the economy going is going to help everybody, including savers in this room. A number of years ago, he was with the i m F at the time, John Let's he talked about macroprudential risk. Will let him have the first question today, Dr Lipsky, Thanks,

good morning, good question. Obviously, the FED in recent uh FO MC and its recent pronouncements has paid a lot of attention to international economic development financial developments. Does that represent a heightened awareness of the influence of international forces on domestic and the domestic economy and hence on domestic UNFED policy or is this in line with the previous practice.

And secondly, it was many had suggested that with central banks, all key central banks focusing on the same inflation target of two, that that would bring about an implicit coordination of international monetary policy among key central banks. Yet today we see as substantial differences in UH in actual short term rates, substantial and uncertainty about its influence on UH the value of the global value of the dollar. Has that agreement on a common inflation target actually brought about

coordination or of international monitory policy? Those Yeah, now, that's that's that's that's really interesting and and quite quite complicated because as you point out, that sort of gets at the foreign exchange values. You know, we could all agree on different inflation objectives, and that in principle would have a path for how foreign exchange rates would evolve smoothly over time if everything went on a steady state fashion.

So it gets complicated pretty quickly. But I believe that UM on that basis more clarity for all the central banks as to what their objectives are, the weights that they give to inflation versus other objective of which in most of those cases are secondary to the inflation, right, But they also care about the economy and also probably financial stability to some extent, and so the more we all understand UM and our in line in the sense that it's normal we do this too, so it's more

likely we'll understand that. You know, I think there's better understanding of the policies that everyone would pursue UM to achieve that. I wouldn't call it coordination. There is, you know better than I do. There's lots of conversations. Uh. People get together in Bosle uh six times a year at least, and other places around the world, and so there's a sharing of information about what's going on that I think is helpful for everybody to achieve their objectives

in um UM. You know, if it's not cooperative, at least it's non um rivalrous UM as best it can be. I think in terms of the international situation san UM, I don't think things are different in terms of a different policy reaction. I think it's a different moment in time than UM many other times where uh. You know, Europe is definitely slowing. Brexit is a huge uncertainty, even though it looks like now things could play out in

a more careful fashion. But it's really hard to guess that I and and and China is a big uncertainty, and then international tariff trade discussions uncertainty around that certainly changes things. So I mean, in terms of the mid cycle adjustment, I would say this is very much a risk management approach to ensuring that the US economy is positioned as well as it can be for a little more noise from wherever it could come from to the

economy to help support it. Our adjustments have not been anywhere, um, you know, large enough to change the dynamics substantially. If there was a big negative shock, we'd have to respond, and I would expect other countries would have to. So I think this is sort of the normal response. But the moment in time is really, you know, quite different than large events you're channeling there, Frank Night, Chicago. I'm

in the same maybe, but parts right now. Chair Paul's out there at the press conference and he has to parse the risks you measure versus the tangible uncertainties that are out there right now. Expand a little bit here on on how uncertain those uncertainties are something Muhammadalarian, I'm sorry, how uncertain are those uncertainties right now? Those unknowns, Uh,

they're uncertain they're big. Um uh. You know, before before before breakfast, we were talking about a few things and we mentioned Rudy dorn Bush and um, you know, while I never met him myself, I have seen a number

of scholars who studied with him. He's much beloved and and Paul Krugman attributed but others to to Rudy Dornbush this idea from international crisis that you can see something really bad happening and it unfolds in a very slow fashion, and you just think that it has to change the world, and it doesn't, and it takes longer than you can imagine.

Then when things really hit the fan, it happens much more quickly than you ever you know, expect, And so there's this non linearity, you can call it nighty and ninety and uncertainty in the sense that it may never have happened. You can't predict the timing of it. But they're these factors out there and unless something offsets them or somebody else gets their act together, it you know, doesn't look like it would be helpful, but it might

not occur. That's really hard to address. Allan Santner plays the chief economist to Morgan Stanley. I thought the Evans rule original was brilliant because unemployment our rates remain low, at least until unemployment was below six and a half percent um. But you had to guard against financial stability, and that was important, right, so as long as inflation doesn't move but isn't projected to move above two and a half percent. So if you think about, um, you know,

you all have been discussing inflation framework. What would an Evans role look like today that would aim at getting inflation higher but have some sort of knockout clause for financial stability. Yeah, so, um, you know. So when I was arguing for Ford guidance, it was a little bit simpler in the following since we were stuck at zero on the funds rate, we had a lot of discussions

about you know, the committee was divided. Some people wanted to raise rates, um, you know, sooner than certainly I thought. And the unemployment rate was high, and you had a discussion about, well, what's a natural rate of unemployment? What if it's seven percent. If it's seven percent, maybe we need to start raising the funds right now we think it's more like four point three percent. So you talk about uncertainty a whole lot of that, and it was

a little easier. I thought we were trying to stifle premature expectations of a FED tightening. Now, if you're gonna do it, I mean, we've got the funds rate target at one and a half to one on a quarter percent, and so now you would be trying to craft something where you'd indicate we're going to continue to maintain an accommodative stance of policy. Maybe that would be keeping the funds rate where target where it is now until and

then some objective has stated. So my colleague Neil cash Cary, I believe, is not being shy about sort of saying, you know, we should have inflation at two percent, and maybe one thing to do would keep accommodative policy until inflation gets to two percent. That could be one example of that it gets to be well, it was challenge. It was kind of easy then because unemployment was so high and six and a half percent was such an achievable objective just kind of knew we should blow through that.

You know, you get to two percent and you kind of go, is it sustainable at two did we just kind of touched too? You know? Should we have six months at two, you'd have to craft something like that. Um. And then I suppose I know, I have a number of colleagues the committee. By judging by my colleague speeches

and our summary of economic projections, the committee's fairly well divided. UM. You know a number of people have mentioned financial instability risks that if there was more leverage taken, more frothiness and markets than maybe the low funds right target would be inconsistent with that. I don't subscribe to that argument myself, because I think that that's trying to do too much with a single tool. I think our supervisory and regulatory policies ought to be UM ensuring that any damage that

comes from leverage. First off, it's we don't get to an over leverage position, and also that we're ready with the capital without re leveraging. Can you reflate without re leveraging? Well, I mean we have to talk about the circumstances that I you know, we're talking about a two thousand nine uh period and so I mean, I think a lot of it comes down to capital in the banking system, and UM, at the moment, it looks like we have, um,

you know, quite a lot of capital. We've added more and better capital, and the regulatory environment has shifted just a little bit to allow uh, you know, more UH dividends and and things like that a little bit um. You know, it comes down ultimately during a financial downturn, when banks are rebuilding their capital, when did they think they've got as much as they need to lend freely and intermediate credit in all the right places. And that's one of those things that I think always takes longer

than most people appreciate. And I think that was a big part of UH coming out of the financial crisis this time. Uh. And also, you know, financial institutions thinking about how their business model might change over the next five and ten years. So it gets complicated pretty quickly. I've only got one tool. There's an awful lot of objectives out there. And if you want to put a little political spend on some of the police, I just don't know you you I only say that because you

did um. But if you did about you know, you like more growth and things like that, you have to think about sustainability and all of that. So it gets complicated very quickly. Well, the path, let's go to a villain bowder here. The path from Yell and James Tobin with City Group. Villain Bowder, thank you very much. You mentioned that standard Taylor rule into the nine called for roughly minded four percent policy rate. UM. Admittedly, you know, but every effective lower bound is it's about to be

higher than that. But it doesn't explain by the margin that is there. Technically it wasn't used by the authority. The question is is this political or is there a believe that there's a reversal rate, which you mean why we didn't take it into Neglece territory and the next time of asking the next tichtical slowdown you will be back at infective zolo about and by not plot further?

Is there any particularity for that, Um, that's a good question, certainly. Um. The FED was ahead of the other central banks in two thousand and eight, two thousand nine. It started in the US, and uh, our our our problems were worse initially. I think there was you know, I really can't recall any substantial discussions of negative interest rates during that time.

I would give you know, Professor Governor Chairman Ben Bernanke huge credit for thinking up new liquidity programs that were inspired by things he had studied in the nineteen thirties and problems there and all of that. Negative interest rates just weren't something that seemed to appeal to many people.

Now we have experience in these other central banks, and so you could imagine trying that, you know, like I said, I think maybe you could get seventy bases points and whether or not that would help maybe, I I frankly think that a lot. I mean, you know, if we had a longer discussion about asset purchases and open ended QWI three and you can probably every side can find studies that indicate powerful and not really so powerful an event studies being what they are, that's a very difficult

thing to measure. I continue to come down on the side of it really came down to communicating the signaling channel. We were going to do whatever it takes. If you look at what Mario Draggy achieved in two thousand and twelve by saying, we'll do whatever it takes and it will be enough. What did he do He developed the o MT How many O m T bonds did they ever issue? None? I mean, you showing your willingness to do something that previous versions of the head of the

Central Bank weren't willing to contemplate goes. Always following through and delivering though is really important, So constantly working on that if negative interest rates were a helpful signal, and I think that's part of what it is, because they keep backtracking on what reserve levels are actually being hit. If anything, you kind of want to hit more of it, and in sent if you lend out more than you get more credit or whatnot. So the design is challenging.

This gets to courage. As you mentioned the perseverance needed to reflate above two or two and a half percentages. I want to circle back to the single idea, what is the mechanism of that perseverance, that courage that we need. Well, I think it's very important that the Central Bank have uh sufficient level of independence and be perceived as independence.

So I think whenever you start worrying about the actions that I take through increasing my balance sheet might not be perceived well by a variety authorities, that tends to make you wonder about that being able to undertake these very strong actions and be accountable. So go and testify to Congress and explain it to the public and and everybody.

I'm not saying it's not without risk because we tried things which had not been tried before to my knowledge, and um, they were unpopular for a lot of people. And then you've got the saber question. I have taken the saber question many, many times. Um, it's still there. It will always be there. Um. You know, some people

benefit from some policies and other people are disadvantaged. When we we know when Paul Boker had to bring double digit inflation down, the unemployment roles increased hugely and that was part of the cost. And so monetary policy affects people differently at different points in time. Sir h thank you, David Fake. You alluded to the conundrum of lack of

productivity growth in the eighties. How comfortable are you with your metrics and your ability to appropriately measure productivity in services, which is constitutes the lion's share of our economy. Yeah, now there's a good points. Productivity is one of the most difficult things to measure. Services in particular, is very difficult. Um, yep.

I I take those points. I think that um, no matter how poorly they may be measured at the moment, I believe them to be measured on a basis that is consistent with the way the national income and product accounts are measured. I say that only because if we pick a benchmark, we can pick a benchmark GDP growth, real GDP growth. UM. I'm trying to explain to people why I think one in three quarters per cent is the rest growth rate for the economy. I do not

think it's three um. Now, UM, inflation has not been growing very strongly. Part of this is going to come down to UM. If inflation we're growing very strongly, um Collie, you know, and we're at two and a quarter percent growth and inflation is growing very strongly, we'd have to have more restrictive policies. I would guess that would reduce economic activity, and so that would make you wonder about

what productivity is. Now. If productivity was really strong, that presumably would reduce unit labor costs, and that could be consistent with the lower inflation. So, you know, I look at inflation and I kind of go, if we can hit our inflation objective and get that right. We look at real GDP, We look at all the indicators of productivity, and if they're aligned and seem like they're doing well, then I call it a day and I'm done. The search staff looks at productivity and tries to find out

if there's new insights from the services. It's very important, there's no doubt about it. But it's the you know, the big inflation and how's the economy doing that capture most of my intention. I'm sure that some sectors of the economy have very strong and thriving productivity growth, but when you put it all together, and we've also got the age of disruption too, and so you see spectacular productivity gains in other areas that completely decimate, you know,

the legacy producers, and that gets averaged across that. So you kind of want to People usually want to pick out the winners and look at the strong productivity growth, and we've also got the laggards that need to be dealt with. To this wonderful question, it's a hard question. I can't do. It's a hard question. There's no answer there. I was speaking with Ellen Meltzer lunch with Allan Meltzer in Pittsburgh. We got this raging argument about should we

add you know, Allan Meltzer. You up at Allan Meltzer. I upset Allan Meltzer at lunch. It's hard to do. But we have this raging debate about John Edwards in two America's versus the desire to aggregator. As you say, put all the data together. Do we need to be more respectful of not putting all the data together and worrying about two or three America's. They have benefiting from the new productivity and they have nots left behind. I

have a lot of respect round Melzer. He was steam professor Carnegie Mellon when when when I was there, I didn't always agree with everything, But you know, that's the nature of economics. Um, yeah, I don't know. I think it's you know, the state of the economy is really hard. Um. You know, I was falling back on my meager economics training and macroeconomics. One of the first things you assume is that the distribution of activity just isn't that important.

Income distribution I income, low income. It's just a simplifying assumption. But it seems like the level of income inequality is really very large at the moment. And um, the nature of productivity enhances returns to UM. Education and certain skills UM lead to outcomes like that. And I think if you're you know, wondering about appropriate levels for economic growth

that benefit a large uh swath of the population. You have to be thinking about how you can address some challenges that aren't in my economic models to help more people benefit from that. So I mean, is that two America's three America the data? I mean, you can kind of try to do the uniform macroeconomist viewpoint that it's GDP and that's all I care about. But there's way more, um, you know, going on, you know, and this comes up in in the economics profession now, in the lack of

diversity and women in the profession. And do we find ourselves looking at certain questions more and deciding that it's perfectly fine because of that? I really don't know, but I know that when I have more people in the room giving me new perspectives on how things will be playing out, I usually end up in a better place. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

platform you prefer. I'm on Twitter at Tom Keane Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio