CNBC's Sara Eisen moderates a policy panel at the ECB Forum on Central Banking 2026 — 7/1/26

[00:00:00] Speaker ?: I'll see you next time. [00:00:30] Speaker 1: I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. [00:03:00] Speaker ?: I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. [00:06:00] Speaker 2: I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. [00:06:28] Speaker ?: I'll see you next time. I'll see you next time. [00:06:32] Speaker 3: I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. I'll see you next time. The members of our next panel must translate analysis into decisions that affect hundreds of millions of people. I am delighted to welcome to the stage Andrew Bailey, Governor of the Bank of England, Tiff Macklem, Head of the Bank of Canada, Christine Lagarde, President of the European Central Bank, and Kevin Walsh, Chair of the Board of Governors of the Federal Reserve. The panel will be expertly moderated by Sara Eisen, anchor at CNBC. Sara, over to you. [00:07:22] Speaker 4: Thank you. Thank you very much, and thank you to President Lagarde and to the ECB for having me back here. It's an amazing tradition and one of the highlights of my year and my career, and way more fun than watching you guys on your irrespective press conferences. So this is going to be fun. And I'm excited because I'm hoping we can have a good debate about divergence in policy and approaches. And maybe with that, President Lagarde, I'll kick it off with you because you're the only one up here to have raised interest rates in response to the Middle East oil shock. Are you going to do it again? This year? No, why did you do that? [00:08:10] Speaker 2: Well, we did it because we had the perfect monetary policy circumstances to do so. And, you know, when you have your inflation outlook up, your core inflation up, when you have the underlying inflation indicating that it's also trending up as well, and that you're only going back to your 2% target at the end of 28 with a number of things happening in our inflation outlook, which includes, you know, the market expectations in particular, you have the obvious decision, and it was so obvious that we had a unanimity decision within the board of government, the board of the governing council. [00:08:50] Speaker 4: But seriously, how will you decide whether you keep going, because you're still above target? [00:08:56] Speaker 2: You know, what we decided to do is, way back, to give up on forward guidance, okay? And personally, and I've said that publicly, if I have one regret, it's to have felt bound and compelled by forward guidance. So, I think what we do is now also informing market participants, informing financial experts from all walks of life, about how we come to our monetary policy stance. And I have called it, not forward guidance, but framework guidance. So that those interested in how we come up to a particular decision appreciate what we take into account, what intellectual process we go through, what indicators we are particularly attentive to, so that, of course, they have to do a little bit more work themselves. It's not forward guidance blindly, and you just assume that it's going to be what had been calibrated as forward guidance. They will have to do a bit of homework. They will have to look at the indicators that we're attentive to. They will have to appreciate our intellectual process and what we are especially attentive to. And that includes, you know, if I go through what we did on the 11th of June, we looked at the inflation outlook, taking into account all the latest economic and financial data, with risks, part of our assessment as well. And that's, you know, recent development, as you know. We looked at underlying inflation, various set of indicators, and we looked at the transmission of monetary policy. So it's taking all that into account in the context of a supply shock that led us to the decision that we made. [00:10:39] Speaker 4: So, speaking of not liking forward guidance, which is going to make this job so much harder for me, this panel, Chairman Warsh, we have inflation in the U.S. that is higher than Europe's and farther away from our target. So why are we not raising interest rates? [00:10:53] Speaker 5: I was hoping you asked me about forward guidance. We'll get there. [00:10:56] Speaker 4: Because you have so much to say there, too, right? [00:10:59] Speaker 5: So, we have found common cause. It's what President Lagarde said. I liked her when we met 20 years ago when she was finance minister. After that answer, I love her. Reform does not stop at the water's edge. What I found most exhilarating about the last two days here is the kind of discussions that we have begun at the Federal Reserve. As a lot of people at this conference, open-minded, keen to think anew about the conduct of monetary policy. And President Lagarde's answer on forward guidance, I couldn't have said it better myself. We're going to chart a new course so that we can make better decisions and do the right thing. And so my few days here have been incredibly rewarding on that. On the broad conduct of policy, at my press conference, I said, I'm not going to give forward guidance because we're meeting in six weeks, but I have an update for you. We're meeting in four weeks. Helpful. [00:11:57] Speaker 4: So, is July on the table for a rate hike? [00:12:00] Speaker 5: So, Sarah is trying to get me to break this rule. She's going to fail. There's a lot of data that we received in that meeting. I see many of my FOMC colleagues here in Sintra. I take their views very seriously. I want us to have a good family fight when we meet in four weeks. There's a lot of late breaking news on a series of these things. And when we get into that room and shut the door, we're going to have a good debate. But I don't have much more for you than that. [00:12:31] Speaker 4: Okay. We'll get back to that. I have more questions for you. Governor Bailey, you did not raise interest rates, even though your inflation is above target. But there are members of your committee that want to raise interest rates. So, why are you holding back? [00:12:45] Speaker 6: So, I mean, like Kevin and Christine, you know, we all spend a great deal of time looking at the substance of the evidence. And I think an important piece of the substance of the evidence for us is that we've got a softening economy. So, we're seeing a softening labor market. We're seeing some softening of activity. Yeah, we think we've got a bit of an output gap opening up. And we had that before the hostility broke out in the Gulf. So, that's the contextual setting. I mean, because, you know, we're very focused on the risks of pass-through of the energy prices to the indirect effects and things like food prices and the second-round effects. And we don't obviously want it to become embedded. It is very frustrating. I was very much at the view that we were going to have inflation back at the 2.0 targets, you know, in the late spring. Everything I've seen actually since tends to confirm me in that previous view. It's obviously not there because of the effects on the Gulf. But the decision not to raise rates for me was based on, you say, reading, you know, the evidence of a softening economy. And then the second thing, and this is probably where we're in a little bit of a different position from the ECB to start with, because it's sort of the adage, you know, where you get to depends on where you start. You know, there was an expectation that we would cut rates this year. That's not unreasonable in the context of the softening economy. You know, that was off the table in March and, you know, it's off the table at the moment. So, you know, that was the context for me that I think we had some time because by taking that sort of, in a sense, that loosening off the table, the mortgage rate went up 1%. So you can argue that we've actually tightened policy in the period since the conflict broke out. But like, you know, Kevin and Christine, you know, we reviewed every meeting. So we've got a meeting coming up at the end of July. And we will be looking at all the evidence again then. So we return to it. [00:14:42] Speaker 4: Yeah, the weakening economy though, it sounds like, are you more worried about that than the higher inflation? [00:14:48] Speaker 6: Well, I'm not going to give you any prediction as to what we will do. I think, obviously, the thing that has happened is that energy prices have come down quite substantially. They're still a bit above where they were pre-conflict, but they've come down. But the other thing you have to be a bit careful with in the UK is that we have a delayed reaction mechanism to energy prices because of the way our household energy price cap system works. So I always say, you know, it's appropriate at the moment to borrow a soccer analogy. We always look, I'm afraid, we always look a bit better in the first half than we do in the second half. [00:15:21] Speaker 4: I'm proud that you used the word soccer. Now the World Cup is in the US, everyone's talking soccer. Governor Macklin, your inflation rate for May was 3.2%. It was above your range for the first time in a long time. But you have not really spoken about raising interest rates. Are you comfortable where you are? [00:15:40] Speaker 7: Well, we left our policy rate unchanged last time. So yes, I guess we're comfortable where we are. Look, on the… [00:15:47] Speaker 4: Going forward without forward guidance. [00:15:50] Speaker 7: No, no forward guidance. You know, what's interesting is we're all facing pretty similar shocks. But we all start from slightly different places. And we have different proximities or different exposures to these shocks. And, you know, the benefit of our frameworks with flexible exchange rates is we can direct policy for what we need in our country. So yeah, you're going to see some differences. In Canada, like the UK, the economy is soft. The economy is growing, but it's been weak. There's excess supply, the labour market, there's some slack in the labour market. But, yes, inflation is clearly above the target, 3.2% in May. That's a dilemma for monetary policy. You know, if we raise rates to pull inflation down, it's going to weaken the economy further. And if inflation comes down quickly, we're going to regret that we did that. On the other hand, if we cut rates, support growth, there's a risk that the rise of inflation becomes more persistent. So, you know, when we looked at it, you know, we're sort of on the, we think, you know, our range for neutral is 225 to 325 or 225. So we're kind of at the bottom end of our neutral range providing a little bit of support. But, you know, we think it's about the right level to keep inflation contained. You know, the other thing I would say, though, is, and this gets a bit back to your forward guidance question. I mean, we've got to be humble. There's a lot of uncertainty out there. Those risks could shift quickly. And the other part of our message is, if the situation changes, we're prepared, we're prepared to take action. [00:17:33] Speaker 4: Do you think, Chairman Warsh, that the inflationary spark that everyone's seeing and feeling is a temporary phenomenon as a result of the rise of energy prices, which have already started reversing pretty sharply? [00:17:46] Speaker 5: Does temporary sound like transitory? Is that what you were trying to sneak into? [00:17:50] Speaker 4: Yes. Is it transitory? [00:17:51] Speaker 5: So I'll build on what Governor Macklin just said. By the way, the four of us all served together in the global financial crisis in different roles. So I would say for us to be back on this stage in this circumstance is great. And they've been incredibly warm to me. President Lagarde has sort of welcomed and encouraged these sorts of new ideas that we've talked about at the Federal Reserve on these series of task forces. And Sarah, my hope is that the results of these can be a public good. If we make progress in thinking about the effect of productivity, the effect of data, new inflation frameworks, this is something we can all borrow and use from. The other thing I'll add is that monetary policy spills over from one of our economies to the other and it spills back. I think the way Governor Macklin said it right, which is we're all being hit by a series of shocks. In the US, the AI shock is leading to a boom in capital expenditures. We see that first and foremost in demand, but I'm confident we're going to see it in supply at some point. So we're spending most of our time trying to monitor those developments. Is it inflationary? Well, in the near term, we can observe it on the demand side, but it's up to the central bank to decide whether it's inflationary. [00:19:04] Speaker 4: That's why I'm asking. [00:19:05] Speaker 5: Whether in fact it finds its way into a broader set of goods. I don't have any news for you on that, but I would certainly rather be in a position where we have two things, where we recommit the way I know my colleagues have to deliver price stability. And the other piece that I'll take note of, which shows some difference, I think, among our nations is the AI boom is showing itself first and very prominently in the United States. I'd certainly rather have this problem where we have massive capital expenditures instead of thinking years back where we had financial engineering, where we had companies that weren't able to deliver profits. So they would do shareholder buybacks. Well, right now they're investing in the future because their expectation is the supply side of the economy will expand. And if it does, that has huge implications for monetary policy. But again, I'm not going to make a judgment now. We'll meet again in four weeks. But this is as exciting a time and also as a consequential a time to be a central banker that I can think of at any point, maybe outside of a crisis in my adult lifetime. [00:20:11] Speaker 2: Thank you. President Lagarde. Can I pick up on a point that my friend Kevin made? It's the speed at which things change. And that is clearly accelerated by AI. And I think in that context, we have to be open to new measurements, new ways of thinking, new tools that help us and assist in making the right decisions. So I think in that context, the use of scenarios, for instance, that we have now really nailed down with milder, severe and adverse scenario to make sure that our decisions are solid and robust across scenarios. The fact that we are incorporating risk into our assessment of inflation. And I think risks, by the way, that we have to the upside on inflation and to the downside of growth are probably more broadly balanced than they were a few weeks ago as a result of what we are seeing, which happens at speed. If you look at how fast the price of oil, spot price granted, has moved down, you know, $72 a barrel now, when it was $120 back in March. These are changes that are just so accelerated that we have to be prepared to measure differently and more accurately using AI, for instance. [00:21:27] Speaker 4: How do you make sure Europe doesn't get left behind on AI? I know it's not necessarily the central banker. [00:21:34] Speaker 2: It's not the central bank governor's question in a way. I know you probably have thoughts on it. No, I'll tell you something. One, I think that we have to consider that as a transformational technology breakthrough and diffusion and material technology. It's going to, it needs to be analyzed from our perspective, both in terms of, you know, how much capex is going in that particular domain, what impact it will have, how fast will it develop, how will it diffuse, how will we reorganize the way in which we conduct work, including at our central banks, by the way, to really appreciate what impact it will have on productivity. But if it delivers the productivity expectation that we have, then it is going to be a radical change going forward. And we need to, of course, from our perspective as central bankers, we need to measure the disinflationary, inflationary impact it will have over the course of time. And it might be disinflationary first and inflationary second, or probably more so the other way around. But it all needs to take into account. Now, I take your point about Europe lagging behind in terms of investment and the frontier companies that are leading the game at the moment. But I think that we are all sort of hostage to each other, if I may say, because we need those frontier companies, but they need the markets. When you represent 25% of the revenues of many of those hyperscalers, we need each other. We are in this game together. At which end of the spectrum, at which set of the supply chain to be determined and there will be healthy competition, I'm sure. But we depend on each other. We can't dispense of them, and they can't dispense of the revenue source that we constitute. So we are in this together. That's my personal view. [00:23:27] Speaker 4: Governor Macklin, how is it impacting Canada? Do you get the tailwind from the boom in the U.S., or are you still dealing with too big of a headwind from trade, for instance? [00:23:36] Speaker 7: Well, look, trade does continue to be a headwind. I mentioned the economy is soft. You certainly see the impact of U.S. tariffs on our exports. I think, you know, coming back to investment, I think we get both some tailwood, but we also get a lot of competitive pressure from the U.S. The U.S. is investing in a very big way. And, you know, our economies are very integrated. We have a very integrated business model in North America. That's why trade uncertainty is impacting Canada. It also means, though, yeah, Canadian firms are going to have to be competitive. I mean, what you see on AI, you know, it's very interesting talking to companies. So, you know, you survey companies, you ask them, are you using AI? Yeah, like almost everybody's using AI. But then you say, okay, have you, you know, materially changed the whole production process and, you know, made it, you know, embedded AI? That's a much smaller number. You know, that's something like 10%, 15%, depending. So, it does show that there's, there's a lot of, a lot of potential there. The, you know, whether it's inflationary or disinflationary, I think, you know, looking out, ultimately, I mean, there's so many good reasons why this is a general purpose technology. And, you know, one of the things I picked up over the last couple of days is, well, actually, it could be even bigger than that. If it actually accelerates the process of innovation, of discovery itself, it could be even bigger. But, you know, when exactly that arrives, when those disinflationary kick in, I think is a very open question. That's, you know, another one of those things we need to be humble about. In the near term, we are starting to see some pressures. You can see it, you know, you mentioned our May CPI number. You look at computers, up 10%. How's that going to feed through the supply chain? I mean, those are the sort of things we're going to need to keep an eye on. [00:25:37] Speaker 4: Yeah, memory chips are a big deal. There's the inflation question, Governor Bailey, there's also the jobs question. And I know it's early, and we don't exactly know. But do you think of AI at this point as a job killer or job creator? [00:25:50] Speaker 6: Well, I think the jury's out on that question. I mean, if you look at the sort of, look at history, and you look at, I mean, Tiff's just been referring to general purpose technology innovation. And you've seen waves of general purpose technology innovation over history. And they've actually had different patterns in terms of their impact on employment. So you can't generalize to start with. You know, there are some channels which will create jobs. There are channels which will destroy jobs. There will be channels which will substitute jobs. And what, I mean, two things matter here. One is what the mix of those channels is. And I say it has differed. Now, I do think, I mean, this is not a central bank point. This is much more of a broader public policy point. I do think we have choices in terms of public policy, you know, mixes that we adopt on that front, particularly in things like skills and training. And the second point I make is, because again, this comes strongly through from looking at the past, is that the length of time it takes these effects to come through. And, you know, I said there's more than one labor market effect. The length of time it takes for each of those effects to come through. And therefore, what the mix will be over time, differs over time. Now, again, you know, we can, we can have choices there in broad public policy terms and in how economies operate. So it's very important to look at that. But I wouldn't generalize. I mean, we're certainly, I mean, so far, you know, when I go around the country talking to businesses, yes, there's a lot of talk about it. I think a lot of businesses are using it. I mean, we're using it at the Bank of England. I would say we're still really in the experimentation phase, actually. And that's fine. I mean, that's what you'd understand. And the consequence of that is that you don't, certainly in the UK, I would say we don't see it strongly in the overall economy-wide data. But that doesn't surprise me. I think it's too early for that. [00:27:41] Speaker 4: Chair Warsh? Yes. Opinion on jobs? [00:27:44] Speaker 5: So I'll jump in on that. First, I'll say this is one of the central questions that all of us have for our day jobs in evaluating output, employment and inflation. These are big questions in part because the rate of change of improvement in these models is moving at an exponential level. This is hyper Moore's law stuff. And so while we might see business surveys that say no big deal, my speculation is six months from now, the surveys will be saying quite the opposite. The United States is likely to be a big winner over the medium term in this, but I don't say this from a parochial perspective. The U.S. is not afraid of productivity-led economic growth, but we don't view the economics of this as zero sum. We aren't rooting for another country to fail. We're rooting for economic growth to be broad-based. That's good for the United States. It'll make all of our jobs easier. On your question of jobs, I mean, I will go back to good econ one. It's called the lump of labor fallacy for a reason. Who knew when the Internet was born that the Internet was going to create a million and a half jobs as Uber drivers? We are in the first or second inning of this revolution. This is a big paradigm shift, both for the conduct of our policy and for our economies. I think the jobs will be greater. Prosperity will be stronger. The question, as one of my colleagues raised, is timing. And we have to take that timing very seriously. We have, at least in the United States, a dual mandate. And we have to deliver both on the employment side and on the stable price side. So we'll be monitoring the speed of it. But if you wanted me to sound like a pessimist and a doomer on this, I'm afraid I'm not there. [00:29:25] Speaker 6: If I could just come back on one of the points on this whole area. I mean, the other big issue is financial stability. And this is a very big, you know, a big development in terms of frontier AI. And what we do need to see, and I think this is pressing now, is that, you know, we work together to have, you know, solid and robust arrangements for introducing these models. So that we can take, you know, take risks out as best we can, where we, where they are created. But, I mean, they're always there. But they're brought to the surface, if you like, by these models. That is a very pressing issue that I think we have stronger coordination of that process. President Lagarde. [00:30:08] Speaker 2: And on that vein, I completely agree with Andrew on that. But I celebrate the fact that apparently tomorrow, the US and the EU authorities are going to get together and sit down and decide the terms under this will best be deployed for the safety of all of us. So that's, that's a really good development. [00:30:26] Speaker 4: I did want to bring it back to economic growth for a moment, President Lagarde, because, and I've asked you this for a few years in a row now, and you've always pushed back and have been right. [00:30:35] Speaker 2: Okay, I'll push back again. [00:30:37] Speaker 4: The stagflation question, and whether Europe is facing stagflation. [00:30:41] Speaker 2: Okay, well, then I'll repeat what I've said before. Stagflation is a concept of the 70s, in circumstances that are not replicated those days. We are currently at almost lowest historical levels of unemployment. Employment participation continues growing. There will be different jobs, to your previous questions. But employment is, is, is continuing to, to grow. But growth is weak. And, and, and, and, and we are taking all the right steps to make sure that we have price stability. We're, we're not going to let inflation run, you know, out, or the genius get out of the bottle and inflation move up. We will take the necessary steps. And we have. [00:31:27] Speaker 4: Yeah, I mean, the employment story has been a positive one for Europe, for the US as well. I mean, we've seen a really remarkably resilient labor market. Chairman Warsh, how do you interpret the recent data points on the labor side of your mandate? [00:31:40] Speaker 5: So when we met two weeks ago, I think the way we as a committee described the labor side of the mandate is we said labor markets are steady. We said the demand side of the economy was solid. And we said the supply side of the economy, especially capex and productivity. Again, this is before we see the fruits of AI. We said that was strong. I don't want to, I don't want to sound like a Wall Street newsletter and update that with recent events because we follow trends. And, you know, I'll reinforce something that President Lagarde just said. We're all in the price stability business that might not be our only business. But if there was a common thing I heard over the last couple of days, it was open mindedness on these questions of AI, open mindedness on productivity. But we've all looked around and we've seen the prices are too high. And I don't think I'm the only one on this stage that's recommitted to deliver price stability. [00:32:33] Speaker 4: So the market was right to interpret your first news conference as hawkish. Nice try. [00:32:40] Speaker 5: Yeah, I'm not, I'm not, I've just gotten advice from, from a, from my senior statesman on this group not to do that. But I'll say this, expectations of inflation over the first four months, first four weeks of this period, they've come down. Inflation risks have come down. Again, in our business, we don't want to over determine things. But if there were people in household or the business sector and the financial markets who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they'd be disappointed. We're going to deliver price stability in the US. That's what this committee has signed up to do. And our objective is to do that. The tactics, the strategy and the rest, that's still to come. [00:33:29] Speaker 4: No matter what the president wants. [00:33:31] Speaker 5: We were in, we've been an independent central bank for a very long time. We're going to be an independent central bank at this moment. And you're going to see no changes on that. So is anybody, yeah. [00:33:42] Speaker 7: Can I come back to the stagflation point? Because I just want to double down on Christine. I mean, stagflation, it's a, you know, it's double digit inflation, double digit unemployment. And the other thing, you know, getting back to what Kevin was just saying, it's unanchored inflation expectations. That was the fundamental problem in the 1970s. We don't have that. And the only way we got out of it was we had to have, you know, a big recession to re-anchor expectations. If that happens, you know, we have fundamentally failed to do our jobs. So, yes, you know, we have a period in, I mean, Canada, yeah, the economy's weak, unemployment's a little bit, you know, it's high, it's 6.6. Inflation's 3.2. Those are not double digit numbers. And, you know, that inflation is not going to be persistent. Inflation expectations are well anchored. We're going to keep them well anchored. So this whole word of stagflation, it doesn't apply to the situation we have today. You've got to distinguish between a rise in unemployment and inflation and stagflation. They're not the same thing. [00:34:43] Speaker 4: Right. Some people just think of it as slower growth and higher inflation. But clearly, that's not where you... [00:34:50] Speaker 7: It's a much more loaded word than that. Yeah. [00:34:53] Speaker 4: Governor Bailey, you know, on this topic of forward guidance, we make light of it, but it is a bit of a change, a departure from where we've seen central banks in recent years. I know, I mean, you kind of got rid of forward guidance in 2021. You said you did. And how do we determine the difference between a reaction function and forward guidance? [00:35:13] Speaker 6: Well, look, I mean... You know, I think we have to sort of tread carefully through this debate, not least because of the question you've just asked. But, I mean, almost anything we say, of course, can attempt to be interpreted as forward guidance. And the second thing I would observe is that, of course, all of us are making policy which is going to have an effect in the future. So we sort of start with that position. I mean, I think where forward guidance has been very difficult, and therefore I'm in a very similar place to my colleagues, is that you can get locked into it very easily. You know, I've said a number of times in our committee, it's much easier to put it in place than it is to take it away. And, therefore, before you actually go and put it in place, just think about, you know, what we're going to have to deal with as time goes by. Because, you know, it becomes quite problematic after a while. It overstays its welcome. So, you know, I'm also very cautious. Now, but I recognize that, you know, anything we say about the outlook for the economy can be interpreted as a view of the future. And, of course, that, you know, we have to sort of in a sense do that. But I think we have to be very careful about, you know, getting tied into views on where rates are going to go. That's the thing that is much more problematic. [00:36:35] Speaker 4: But isn't it important, Chairman Morse, to give the market a sense of how you're thinking about policy? You don't have to give them a pre-commitment, but the whole reaction function, how you think of how you're going to make policy. [00:36:48] Speaker 5: So I think the most important thing we can do is to get policy right. If our communications tools, if our models, if the way we've been playing things makes it harder for us to go into these meetings, have a family fight with our colleagues, and make the best decision in pursuit of our mandates, if that's an obstacle, we should get rid of it. It is, it is said in recent weeks, well, we need to know more about your action function. If I look at trigger pullers, people that are making decisions in the bond market, in a range of markets, volatility is not up, it's down. Yields aren't up, they're down. Inflation expectations are down. So I hear this, that as if people don't understand, I think they actually understand quite well. I feel incredible comfort that I'm not sure I had internalized, that there is a willingness by my colleagues in the central banking community around the world, to go back to first principles. We all want to make the best decisions we can. We've all been burdened with many of the policies that in some sense the Fed created in the 2008 financial crisis. This is a rare moment for us to go back to first principles, ask hard questions, review what we're doing. At the Fed, we've got five outside task forces to shed new light on this. And I'm encouraged because in some sense we each think we're making our own monetary policy, but each of our monetary policies affect one another. And I'm honored to be on a stage with three colleagues who have been in the fight for 15 or 20 years with me and without me. And I won't at all be surprised if six or 12 months from now, each of us are on a better path to deliver on what we've said we're going to do. [00:38:36] Speaker 4: Who's leading these task forces? [00:38:38] Speaker 5: We have news to come, I can tell you likely next week, who will be the outside experts, some of them would have been folks in seats like this in prior years, some would have been academics in the audience. But we really tried to find the best minds and economics profession among practitioners, people experienced hands, including people from countries outside the US. We're not asking for de Tocqueville to come to America, but sometimes we need a foreigner to sort of see things clearly. And the idea of these is not to prejudge the outcomes. I'm certainly not going to do it. But I think as we make progress on this, I think some of the lessons learned might not just be for the American central banker who's new to this crew, but my colleagues on the stage. [00:39:23] Speaker 4: I was going to volunteer for a task force. [00:39:25] Speaker 2: At the ECB, we went through the same process. And when we started the strategy review, it takes time. And we did bring under the leadership of Philip Lane, our chief economist, it did take time to bring the, we didn't call it task force, but we had expert committees, we had groups. And it took a couple of years before we actually settled down and all agreed on the key principles, the reaction function, the elements that we would take into account, the measurements of the nature of the supply shocks and the origin and blah, blah, blah, blah, blah. It doesn't happen overnight. It's complicated. It sounds simple when you're at the end of the supply chain, but the whole process is complicated. So I really celebrate the fact that you're going into this task force exercise and are prepared to let the best minds participate in that. [00:40:21] Speaker 4: You know, there's also been a lot of talk here about coordination and influence on each other. And I am curious, President Lagarde, now that you do have a little bit policy divergence, you guys go in maybe in different directions. Is that, is that, is that a good thing or is that a bad thing ultimately? The divergence between who and who? Policy. I mean, you're raising rates, they're not raising rates. You know, is that, is that destructive? [00:40:44] Speaker 2: No, but I totally endorse the comments made by, I think it was both Tiff and Andrew. We started from different places. We were at 2% interest rates. I think the Fed was at 350 there about and you were at 325. Yeah. Inflations were at 35. Inflations were at different levels as well. And markets were expecting cuts in various corners. So it's the different, the situation was entirely different. I don't regard that as a divergence. I think the commitment is the same to maintaining price stability and doing what it takes to actually deliver on that commitment. [00:41:20] Speaker 4: But sometimes you see wild swings. And I mean, the dollar yen, for instance, is at the highest level in 40 years. Is that, is that okay? Chairman Worsh? [00:41:27] Speaker 5: Well, before we came here, we each told a small story about Governor Waita, who's been a great colleague of many of ours and we're rooting for his good health so that he can join us on panels like this in a couple of months. If this central bank stands for anything, it's staying in its lane on monetary policy. So do you think I'm going to wander into yen policy in Japan? I try. You're asking way too much of it. [00:41:51] Speaker 4: Well, it's making a move. That's all. You know, Governor Macklin on the markets, you recently, I think, warned about excess. Just given the AI trade speculation, I think that's very much on the market's mind. Do you see signs of that, thinking of irrational exuberance of the great Alan Greenspan? [00:42:14] Speaker 7: Yeah, we've been worrying, really, of two things. And I'm going to draw Andrew into this. Andrew chairs the Financial Stability Board. I chair the Vulnerabilities Committee. So, I mean, you know, as Governor of the Bank of Canada, I'm looking at this from a Canadian perspective, but at the FSB, we're looking at it from a more global perspective. And, yeah, I would highlight a couple of vulnerabilities. You know, as we've already said, look, there, you know, there is so much potential to raise productivity growth with the adoption of AI, with the diffusion of AI. But there, you know, we've seen this before in when there's a new breakthrough technology. I mean, the internet proved to be, you know, better than anybody imagined, created whole new businesses. But we still got the dot-com bubble. It doesn't mean there can't be a period where the market gets ahead of itself and you see a retrenchment. So, look, it'd take two sides to make the market. We don't, we don't, we're not in the business of giving investment advice as central bankers. So, but, you know, from a financial stability point of view, you, you know, you look at the sort of, you know, historical benchmarks, PE ratios, forward ratios. Yeah, things look stretched compared to those. So, that doesn't mean there, there's a problem, but it does mean you need to, you need to take that risk on board. The other, the other risk we've been highlighting is we've seen very large growth of hedge funds in the sovereign debt market. And to some extent, that's been very welcome. They've been very efficient in buying and distributing government debt. There's, there's lots of issuance out there. Governments need investors. But a lot of this is being done with a lot of leverage, very short term leverage. And that does make you a lot of it overnight in the repo market. And that does make you nervous that if there was a period of volatility and, and, you know, haircuts in repo markets went up or there was some disruption in repo markets, you could get a, you could get a rapid unwind. You know, again, part of our job is to sort of, markets do a good job of seeing the risks that they face individually, they have a harder time seeing the systemic risks. These, these trades are very low risk for each hedge fund. But when they're all doing something similar, there could be a systemic overlay. And the idea is if we can point that out, the market can, can guard against that risk. [00:44:46] Speaker 6: So, yeah, I mean, look, Kevin refer, has referred to the financial crisis a few times, and he's absolutely right to do that. And one of the big questions, you know, at that time, or before it was, is the subprime mortgage market going to be, you know, in a sense, the trigger and the cause of a wider financial crisis. And, you know, we didn't get that call particularly right, frankly. But the, the thing that we have to bear in mind is what we're trying to look for here is sort of tail risk. You know, is there something in these markets that could trigger a wider, you know, a wider consequence in terms of financial stability? And that's, as Tiff said, that's what we're trying to do. You know, Tiff leaves, leads the work in the financial stability board globally to do that. So, you know, we're absolutely right. So we look at, you know, we look at the increase in leverage in, in, in core government bond markets. I mean, these markets have changed substantially. I think the thing we've seen actually in the course of the last few months is an increase in, in leverage in equity markets. So if you look at hedge fund leverage in equity markets, you look at leveraged exchange traded fund markets, those things are changing. If you look at private credit, you know, the questions we're asking is, are those the things that actually can, you know, can move from tail risk into a broader consequence? So then you have to say, what are the channels through which it can happen? So at the Bank of England, we're doing a second system wide exploratory scenario to ask that very question about private credit. That's, that's our job. [00:46:15] Speaker 4: Do you see any other broader risks emerging? And do you agree with the characterization of stretched for the market? [00:46:22] Speaker 6: So I look, I mean, we are looking, obviously, yes, we do look at asset valuations, because you are living in a world, I mean, you've seen this, obviously, over recent months, where you've got quite a divergence between how, you know, bond yield, bond yields are moving and how equity markets are moving. Now, I think this, a lot of this comes back to what Kevin was saying about AI, I think it's explicable in broad economic terms. But the question is, you know, is that going to lead to some, some wider stability issues? So that's on the list. And then, you know, going back to what I was saying, I don't want to reopen it again, but frontier AI is obviously high on the risk as well. So we've got quite a list of things that we're looking at at the moment. [00:46:58] Speaker 4: I wonder if you, Chairman Warsh, see any signs of excess trillion dollar IPOs, high margin debt that was referenced, I mean, other things that are going on in this market that remind you of those other times? [00:47:11] Speaker 5: Well, I would say, I've been out of this business for 15 years, but I still have the scars from the global financial crisis, I suspect my colleagues do too. We take risks seriously. And that's part of the reason why each of us, I think, at the core have sort of a reformers heart on this. What can we be doing in the conduct of monetary policy? How should we be revisiting fundamental reforms to supervision and regulation? How should we think about the payment systems that connect us all? So this conference is principally about monetary policy. I must admit my first four weeks at the Fed, my attention has been focused on monetary policy, but our governments have tended to give us larger jobs than that. We take it all very seriously. I'm not prepared to sort of make a broad comment denoting risks that are available in the system. But I will say this. This is the biggest time of consequence to each of our economies, I think, in our lifetime, maybe absent the shocks of 2008 and the COVID shocks. The dramatic change in how businesses do business, how households are thinking about employment and inflation. And so this is the time we have to go back to first principles. I know at the Federal Reserve with my colleagues, many of whom are here, we're doing that. So I don't want to sound complacent. The same time, I do want to say, at least for the United States, this is a time of huge opportunity. And if the Fed can deliver on its remit to deliver prices, I've never been more optimistic about what the growth engine of the U.S. could produce. [00:48:45] Speaker 4: The growth outlook of the U.S. economy this year is what? [00:48:50] Speaker 5: We're playing Mad Libs now. Fill in the blank. So I would just say this. Over the last four quarters in the U.S., structural productivity is in the high 2% range. So potential growth looks like it's trended up. This is a time that the labor markets, hours worked relatively flat. History says that we go from periods of low productivity to periods of high productivity. Nothing is in the bank at this time of consequence. But if the last four quarters are an indication, which is really largely before the advent of the new surge in what artificial intelligence can do, I think there's reason to be optimistic. Now, does that optimism convey into policy in the next six or nine months? Still too soon to say. [00:49:37] Speaker 4: But strong. Strong outlook. Sounds like. [00:49:40] Speaker 5: You're back to forward guidance. I'm going to disabuse you of trying to extract that. My view, and my colleagues I think have said this better than I, my view is financial markets and the real economy work best. When you look at what's happening in the real economy, you make your own judgments. There has been a tendency, and I take plenty of blame from this, the 08 crisis, where we were trying to suppress volatility, where we thought we needed to spoon feed markets to get out of that. That was the right policy for a crisis. It is not the right policy for the time that we have now. And so sometimes unlearning is harder than learning, and I'm going to keep at it. [00:50:21] Speaker 4: Okay. So what are the, President Lagarde, how do you think about the best levers to boost growth in the Eurozone right now? [00:50:28] Speaker 2: Capital market union. 28th regime, 28th regime, and boost the venture capital. Okay? So that would be on the growth front. But I would like to add one thing. Thanks to the veterans at this podium, and a few other people, we have a strong, solid, robust banking system, which is strongly well-regulated, well-supervised. And I think we should be cautious about what we are throwing away by way of simplification. So we do simplify things, and I'm delighted that, for instance, the ECB has done away with 40 different set of declaration disclosures that were unnecessary out of the 130-plus. So we have to go through that process. But I think we have to be cautious about how risks actually move. And risks were squarely in the banking system back in 2007-8, when we were all together fighting this global financial crisis. Risks travel fast, and there is no limit to the imagination of those in the financial sector who are trying to make money, as is their business, and who are taking risks. Risks. But the question is really, who eventually ends up taking the risk and sweeping the mess. So I would contend that this regulatory work that we did at the time, we need to be very attentive, as Andrew suggested, to make sure that the risks that have moved and traveled afar, through different structures, bodies, and the different names, are also looked at carefully, and that the right measures are taken to protect the public good, and to protect the principle of who takes risks, bear the responsibility that goes with it. [00:52:24] Speaker 4: The other big topic that I know that you all think about, and as part of your remit, is the balance sheet. And, Chairman Warsh, you have talked about, before you became Fed Chairman, that the balance sheet was too big in the United States. So it's at 6.7 trillion right now. What level would you be comfortable with it at? [00:52:45] Speaker 5: No forward guidance. No forward guidance. And I'm not going to give… It's a balance sheet. I'm not going to give… It's a balance sheet. Okay. We're just among friends. We have a task force for that, too. [00:52:55] Speaker 4: Great. We're going to play drinking game on task force. [00:52:58] Speaker 5: I'll say this. There is no secret that from the 2011 period, when I was leaving the Fed through now, I wanted the Fed's balance sheet to be smaller. And I long wrote about and described interest rates should be the dominant means through which we make monetary policy. If we're in a crisis that could be a different set of rules, it's always struck me that interest rate policy is the fairest of the broad constellation of our citizens. Interest rate policy, whether we move it up or down, transmits its way into a new mortgage, credit card debt, transmits its way through a lending channel and credit channel. I've always had a view that the balance sheet works mostly through asset prices, works mostly through signaling effects. My four weeks at the Fed haven't disabused me of that idea. As we're hearing an alarm, that must be my way of saying that I've gone too far on the balance sheet. But we have a task force that you'll find out of outside people that are going to debate this topic, bring it back to my colleagues and me to see whether we can have a judgment about whether the balance sheet should be made smaller. The only thing that I'll repeat here, which I've said repeatedly, is if there's a change in balance sheet policy, it'll be a change of my colleagues of the FOMC and the board. Those decisions will be well deliberated publicly, well understood and will not be implemented until financial markets have come to understand what those are. It took us about 18 years to find our way into this big balance sheet, which again, in my biased view borders on fiscal policy, took us 18 years to get out of it. It won't it'll take us more than 18 weeks to bring it down to size. I'm open minded on the question, we're not going to prejudge it, but I want interest rate policy to be the working or for monetary policy. [00:54:55] Speaker 4: Governor Bailey, you've been focused on the balance sheet. I guess at one point we were asking how big can your balance sheets get and now I'm wondering how small they can get. [00:55:03] Speaker 6: Well, there's a huge, there's a nice sort of sense of irony, I appreciate from this conversation, because I, you know, I've been accused of having too big a balance sheet and reducing it too quickly. So, you know, well, really. I, so can I go back, can I go back to forward guidance for a moment, because I've really eschewed forward guidance on the balance sheet. So I really don't step into this world of saying we want ample reserves, we want big reserves, small reserves. My line has always been, we will meet the system's demand for reserves, because that's the system's demand for liquidity. Now, we will also spend a lot of time, by the way, understanding why the system wants the liquidity at once. And also, you know, the key other point, which Kevin has made very forcefully, is that's the way we actually implement monetary policy. Through the, through the short term interest rates, transmitting out of our balance sheets into the, into the system. And that, and that works very well. So, you know, our world is, look, we want, we will meet the system's demand for reserves. We will, we will seek to understand very closely why it's doing that. The other policy I have is that I want to take interest rate risk off the central bank's balance sheet, because, you know, we're the public balance sheet. Interest rate risk should be in the market, not on our balance sheets. And so that's why we're moving to a repo asset side of our balance sheet, because that takes the interest rate risk off our balance sheet, which is what should be the case. [00:56:29] Speaker 4: You mentioned that you alluded to the political heat that you get over this issue. Does that influence the way you think about it at all? I know it's not supposed to. [00:56:37] Speaker 6: No, I think we, we must have, you know, a sensible policy for moving to, you know, a system where our balance sheet reflects the system's demand for reserves. So, yes, it went up during, it went above that level during the QE period. It's coming down to that level. I want the interest rate risk off our balance sheet. Those are the policies we're pursuing. And I think those are the right policies. [00:57:00] Speaker 4: Speaking of politics, do you get let off the hook, Governor Macklin, because you're, because the prime minister used to be in this seat? [00:57:06] Speaker 7: You know, we get some free advice from elected officials across the country. And, you know, as I tell them, I, I appreciate understanding what's going on. It's a big country. I appreciate understanding what's going on across the country, but I don't appreciate telling me what we, what we should do with interest rates. You've got your job. We've got our job. And, you know, that needs to be respected. So I'll just come back to the balance sheet. You know, interestingly, if you, if you compare different central banks, you'll, you'll see, you'll see a pretty wide range of sizes. In Canada, we didn't do QE in 08/09. Fortunately, in Canada, no banks failed. We did get a big shock, but it wasn't so big that we needed to invoke that. emergency policy. We did use QE in the pandemic. It's the only time we have used it. But the fact that we only did it once meant that our balance sheet wasn't as big to start with. And we, we let the bonds run off. So our balance sheet has run back to its new steady state. And if you compare central banks, as I said, the size of the balance sheets can be pretty different. I mean, Canada's balance sheet as a percentage, Bank of Canada's balance sheet as a percentage of GDP is about a third of the Feds. Now, look, Canada is not the world's global reserve currency. So yeah, there might be some differences here. But I, you know, I think, I think the results of Kevin's task force is going to be very informative to us. And the other thing I'll say about balance sheets is, it's a very inside baseball kind of discussion. It's not the sort of thing most Canadians are really that engaged in. But it, it does, you know, it is how we, you know, there is an element of how do we implement monetary policy? What is the demand for reserves? We've spent, you know, the last couple days talking about new kinds of money. What do those, do those, what do those potentially mean for our balance sheet? So these are questions we need, we need some thinking on. [00:59:20] Speaker 4: In the, in the short time that we have left President Lagarde, I did want to get to you on this political point. And because you have been a forceful voice for central bank independence, I know you continue to do so. And, and you, I mean, unlike these, these guys, you have to battle more than 20 different governments and leaders. 21. 21. 21. So you're, you're a pro at that. I'm just, I'm curious if you think that there are, if you look across, if you look out and see serious risks to central bank independence, especially in light of the Supreme Court ruling that we got in the United States, letting Fed Governor Lisa Cook keep her job. [00:59:55] Speaker 2: Well, I think, you know, the best way we can actually all do our jobs is to be number one, accountable, number two, independent, and the two come together. You know, and I go to the European Union. And when I go to the European Parliament on a regular basis to report on what we do, to explain what we do, that's the counterpart for this independence that we have. Staying in our mandate, the entirety of the mandate is also the sine qua non-condition for deserving that independence, which is a precious good, without which we would not do a good job. That's my view. [01:00:28] Speaker 4: How did you feel about the Supreme Court ruling, Chairman Warsh? [01:00:31] Speaker 5: We were doing so well. So before the Supreme Court, the Fed acted independently and followed its remit. After the Supreme Court ruling, the Fed will continue to do so. I read the opinion on the plane over here. One of the secrets of the productivity led economic growth that I was talking about at the outset is because of the constitutional design in the US. It's the foundational element that has given us 250 years of outperforming expectations. I believe in Article 3 judges. I believe in the rule of law. We'll follow the Supreme Court decision. But day to day, the decision reaffirms what President Lagarde already said. We are calling balls and strikes as best we can. We're taking seriously the reform objective. And we're going to deliver on the high promise that Congress gave us to deliver price stability in the context of our dual mandate. And when we do that, we don't have to worry about politics. We don't have to worry about judicial intervention. We get to look in front of us because it's a challenging step. [01:01:40] Speaker 4: Okay, we have a minute left. So I'm going to ask everybody one quickie for everybody. Two quickies, actually. Governor Bailey, I'll start with you. So favorite economic indicator right now? Sorry, though. Your favorite economic indicator right now? [01:01:54] Speaker 6: Oh, that's a trap question as well. You see, that's a trap question into forward guidance. Oh, God. Thank you, brother. [01:02:03] Speaker 7: I'm trying. I'll tell you what, I'll answer it. Oh, there you are. My inflation forecast. Oh, there you are. [01:02:11] Speaker 4: Governor Bailey, you have to answer. [01:02:14] Speaker 6: Well, look, we look at a whole range of data. Oh, God. I mean, look, honestly, if you sat through our meetings, you would see more data than you could ever dream of. The other thing I say, look, I'll say this. I spend a lot of time going around the country and I talk to a lot of businesses and it's absolutely imperative that we stay in touch with the economy. [01:02:32] Speaker ?: Thank you. [01:02:33] Speaker 2: President Lagarde. President Lagarde. Inflation outlook, balance of risk, underlying inflation, transmission of monetary policy. Thank you. [01:02:41] Speaker ?: Chairman Warsh. [01:02:42] Speaker 5: I guess I have the last word. With the new data, with the data project, the data task force, my hope, my aspiration is that nine, 12 months from now, we're going to be using new technologies to understand what's happening in the real economy in a contemporaneous, real-time way. That positions us as central makers to make better decisions. That we're no longer going to have to rely solely on data that we get from government agencies with mis-measurement problems that have surveys that are no longer relevant. That every business we know that are leading in our country are using new data sources to make better decisions. My favorite data is upon us. And if we do our jobs, we'll be here a year from now. And we'll say we've discovered data that helps us make better decisions. And we live up to our promises, we strengthen our credibility, and politics stays at bay. [01:03:40] Speaker 4: Least favorite economic indicator. [01:03:42] Speaker 5: The conventional wisdom, the conventional wisdom that we hear from time to time tells us nothing. Monetary policy works with long and variable lags, as we know. And many of these indicators are echoes of history. We need indicators that tell us what things are. We look out our window today. So when we make judgments, when we next convene, they're as close to real-time as possible. [01:04:09] Speaker 4: I thought you were going to say the dots, since you didn't do one. [01:04:12] Speaker 5: I'm going to let one panel discussion go without me sort of wagering on the dots. There will still be dots for a short time, at the very least, but we have a task force for that. I know. And we'll revisit it. [01:04:26] Speaker 4: Do you have a least favorite economic indicator, President Lagarde? What did you say? Least favorite economic indicator that gets too much attention. Those that are wrong. [01:04:35] Speaker 2: Governor Mackel, help me out. [01:04:36] Speaker 4: Governor Mackel, help me out. [01:04:41] Speaker 7: You know what, what I'd say is that, especially a lot of the monthly data, it can be very volatile. And, you know, sometimes the market over-rotates on the last number. You've got to kind of, you've got to correlate it with other things. You've got to, you've got to smooth it a bit. You know, the last monthly number is never going to be the best indicator. [01:05:04] Speaker 6: So I'll give you one that we're wrestling with at the moment and have wrestled with for years. And it's obviously relevant, which is oil and gas futures prices. So they are terrible indicators in history. That's a good one. The problem is that everything else is also a terrible indicator. [01:05:23] Speaker 4: Very good. Finally, you know, when we were coming into this year, everybody was talking about rate cuts. Is anyone still talking here about rate cuts? Show of hands. [01:05:33] Speaker 1: Well, that's a nice try. [01:05:34] Speaker 6: Is that a no? That's a nice try of forward guidance. All right. I tried. [01:05:38] Speaker 4: Thank you all very much for the candor. And for your sermon. [01:05:41] Speaker ?: Thank you. Thank you.