The most important figure traditionally in monetary policy in the United States is the chairman of the Federal Reserve Board. The current chairman is JPW someone I've known for many years. I had a chance to sit down with him recently. You talk about interest rates, inflation, and the overall economy. There are a few billion people in the world are waiting to see what interest rates are going to be doing. Do you have any insights on where interest rates might be going?
So I'm going to take that as a great opportunity to talk a little bit about the economy and then talk about where that leaves us with policy. So I would just start by saying that the US economy has performed really remarkably well over the last couple of years. Twenty twenty three. Last year was a year in which the economy grew well above three percent. The labor market remained very strong, unemployment remained very low, and inflation came down at quite a sharp pace, particularly in the second
half of the year by a very large amount. That forecast was almost unheard of. It was unheard of before twenty twenty three, so big upside surprise that year. This year, we had expected the economy to slow a bit gradually, the labor market to continue to gradually cool off after being overheated a couple of years ago, and inflation to continue to make progress. And something like that is basically what has happened. The economy is growing now at about one and a half percent in the first half of
the year. Most forecasters have about a two percent growth rate for the full year. The labor market again has moved into better and better balance, to the point where I think you can now say it's essentially no tighter than it was in twenty nineteen before the pandemic. Remember that the labor market of twenty nineteen was a very strong labor market, So we're back to that place, no longer overheated on inflation. In the first quarter, we didn't
make any more progress. The second quarter, actually we did make some more progress. We've had now three better readings, and if you average them, that's a pretty good So turning to policy your question, what we've said is that we didn't think it would be appropriate to begin to loosen policy until we were more we had greater confidence
that inflation was moving sustainably down to two percent. We've been waiting on that and I would say we didn't gain any any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week, do add somewhat to confidence. We've also said that, you know, we're a dual mandate bank. For a long time, since inflation arrived, it's been appropriate to
focus mainly on inflation. But now that inflation has come down and the labor market has indeed cooled off, we're going to be looking at both mandates there. They're much better, in much better balance, and that means that if we were to see an unexpected weakening in the labor market, then that might also be a reason for reaction by US.
Okay, I think I understand, So to put it in terms I can for sure understand, the markets are suggesting the future's markets that there's a ninety percent chance that the FED will lower its discount rate in September. Do you think the markets know what they're talking about?
So I'm so today I'm not going to be sending any signals one way or the other on any particular meeting. So just to ruin the fund right at the beginning, I simply you know, we're going to make these decisions meeting by meeting, and we're going to make them on the basis of the data as they come in, the evolving data, the evolving outlook, and also the balance of risks. Now that the two mandates are basically close to being.
In balance, right, there are some people who say that the FED would not like to lower interest rates in a presidential campaign period because you could be criticized for helping one party or another. Do you have any comment on whether that's an accurate view.
I do so. Our undertaking at all times is that we'll make our decisions based on the incoming data, the evolving outlook, balance of risks, and only on that. We don't take political considerations into accoun We don't put up a political filter on our decisions. That would It's hard enough to make these decisions based on the appropriate factors. If you're going to add a whole different filter in an area where we're not experts, that's not going to
improve the quality of our decisions. And it's also not the orders we have from Congress or orders from Congress. Sort of use our tools to foster maximum employment and price stability, and to do so without political considerations. That's what we're always going to do if you look at the modern record, that is what we do, and we don't think about election cycles or anything that's political.
Many people use the phrase hard landing to describe hard landing is a euphanism for recession.
I guess people.
Thought in twenty twenty three we might have a hard landing. People thought in twenty twenty four we might have a hard landing. And none of these people were economists, professionally trained economists, but they seem to be wrong. So do you rely on these economists very much in the future when you're get projecting whether you should listen to their views and where the economy is going, or how do you react the fact that we haven't had a hard landing and disappointed all those economists.
So I'll just say that, you know, as someone famously said, predictions are very difficult, especially about the future. On the hard landing question, I have always felt like that there was a pathway to getting inflation back down to our two percent goal on a sustainable basis without the kind of pain in the labor market, the kind of high unemployment that has been typical of tightening cycles and getting
inflation down. And the reason why. My colleagues and I thought that was that the labor market was so overheated that it could cool down quite a bit without having to There still is apparently no slabor, no slack in the labor market. The labor market does not have slack. Essentially, you're at equilibrium now, but look where inflation is. Inflation is at two and a half percent. So this was
in defiance of a lot of conventional wisdom. But we thought that was right, and that says that you have to be one thing that you learn as humility and forecasting. So I wouldn't rule it out, but I would say that the kind of hard landing scenario is not certainly not the most likely or a likely scenario.
I think you have said somewhere that when the Fed does lower interest rates, not saying that you're saying it's going to do that, but if the Fed does lower interest rates, at some point you didn't think it was ever going to go back to kind of the free money practically of years ago, when the interest rates are on the zero. Is that a fair statement that you don't think it's a good idea to go back to interest rates as low as they once were.
The period between the global financial crisis and the pandemic was his historically unusual from the standpoint that we had ever lower interest rates through that era, including a part of the era when, for example, sovereign debt of major European sovereigns was trading at a significantly negative rate. And still even with rates that low, inflation was very low below target. So and so the question, where you know, is what caused that? And are the forces that cause
that gone for now? And I think most people attribute the low inflation era to slow moving forces like demographics, globalization, uh, technological evolution, things like that, and those may or may not have changed. But I but nonetheless, I look at where we are now or our funds rate is a five point three percent roughly give or take, and it seemed it feels like it's restrictive, but not not, you know,
severely restrictive. So it tells me that rates, at least for now are the neutral rate must have risen, probably has risen from where it was during the inter crisis period. And I mean, I think instinctively I can't prove this. We're gonna, we're gonna we're going to learn about this empirically, but but it seems to me that the neutral rate is probably higher than it was during the inter crisis period, and so rates will be higher.
The Fetish set its target for inflation of two percent. Now can you clarify does that mean that the inflation rate has to be at two percent before you're ready to move if you are ready to move, or does it have to be within sight? And what does it mean to be within sight?
So when we change interest rates, that tightens financial conditions, and that in turn affects economic outcomes, you know, growth, labor markets, and ultimately inflation, but with lags that can
be long and variable, as Milton Freeman famously said. And the implication of that is that if you wait until inflation gets all the way down to two percent, you've probably waited too long, because you know, the tightening that you're doing, with the level of tightness that you have, is still having effects which will probably drive inflation below two percent. So we've been very clear that you wouldn't wait for inflation to get all the way down to
two percent. Our test has been for the past quite some time that we wanted to be to have greater confidence than inflation was moving sustainably down toward our two percent target. And what increases that in that is more good inflation data, and lately here we have been getting some of that.
So if you go back in history when inflation began to arise after COVID, at some point people said had include a year, that it was transitory. In hindsight, what do you think people missed about the nature of the inflation? Why was it more enduring than people initially thought?
So, these are this is a question that people will be writing papers about and debating long after all of us are gone. So and it's early to say it's actually kind of kind of soon to be answering it, but I think it's So here's my answer to that question. When inflation arrived, it was really coming out of the goods sector, and it was connected to really high demand
for goods. And it was and you know, the supply change, global supply change, which account for most manufactured goods, collapsed because of too much demand and because of COVID, and you know, so and to us that looked like a
a temporary fleeting situation. We also lost several million people out of the labor force, so wages went way up as the economy really boomed when we reopened the economy, and we thought, you know, there we were getting vaccines were coming in, and we thought that that would fix itself too, kids would go back to school. We essentially overestimated how quickly the economy would return to normal. Finally, these things finally did happen in twenty twenty three, but
they didn't happen in twenty twenty one or two. And what we meant by transitory was that it would go away fairly quickly without the need for our intervention. You don't want to intervene with interest rates if something is going to go away quickly without us intervening, because you know, monetary policy, as I mentioned, works with long and variable legs. So the lore is you look through things like a temporary oil shock. So that was the mistake was that
it actually it actually didn't reverse itself. The problems with the supply side didn't reverse themselves until twenty twenty three, when they really did. When we got it, we got a big burst of employment and also the supply chains were fixed.
So in hindsight, now knowing everything you now know, would you have done anything differently? Would you have had less quantitative easing? Would you have changed interest rates differently? What would you have done differently? Now knowing everything we now know, You know, it's almost unfair. Hindsight's always twenty twenty, right, you know, we remember what we were doing in real time.
We went from a really nice economy in December of twenty nineteen to a global partial shutdown of the economy, and we were contemplating there was no thought that vaccines were around the corner, the economies closing down.
We were looking at severe and perhaps prolonged downside risks. Literally, people thinking and doing work on or are we going to have another depression? Is it going to be the nineteen thirties. So governments around the world, and in particularly the United States government really went to work to provide a lot of support to the economy. We did everything thing we could, including many things that were right. You
know that we read lines that we'd never cross. We crossed them to support the economy and support the financial system. And it was all done because we were managing severe downside risks which did not materialize. We did not have a depression, and part of that is because of what we did. Then the economy reopens and demand is very, very strong, and we saw basically, we saw a big
burst of inflation everywhere, including in the United States. It was different in different places, but so that's what happened, and you know it's not that's how I would answer that.
Okay, but so what you did, You're happy with what you did in hindsight, you would say, in foresight.
I think that the work that we did in twenty twenty in response to the pandemic will stand up very wealth in history. I think people will look at the things that we did, and essentially the financial system was grinding to a halt all around the world. We acted. We were the first central bank, and we were the most you know, supportive, and you know, I think that work will hand we'll hold together when historians are looking
back on it in a long time. I think when you get to the inflation era, that becomes a different question, and you know, people are going to be arguing about that for a long time.
The FOMC, for those who don't follow Washington acronyms, stands for what what is the FOMC.
It's the Federal Open Market Committee. And who is on that committee. It's a little bit complicated. Our structure is we have seven governors here in Washington, all nominated by the President and confirmed to staggered fourteen year terms. And we have twelve reserve Bank presidents at reserve banks around around the country, all nineteen seven plus twelve our participants
on the FMC. In any given year, all of the seven governors vote, and five of the twelve reserve bank presidents vote, but one of the voters is always the New York FED.
And so when you have an FOMC meeting, how many do you have a year?
We have eight a year, so you have eight a year.
And when you get together, you get together for two days or so we do.
So generally starts at noon or in the morning of a Tuesday, and we go all day. We generally talk about the economy, the financial stability issues, whatever special topics there may be. And at the end of the day, each person speaks on those things, and I speak at the end of that day. Then there's a brief presentation on monetary policy, and then we go to dinner upstairs in the Martin Building and we come back the next morning.
We come in at nine o'clock and we talk about monetary policy until we're satisfied with the outcome on monetary policy, and that usually takes most of the morning.
So when you go into an FOMC meeting that the first day, do you pretty much know where you want to come out at the end of the second day or you want to listen to everybody and you haven't made up your mind yet.
You know, the way it works is that you know, I talk to the other eighteen participants regularly, and I talk to all of them at least once in the ten days before the meeting, and I'm thinking about this three or four weeks before the meeting. You know, what what should we want to achieve? What data do we need to see, how do we want to change our communications?
All those things? And so I talk to people, listen to them, and I try to I try to put together an answer that has broad support on the committee. And so when we go into the committee on Tuesday morning, you know, I'm confident usually that I know where this is going to go. But you know, things happen. We get data during the meetings, sometimes events happen, but largely you go in kind of knowing what's what the likely outcome is, and that's that's that's that's the design of it.
So a lot of people in Washington government agencies are very good at leaking, leaking things. You're not that good at that. Why don't't the Fed? Why doesn't the FED leak more?
Why don't you.
Kind of leak a lot more about what you're going to do? You just don't leak that much?
I am. I'm kind of proud of that. Actually, we we do take our obligations to confidentiality very very seriously, and because we know, you know, how consequential it would be for someone at the FED to be leaking. You know, just our whole success depends on having the public's confidence that were ethical and that we're working on behalf of all Americans and not on behalf of ourselves. And we're
not leaking in that kind of thing. So we do have a culture when we're working on a for example, a regulatory matter or or some matter involving one of the banks, it never leaks out of the FED. So I am proud of that record.
Some people have suggested that the Fed's independence is not as good as people talk about it a being, and that maybe we better have more White House coordination with the FED.
I'm sure you've heard about this I think that any comments on that, I'm happy to comment on what independence. On the point of central bank independence, so I think a long time ago people that learned that a central bank that's independent of political consideration does a better job getting inflation under control, and that is now that has accepted wisdom in all advanced economies around the world. It's also a principle that has very very strong and broad
support where it really matters, which is in Congress. You know, you talk to senior leaders in both chambers, in both political parties, and they all understand that you want an independent central bank that doesn't run monetary policy to support or oppose any particular politician or political party.
Do you ever get a call from the President, I'd say, saying interest rates are too high or something like that.
So Ever, no, I would say that, you know, meetings with the president are rare and appropriately so.
You are you are originally appointed to the Board of the Fed and by President Obama, and you're appointed chair by President Trump and reappointed by President Biden, and your turn mischair goes through I think May of twenty twenty six.
So any thought.
About staying through all the way through May twenty twenty six, you're going to do that? Yes, And if some president came along and said, well, you did a great job, I'd like you to reappoint you, would you consider that.
I have nothing for you on that today, Okay? Right?
And is being chair of the FED a enjoyable job or not so much?
It is? Actually I think I enjoy it. I enjoy it quite a bit. I do. It's a first of all, it's a great honor. It's incredibly interesting. I love the people we work with, I love the institution. At this time in my life, it's just been a great thing. I'm in my thirteenth year there now and it's just been it's been, you know, really challenging and all that. But what else would you want? You know, I'm very happy doing the job now.
The Federal Reserve is over one hundred years old, was created under Woodrow Wilson. If you were around then, what would you have suggested they do better than they did? And creating the system where you think the system works pretty well after one hundred years and you wouldn't change it very much.
So I'm giving myself perfect hindsight here. I would do what Congress did in nineteen thirty three. So the original FED didn't have an FOMC, and it really didn't function very well during the early parts of the depression or during other So in nineteen thirty three the current structure was put in place, and that's with the FOMC, with the number of governors and the voting arrangements, and I think that arrangement is fine. It works really well. In
the seventies, the dual mandate was added. But ultimately we're not looking for any law change. We think we have the authorities that we need. We think that the law is in just a fine place.
So basically, do you think the system works reasonably well as it is today?
And today?
What is the the biggest economic challenge you think facing the country?
Is it growth?
Is it inflation, hard landing potentially or what are you most worried about what keeps you up at night of anything in the economy.
So I'll say in the short term, that's what keeps me. But like literally, you know, the thing I'm thinking about in the middle of the night is always this balance we have between not wanting to if we ease too early, you know, we can undermine the progress on inflation, and if we wait too late. We can undermine economic activity, we can undermine the expansion, and you know, so we want to get this right and getting it right is
incredibly important for the people we serve. So that is really that's that's what I spend a lot of my you know, thinking time on you know, longer term. There are lots of things to worry about, but that's really.
What most people they have dinner with friends or sometimes how can you have dinner with friends without hinting what you're thinking about? And do you ever get suggestions from your friends at dinner this is what you should do? Or and how do you respond when they kind of say maybe you should lower interest rates just keep eating.
Or what you might define the word friend to mean doesn't ask you about interest rates. So no, people don't do that generally. You know, people I don't know will always say, hey, cut rates. Somebody said that in the elevator this morning. Did that influence you or no? I said, thank you, sir? You know, no, but I mean, you know, we people say things, but you know, it's fine.
So in some parts of the society these days, people are making decisions based on something called artificial intelligence AI.
Have you thought if you thought about, you.
Know, calling up chat GBT and saying, you know, you know, here's the all the data we have. What do you think about would be a good idea?
Have you ever thought about that? Or are they're not going to like to do that. We haven't done that. I mean we have. We have done little things like we've asked chat GDP, GPT to generate questions for the press conference, and I'm happy to report for any journalists who are here that the questions were not as good as the ones we get from real journal.
So what about my questions? How do they compare to my questions? Okay, so they weren't that great. Okay, thanks for listening to hear more of my interviews. You can subscribe and download my podcast on Spotify, Apple, or wherever you listen