Fed Chair Powell Delivers Economic Outlook

[00:00:00] Speaker 1: - Thanks, Debbie. It is a real pleasure and delight, should I move that for you? To introduce our guests, two of the firmament of economics and finance. First, let me introduce the moderator, my friend and professor at the University of Chicago Booth School of Business, Dr. Raghu Rajan, the Catherine Dusick Miller Distinguished Service Professor. He is a world expert on banking, corporate finance, economic development, author of numerous award-winning books, was himself as a scholar winner of the Fisher Black Prize, which goes to the greatest financial researcher under age 40. He's since over age 40, but he was the inaugural winner. He is a member of the group of 30, and he was the 23rd governor of the Reserve Bank of India, and before that, chief economist and director of research at the International Monetary Fund. You probably know him as a regular contributor to the Financial Times. He speaks extensively on economic and financial issues. Please give a warm welcome to Professor Rajan. And then our featured speaker will be Jerome Powell, the 16th chair of the Board of Governors of the Federal Reserve System. As head of the U.S. Central Bank, as you know, Chair Powell plays a crucial role in the country's monetary policy, oversees major financial institutions, and maintains economic and financial stability in this country. He was first appointed as a board member of the Fed by President Obama in 2012. He was subsequently elevated to Chair of the Fed by President Trump in 2018, and then renominated to his post by President Biden in 2021. He has been -- he has the respect of members of both parties, and I believe that no one as Fed chair has ever had to deal with more and varied challenging issues than Chair Powell has had to deal with. From the pandemic to fighting inflation to bank runs and on and on, his leadership at the Fed has been a steady hand and one of the all-time greats. Before coming to the Fed, Chair Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C. He first entered public service at the Treasury Department under President George H.W. Bush, with responsibility for financial institutions, the Treasury debt market-related areas. Outside of public service, Chair Powell has worked as a lawyer, an investment banker, and been a partner at the Carlyle Group. In addition to his service on corporate boards, he served on boards of charitable and educational institutions, including the Bendham Center for Finance at Princeton and the Nature Conservancy of Washington, D.C. and Maryland. He is a D.C. native, received a B.A. in politics from Princeton, and a law degree from Georgetown University, where he was editor of the Georgetown Law Journal. Please welcome to the Economic Club of Chicago again, Chair Jerome Powell. [00:03:46] Raghu Rajan: Chair Jerome Powell: Thank you, and good afternoon. It's great to be back in Chicago, and thanks for that kind introduction, Austin. So I'm looking forward to our conversation, my conversation with Professor Rajan, Raghu, but first I'll briefly discuss the outlook for the economy and monetary policy. So, at the Fed, we are always focused on the dual mandate goals that Congress has given us, maximum employment and stable prices. Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position. The labor market is at or near maximum employment. Inflation has come down a great deal, but is still running a bit above our 2% objective. Turning briefly to the incoming data, we'll get the initial reading on first-quarter GDP in a couple of weeks. The data we have at hand so far suggests that growth has slowed in the first quarter of this year from last year's solid pace. Despite strong motor vehicle sales, overall consumer spending appears to have grown modestly. In addition, strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential tariffs, are expected to weigh on GDP growth. Surveys of households and businesses report a sharp decline in sentiment, and elevated uncertainty about the outlook, largely reflecting trade policy concerns. Outside forecasts for the full year are coming down, and for the most part, point to continued slowing, but still positive growth. We are closely tracking incoming data, as households and businesses continue to digest these developments. In the labor market, during the first three months of this year, non-farm payrolls grew by an average of 150,000 jobs per month. While job growth has slowed relative to last year, the combination of low layoffs and lower labor force growth has kept the unemployment rate in a low and stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above one near its pre-pandemic level. Wage growth has continued to moderate while still outpacing inflation. Overall, the labor market appears to be in solid condition and broadly in balance, and is not a significant source of inflationary pressure. As for our price stability mandate, inflation has significantly eased from its pandemic highs of mid-2022, without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation. Progress on inflation continues at a gradual pace, and recent readings remain above our 2% objective. Estimates based on the most recent data from last week show that total headline PCE prices rose 2.3% over the 12 months ending in March, and that excluding the volatile food and energy categories core prices rose 2.6%. Looking ahead, looking forward, the new administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. These policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment. The level of tariff increases announced so far is significantly larger than anticipated, and the same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs. Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored as well. Market-based break-evens continue to run close to 2%. So, as we gain a better understanding of the policy changes, we'll have a better sense of the implications for the economy, and hence for monetary policy. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and ultimately on keeping longer-term inflation expectations well anchored. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price stability mandates, keeping in mind that without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close. As that great Chicagoan, Ferris Bueller, once noted, life moves pretty fast. For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance. We continue to analyze the incoming data, the evolving outlook, and the balance of risks. We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. We will continue to do everything we can to achieve our maximum employment and price stability goals. Thank you, and I look forward to our discussion. [00:10:07] Jerome Powell: Thank you very much, Chair Powell, for those remarks. I look forward to your elaborating on them in the course of the next 40 minutes or so. I understand last time you were here, Melody Hobson interviewed you. Well, I'm a poor substitute, but I'll try and compensate in the quality of the questions. As you repeatedly emphasize, communication and transparency are very important for the Fed. I would like to get more from you on some of what you just said. As a former central banker, the only sort of caution I've been given by the Economic Club is to not lapse into central bank speak. So I'll try my best not to do that. Let me start by saying you've guided the Fed through some really difficult events, including the pandemic, the dash for cash in March 2020, the great inflation, the banking crisis centered around Silicon Valley Bank. And then over the course of the last year, we've seen a growing possibility of a Fed-engineered soft landing. And now it seems like everything has changed. In the course of a couple of months, J.P. Morgan has shifted to estimating the probability of a recession this year at around 60%. What do you think about all this? [00:11:44] Raghu Rajan: Well, first of all, thank you for being here today. It's a pleasure to be here with you. Actually, the speech or the appearance I did here was my very first appearance as chair seven and a half years ago. So it's great to be back. And I would agree with you that it's been an eventful seven years. Putting it, putting it mildly. I keep waiting for the three months of calm, you know, that never comes. But to your question, I guess to set the stage, let's look back at 2024. 2024 was a year where the economy grew 2.4%. Unemployment remained in the low fours, close to mainstream estimates of maximum employment. And inflation came down and was running at the end of the year around 2.5%. That's the economy that we had. And I won't decide how to characterize that, but that's where things were. Where we are now, again to your question, is the administration, as I mentioned in my remarks, is implementing significant policy changes, and particularly trade now is the focus. And the effects of that are likely to move us away from our goals. So, unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way, and some part of those tariffs come to be paid by the public. So that's the strong likelihood. And, you know, my hope is that we'll get through this and get back. Well, we're always going to be aiming for maximum employment and price stability. That's what we do. I do think we'll be moving away from those goals probably for the balance of this year, and then -- or at least not making any progress, and then we'll resume that progress as we can. [00:13:25] Jerome Powell: Let's talk a little more about tariffs. I mean, you recognize that some of the effects of the tariffs will be one-off transitory, but you also have said that perhaps they will give room for a number of firms to raise prices. You mentioned dryers. When washing machine prices went up because of tariffs, dryer prices also went up in tandem even though they weren't tariffed. What's your sense about the effects of tariffs on inflation? What would make them more persistent? And what would, you know, make them have effects on growth? [00:14:03] Raghu Rajan: So kind of a simple starting point is that one tariff comes in that gets passed along in prices and raises inflation, but it's just a one-time thing. So the price level goes up, and that's it. But that's -- and that can happen in some circumstances, but it depends on a number of things which we don't know yet, and I would point to a couple of them, or three of them actually. One is just the size of the effects. And as I mentioned, the tariffs are larger than forecasters had expected, certainly larger than we expected even in our upside case. We looked at a range of cases. So that's one. The second one is how long does it take for the tariffs to have their effects on inflation? To the extent it takes longer and longer, that raises the risks that the public will begin to experience higher inflation. They'll come to expect it, and companies will come to expect it. So that risks higher inflation. And the third is just what I mentioned in my speech, which is my remarks, which is got to keep inflation expectations well anchored. So if we have those three things under control, that's what it will take. And indeed, our role is to make sure that this will be a one-time increase in prices and not something that turns into an ongoing inflation process. That's a big part of our job. [00:15:24] Jerome Powell: What about the effects of tariffs on quantities? You know, with the level of tariffs that, for example, have been currently applied on China, there's a fear that the supply chain may get disrupted, that firms may not be able to import their relevant stuff from China, given the level of prices. If it turns into a supply shock, would the Fed's response be different than if it was primarily something which affected just prices? [00:15:55] Raghu Rajan: So I actually had dinner at the Chicago Fed last night and with a number of directors of various parts of the Chicago Fed, and many of them are CEOs of significant companies, and this uncertainty that they're feeling and the issue with imported components to their products is just a huge issue. But if you look back at the pandemic, if you remember, there was a shortage of semiconductors and that led to a shortage of cars at a time of extremely high car demand. And it was a prolonged shortage because production couldn't keep up. And that led to an extended period, one of the things that led to an extended period of inflation. So when you think about supply disruptions, that is the kind of thing that can take time to resolve and that can lead what would have been a one-time inflation shock to be extended, perhaps more persistent, and we would worry about that. In this case, you can look at the car companies, which their supply chains are likely, seem to be on track to be disrupted significantly, and you would worry that that process will take some years and that the inflationary process might be extended. So these are all -- all of this is highly uncertain. We're just -- we're thinking now, really before the tariffs have their effects, how they might affect the economy. And that's why we're waiting, really, to see what the policies ultimately are, and then we can make a better assessment of what the economic effects will be. [00:17:24] Jerome Powell: Let's move to immigration. You talked about the labor markets being in reasonable equilibrium right now. Of course, what we've seen over the last few months, the last months of the previous administration continuing to this administration, is immigration has fallen off considerably. What's your sense on how that will affect the labor market? [00:17:51] Raghu Rajan: So part of why growth was so strong in the last couple of years was just very high levels of immigration, and those people went to work. The economy hired them. You know, there was a lot of demand. We were still working off the labor shortage. What's happened since the prior administration changed their policy, as you mentioned, immigration has fallen very sharply, and therefore, the growth of workers has really stopped. It's really stagnant. But at the same time, demand has also fallen. And so, demand for workers, so payroll job creation has also fallen, and they've kind of fallen in tandem, which is why the unemployment rate has been pretty stable for about a year. So, in a way, demand, and coincidentally, perhaps, to some extent, demand and supply for workers has fallen. In terms of the effect on the labor market, right now, we're still at full employment. And labor force participation is still strong. Wages have moved back down to levels that are now pretty sustainable, given an assumption about productivity. So, the labor market's in a really good place. Longer term, you know, the effects of immigration are not thought to matter much for inflation. The effects on demand and supply will more or less cancel each other out. So, we wouldn't expect there to be a big impact on inflation. [00:19:13] Jerome Powell: You've seen in recent weeks substantial talk about layoffs in government, as well as freezes in research establishments and universities in jobs. How soon and how big will this be in its impact on labor markets? [00:19:33] Raghu Rajan: So, it's too soon to say, but what I can say is, of course, the people being laid off in government, this is highly significant to them. We don't know how big that's going to be. Right now, it's not big enough to affect a workforce of 170 million people materially. In terms of the cutbacks in funding and for science and things like that, we do see in areas, particularly in cities, that have a lot of universities and research hospitals and research institutions, we're really hearing significant layoffs and, you know, significant impacts on employment. I don't know how much that will total up to. And, of course, in addition, cutting back on scientific research may have implications for economic growth, for productivity, for health, for all kinds of things, but those are very difficult to estimate in real time. [00:20:28] Jerome Powell: Now, given that we're talking about the future, you may be confronted in the not-so-distant future with both higher levels of unemployment as well as potentially higher inflation. And, of course, the policies that each one requires could be different. You talked a little bit at the podium about how the Fed would see these two and how it would address it. Just giving you a chance again to elaborate on that. [00:20:56] Raghu Rajan: Right. So, most of the time, when the economy is weak, inflation is low and unemployment is high, and both of those call for lower interest rates to support activity and vice versa. So, most of the time, the two goals are not in tension. And they're not really in tension now. The labor market is still strong. But, you know, the shock that we're experiencing, the impulses we're feeling are for higher unemployment and higher inflation. And, you know, our tool only does one of those two things at the same time. So, it's a difficult place for central banks, you know, to be in in terms of what to do. And so, we, you know, the best we can do is we actually have a little provision in our consensus statement, which is the thing that we vote on to embody how we approach these questions. What we say is we will look at how far each of the two, how far the economy is from each of those two goals, and then we'll ask might there be different paces at which they would approach those goals. We'll look at those things and think about them and we'll make what will no doubt be a very difficult judgment. Again, we're not, we're not experiencing that now, but we could well be in that situation, as I mentioned in my remarks. [00:22:10] Jerome Powell: Just want to pick up on a word that is often used today, uncertainty. As a respondent to a Dallas Fed survey said, I've never felt more uncertainty about my business in my entire 40-plus years career. The worry today is not just about immediate policy uncertainty, but an entire change in the U.S.'s economic philosophy. Not just policy uncertainty, so to speak, but structural uncertainty. You know, one of the effects, as you've pointed out, of higher levels of uncertainty is that firms postpone investment. For instance, even after the tariffs stabilize, firms that contemplate reshoring production facilities will hesitate, not knowing if the tariffs will be reversed will be reversed in the future, maybe by the next administration. How do you take such longer-term uncertainty into account in your policies? [00:23:03] Raghu Rajan: It's, so let me just agree that we're, what comes back very strongly, and you'll, you'll, you'll, everyone will understand this, these are very fundamental changes in, you know, long-held, in some cases, policies in the United States. And there's not any real experience. I mean, the, the Smoot-Hawley tariffs were actually not this large and they were 95 years ago, so there isn't a modern experience of how to think about this. And businesses and households are, are saying in surveys that they, they are experiencing incredibly high uncertainty. There's a lot of research, some of it from the Fed, showing that, that does lead to businesses and households stepping back from decisions, which of course makes, makes common sense. And, you know, you hope that that's something that you go through a phase and then you, then you know what the, things become more certain. And, and therefore, you know, people can resume normal economic activities given their understanding of what is the new normal. I mean, your question really is, what if the, if the uncertainty remains high? I think that's a difficult environment. I think, you know, I think people's expected rates of return would have to be higher. I think people would be, it would, that would weigh on to me investment just in general. If, if, if the United States were to become jurisdiction where risks are just structurally higher going forward, that would, that would make us less, less attractive as a jurisdiction. I don't, we don't, we don't know that at this point, but I think that would be the effect. [00:24:38] Jerome Powell: Well, let me turn to financial markets. We've seen some volatility, especially, the stock, stock market volatility. I mean, the levels of the VIX are up to the levels they were in, in the early days of the pandemic coming off somewhat now. Some people believe the Fed will intervene if the stock market plummets, the so-called Fed put. Are they correct? [00:25:05] Raghu Rajan: I'm going to say no with an explanation. So what, what I think is going on in markets is markets are processing what's going on. And, you know, it's really the policies, particularly the trade policy. And, and really the question is, where's that going to come in? Where's that going to land? And we don't know that yet. And until we know that, you can't really make informed assessments that would still be highly uncertain once you know what the policies are, it will still be highly uncertain what the economic effects will be. So markets are struggling with a lot of uncertainty. And that means volatility. But having said that, markets are functioning, you know, conditional on being in such a challenging situation. Markets are doing what they're supposed to do. They're, they're orderly and they're functioning just about as you would expect them to function. [00:26:02] Jerome Powell: So we've, we've seen volatility also in the bond market. And at a time when usually there's a traditional, there's a flight to safety, we saw yields on the German bond and the Japanese government bond come down. But we saw yields on U.S. Treasuries go up. What do you attribute this to? [00:26:23] Raghu Rajan: So I would just say the same thing. I, I think it's very hard to know in real time. I've had a lot of experience with, with significant moves, for example, in the bond market where there's a narrative that people land on and then two months later you look back and go, that was completely wrong. So I think it's very premature to say exactly what's going on. Clearly there's some de-levering going on among hedge funds in levered trades and things like that. It's also, again, it's the markets processing historically unique developments and with, with great uncertainty and I think you'll see, you'll probably see continued volatility. But I, I wouldn't, I don't, I wouldn't try to be definitive about exactly what's causing that. I would just say markets are orderly and, and they're functioning kind of as you would expect them to in this time of high uncertainty. [00:27:11] Jerome Powell: So, the Fed in its last meeting slowed the pace of shrinking of its balance sheet. Was this driven by uncertainty about how much reserves and liquidity the market needed and you wanted to take a little more time to find that out? And flip side, you said the market was orderly. What if market disruptions emerge? Would the Fed intervene? So the, [00:27:40] Raghu Rajan: we, we think that reserves are still abundant. So we don't think we're, we're close to the point, particularly close to the point where we would stop. But we were facing a situation in which for other reasons there were going to be big flows into and out of reserves as the, it's, it had to do with the debt ceiling and, and the treasury general account. For those of you who are treasury market people that'll make sense. But we, we, while that, those big flows are happening for over a period of six months, we would actually be shielded from being able to see evidence that we were or were not getting close to the level of, of less abundant reserves. And so we decided to slow the pace. We thought about pausing and instead we, we debated, it's one of these great debates that we have at the FOMC, we decided to slow the pace instead. And people really came to see the merits of that because, you know, the slower we go, the less, the, the, the, the smaller the balance sheet can get without disruptions. And we, you know, we want that process to continue and now it's at quite a slow pace. So we think that's a really good thing. So that means we can go on for a longer amount of time and we'll be able to reach kind of very carefully what we think is the right level of reserves. Still, still plenty of reserves. [00:28:55] Jerome Powell: What about the international dollar-based system? With all these disruptions, do you stand ready to supply dollars to central banks as you've done in the past when there's been a global shortage of dollars? Sure, absolutely we do. [00:29:13] Raghu Rajan: Just, just for everyone's knowledge, we have standing dollar swap lines with five large central banks and they, they go to the jurisdictions where there are big overseas dollar funding markets. And in effect, [00:29:27] Speaker ?: those are, [00:29:27] Raghu Rajan: those are overseas markets where, for example, a European or Asian institution is buying an asset-backed security that is backed by loans to American consumers. So in effect, these are loans to American consumers and we support that. We, we want to make sure that, that dollars are available. They need dollar funding to hold those dollar assets. So, the way it works is when needed, we lend to the central bank in dollars and they pay us back in dollars. They then pay in their, in their currency. They lend on, they lend on in dollars. And so we take no credit risk or anything like that and it supports dollar funding markets. Dollar funding markets are very sensitive during times of crisis and it's very helpful. The reason we do it is it's really good for U.S. consumers. So, we'll continue to do that just as, as part of the dollar being a reserve currency, the reserve currency most important and we will do that. [00:30:21] Jerome Powell: You mentioned amongst the issues you were focused on was the U.S. fiscal situation. Well, clearly, U.S. sovereign debt continues to rise and what, what are your thoughts on the longer term implications for interest rates and economic stability? How much further can we go in terms of national debt before we cross a line that might be unsustainable in the long term? [00:30:50] Raghu Rajan: So, the U.S. is on, U.S. federal debt is on an unsustainable path. It's not at an unsustainable level. And no one really knows how much further we can go. Other countries over time have gone much farther, but we're now, you know, we're running very large deficits at full employment. And this is a situation that we very much need to address. Sooner or later, we'll have to and sooner is better than later. In terms of, if I can say from my time working on these issues, it's not the Fed's issue, but the, if you look at a pie chart of federal spending, the biggest parts and the parts that are growing are Medicare, Medicaid, Social Security, and now interest payments. And so, that's really where, where the work has to be, has to be done. And those, those are issues that can only be touched on a bipartisan basis. You know, neither party can figure out what to do without both parties being [00:31:46] Speaker ?: at the table. [00:31:46] Raghu Rajan: So, [00:31:47] Speaker ?: that's, [00:31:47] Raghu Rajan: that's critical. All of this, domestic discretionary spending, which is essentially where a hundred percent of the conversation is, is small as a percentage of, of federal spending and is declining as a, it's already declining as, as a, a percentage of federal spending. So, with, when people are focusing on cutting the domestic spending, they're not actually working on the problem. Domestic discretionary spending is already going down. I just, I like to make that point because so much of the dialogue that the politicians offer is about discre-, domestic discretionary spending, which is not the issue. Well, [00:32:22] Speaker ?: let, [00:32:23] Jerome Powell: let's turn to stability and regulation. Turning to the U.S. financial sector, we still have some concerns about distressed commercial real estate loans on bank balance sheets, whether they've been fully dealt with so far. There's some sense that they haven't. Add to that, the very rapid growth in various forms of private credit over the last, last few years, which, arguably, haven't been tested by a full-blown recession. How would you put the resilience of our financial institutions at this point and their ability to weather potentially uncertain times? So, [00:33:04] Raghu Rajan: I, I think our, our banking system is well capitalized with liquidity and is, is quite resilient right now in the stocks [00:33:12] Speaker ?: that it may face. I, [00:33:12] Raghu Rajan: I do believe that. In terms of the commercial real estate, there are, and this, this has been the case, really been, we've been working on this for four or five years now. There are some banks, it's mostly medium and small sized banks who have elevated concentrations of commercial real estate, some of it troubled, and we've been working to make sure that those banks have a plan, have capital, and can absorb the losses that they're doing. So, and that's been, that's been going on for some time. The very largest banks don't tend to have high concentrations, so this is a problem that we have known would take years to work through, but we're really well into the process of working through it. In terms of non-bank, the non-bank financial sector, it's grown enormously. The provision of credit by non-banks has grown just really fast. Most of it has been funded, though, with a private equity like structure where it's limited partners who are signed up for 10 years to a general partner to invest that money. They're not depositors who can run. You know, your money's committed. And that's, so that funding model is kind of run-proof. That's, that isn't some law of nature, though. So, and you do start to see shorter-term funding creeping in. To your point, though, Raghu, the, this very fast-growing and now quite large private credit part of the economy has not really been through a significant credit event or significant, it's really grown since the pandemic. And so just for that reason and for how fast it's growing, we, we have a close eye on it. It doesn't have the same kind of prudential regulation, though, that, that the banking system has. So we're watching it carefully. And, you know, as I mentioned, it's, it's a more stable funding source to the extent its institutional investors signed up for a long period. But we're watching carefully. Right. [00:34:57] Jerome Powell: Wearing my banking receipt banking research had. Actually, banks are also involved in one of these institutions in a big way. That's right. We do know the administration wants to relax regulations in many areas, one of which may well be banking. What can you tell us about the Basel III endgame, so to speak, which is, you know, at this point primarily focused on additional capital for the large banks? The, the, the Fed view, [00:35:26] Raghu Rajan: and my view, is that we should proceed to complete the Basel III accord. And, and we would have to do that and would look forward to doing that with the, in conjunction with the FDIC and the OCC. But our view is, and I think the, the bank's view as well, is we should complete that. You need international minimum standards. That's, that's kind of a common good. And, you know, we're not bound by them. Really, nothing. The, the United States has plenty of input into what, into, in what the, what those accords contain. So, our view is strongly that we should complete those. And we could do it, I think, relatively quickly. We're, we're not so very far away from, from what would be a, a good, I think, outcome. [00:36:10] Jerome Powell: Well, let me move to something which is more, sort of, about technological change and new, new kinds of instruments. Cryptocurrencies. How do you see the potential for more favorable regulations coming on them, and potential risks from, from that for the system? [00:36:34] Raghu Rajan: You know, so we went through a wave of failures and fraud and things like that were the headlines for a couple of years. And, um, I think, what you, what you see now is, um, and during that period, by the way, we were trying to work, we worked with Congress to try to get a, a framework, a legal framework for stable coins, which would have been a nice place to start. We were not successful. I think that the climate is changing and you're, you're moving into, sort of, more mainstreaming of, of, of that whole sector. So, Congress is, again, looking at, at, both, both the Senate and the House are looking at a framework, looking at a framework, a legal framework for stable coins. You know, depending on what's in it, that's a good idea. We need that. There isn't one now. And stable coins are a product that, a digital product, that could actually have fairly wide appeal and should contain consumer protections of, of the typical sorts and transparency. And that's what the Senate and the House are working on. So that's a positive thing. I also think some of the, um, you know, we took a pretty conservative and other, other bank regulators took an even more conservative perspective on, on how, on the guidance and rules we imposed on banks. I think there'll be some loosening [00:37:42] Speaker ?: of that. [00:37:42] Raghu Rajan: And I think we'll try to do it in a way that, that preserves safety and soundness, but that, you know, permits and fosters appropriate, um, appropriate, uh, innovation. And, but that, that does so in a way that, again, doesn't, doesn't put consumers, uh, at risk in a ways they don't understand or, or make banks less safe and sound. You, you have a policy review [00:38:05] Jerome Powell: underway. Um, now, surveys, uh, recently tell us there seems to be a distinction between a rise in the level of prices, uh, which is what the public seems to worry a lot about. And the rate of increase in prices, which certainly, uh, they worry about in passing, but the fed worries much more about that is the rate of inflation. Um, so even though we're coming down to 2%, people remember that over the last few years, it's been over 20% increase in prices. So as you start thinking about the policy review, is there any thought about how you might want to address this, uh, sort of challenge that it's the path of prices as much as the rate of change which matters? [00:38:57] Raghu Rajan: First of all, you're, I think you're right. And I think the public is right. What, you know, when, when we say inflation is back down to 2%, 2.5%, uh, and we think that's a good thing. It is a good thing. But if you're, you know, if you're paying 20% more than you were paying in, in 2021, that doesn't help you much. You know, you're still paying a lot more than you used to be paying for the necessities of life. So it's just another way of saying people hate inflation and it's easy to understand why. You know, what we, all we can really control is, uh, a world in which, in the world we were living in, prices don't go down in the aggregate except in extreme times that we don't want to court. So I don't think we could, we couldn't have a framework where we're going to bring prices down by 10% or something. That, that's not something we'll be looking at. You know, we're, we're essentially looking at the best way to foster 2% inflation over time. And, you know, the things we did back in, uh, the changes we made in 2020 were, were really innovations around what to do when you're stuck near zero. Now we're well above zero. And it, you know, it may be that we, we still need to have, you know, our framework, a way to deal with that. But perhaps the, the main case is not one where you're dealing with the effective lower bound. And that would be a framework that looks a lot more like the one that we had before 2020. [00:40:26] Jerome Powell: Now one, one of the tools you brought in to deal with the zero lower bound was quantitative easing. But you've also used quantitative easing to fix disruptions in the financial markets. Are you going to be more specific about what your objective is with quantitative easing as you go through this review? [00:40:46] Raghu Rajan: So in, in the beginning, it's, it almost, it's typically we're using it for financial market function. That's that, that was the case with the, uh, with the global financial crisis and with the pandemic. Um, and we, you know, we did, we, we did try to explain ourselves through the pandemic, uh, and our explanations did change. But I think it's fair. It's fair to say we might have done a better job of, uh, of being clear about why we were doing. And that's, that's something that we're, we're aware of and looking at. [00:41:14] Jerome Powell: Um, I mean, no, uh, discussion is complete without talking about AI. Yeah. Uh, with AI coming fast and furious, it could affect, uh, productivity. It could affect employment. There are some people who say we will see for the first time technological unemployment in a serious way with AI. What, what are your thoughts about it? And how will it impact the fed going forward? [00:41:41] Raghu Rajan: So like everyone who's been exposed to what it's capable of, it's just, it's beyond, um, I mean, I started about thinking about it as like a, a better version of Google, but it's not. It's like a better version of a person, you know? Uh, I mean, it can do amazing things. And so the question is it all through the 250 years of technological innovation, technology evolves and people worry that it's going to replace human labor and people will be [00:42:10] Speaker ?: unemployed. [00:42:10] Raghu Rajan: And that hasn't been the case. What, or it, it may be the case in the short run, but in the long run, what it's done is raise human productivity and therefore living standards. So is this going to be the case where it eliminates more jobs than it, than it, than it creates? And we just don't know. Uh, I mean, you, you come back in 20 years, will, will it be the case that just people are much more productive in their work because of AI? Or will it be the case that AI has just replaced a lot of people? And I, I think it's very hard to, to say, but it, it truly is remarkable in what it's capable of. And it's, um, you know, we, we just, we had a pro, uh, we had a demonstration by a, a warden professor recently. And he was, he speak, you speak to it like it's a person. And it kind of responds like a [00:42:55] Speaker ?: person. [00:42:55] Raghu Rajan: And, and the things that it can do are, are, are really amazing. Uh, so, and it, by the way, this is early days. You know, they're talking about even the next couple of years will bring more dramatic breakthroughs. So I think it's, it's one of the two or three things most likely to bring dramatic change to the economy all around the world in the next 20 years. And I'd say very hard to say how it shakes out. [00:43:18] Jerome Powell: Let me turn to your job. Um, an important man once said of your job is the greatest job in government. You show up to office once a month and you say, let's see, flip a coin. Um, and then everybody talks about you like you're a God. What is it that you normally do every day in the office? Is it fulfilling and dare I say enjoyable? And do you really feel like a God? So I, I would agree. [00:43:57] Raghu Rajan: I think it's, I think it's the best job in government. I would agree. I, and I, I really do enjoy it. Yes. Uh, I love the job. It's a great honor to serve. It's quite humbling because, you know, everybody makes mistakes. It's just, the, the economy is just not very predictable. Um, so I, all of that is true. And I, you know, I do what everybody expects me to do. I read, we do a little more reading though as part of our, uh, daily, my colleagues and I do part of our daily regime than, than a typical executive would do. In terms of being a God, I would say that we are, we are blessed with a, a large number of, uh, amply compensated critics who, who would kind of tend to undercut that. So we don't, we don't feel like a God. [00:44:42] Jerome Powell: So, so let me go to the more mundane. In that office, uh, what do you, what do you, what are the key indicators you look for? What, what are the sources of data that you, you go to as you try and make up your mind? [00:44:59] Raghu Rajan: So, you know, I'd say start with labor, you know, there, there's more labor market data and more and better reliable labor market data than probably anywhere else. And, uh, it's just a lot of data. And, you know, it's, it's new jobs, it's payroll, it's, it's, uh, wages, it's participation. You bring, you can break all of those down in different categories. It's a, it's a million different things. So there's a lot of labor market data. It's a great field if you're going into economics because there's just so much to do. So, and then we, we look at the inflation data also. I, you know, I keep track of, of global developments pretty carefully. And I talk to my global counterparts pretty regularly just to stay aware of what's going on. Um, financial markets are really important. And, you know, you can add, and lately something that's, that we've, we're paying close attention to, as you would expect what's going on around the world in currency markets and fixed income markets and equity markets, all of that. For me though, my, my background was more in the private sector. And, and, you know, as an investor and for, for a significant part of my career. And I, I have to talk to outsiders about what they're seeing and what they're dealing with for it to really kind of fit together for me. I, you know, I can look at only so much data and, you know, I, I, but to really get the story and the narrative, it's, it's more talking to outsiders and, and, you know, anecdotal data does help things kind of fit together for me, I would say. [00:46:22] Jerome Powell: Yeah, you told us about speaking with business people last night and getting a sense of what was going on in the Midwest. Um, let me turn to Fed independence. You've reiterated that you intend to stand, stay in office until the end of your term. And that certainly reassured many in financial markets. What are the levers the government or the legislature have to pressure the Fed? And should one worry about threats to the Fed's independence once you're gone? [00:46:51] Raghu Rajan: So our, our independence is a matter of law. Um, Congress has, in, in our statute, we're not removable except for cause. We serve very long terms, seemingly endless terms. Um, so it's, we're protect, protected in the law. So, you know, Congress could change that law, but there's, I don't think there's any danger of that. Uh, Fed independence has pretty broad support, uh, across both political parties and in, in, um, both sides of the hill. So I think that's not a problem. Um, there's a Supreme court case. People will have read probably in today's journal that at which the Supreme court may decide whether independent agencies generally, whether they're authorizing laws can contain a provision that prevents the president to fire from firing members of a commission. All other than for cause. And that's, that's, that's a, that's a case that people are talking about a lot. I don't think that that decision will apply to the Fed, but I don't know. Uh, it's, it's a situation that we're monitoring carefully. Generally speaking, Fed independence is, is very widely understood and supported in Washington, in Congress where it really matters. And, uh, you know, the, the point is we can make our decisions and we will only make our decisions based on our best thinking, best based on our best analysis of the data about what, what is the way to serve our, to achieve our dual mandate goals as we can to best serve the American people. That's the only thing we're ever going to do. That's the only thing we're ever going to do. We're never going to be influenced by any political pressure. People can say whatever they want. That's fine. We, that's not a problem, but we will do what we do, uh, strictly without consideration of political or any other extraneous factors. [00:48:31] Jerome Powell: Well, I have time for one more question. Uh, I know the question that's on all your minds. Uh, what are you going to do on interest rates next? Uh, but I'm not sure that, uh, uh, you know, and I'm not sure you would tell even if you knew. So, uh, uh, I'm not going to ask that question. Well, the question I want to ask is, is a more personal one. Uh, what is it that you'd like to do most at home after an, an exhausting day flipping coins in the office? [00:49:15] Raghu Rajan: You know, I, I play my, uh, one of my guitars. I, uh, I do zoom calls with my, uh, my kids and my grandkids. And I, uh, go to the gym a lot too, just to stay in shape. All those things. [00:49:30] Jerome Powell: We need you healthy. We need you healthy. Yeah. Thank you very much, Chair Powell. Thank you. And please join me. [00:49:49] Speaker 4: On behalf of the Economic Club of Chicago, thank you, Chair Powell and Dr. Rajan for such a wonderful conversation. Thank you very much. You are a national treasure and I hope all of us can see how important, uh, Chair Powell's role is in our business and personal lives. And thank you for sharing your important insights with us. Um, I do want to thank David Snyder and Katie Esposito and the entire ECC team for pulling this together so we can all benefit from it. Um, so, and, and lastly, thank you to all of our members and guests for joining us. We really hope that this program provided you with ideas that will enrich you, your business, and our community going forward. And this meeting is now adjourned. Thank you. [00:50:41] Speaker ?: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.