Presidents' discussion: macroeconomic outlook, nationally and locally

[00:00:00] John Orchard: John Orchard: Welcome, everyone, and thank you for joining us for ONFIF's Fed Week. I'm John Orchard, ONFIF's CEO. You're a very good company. We've got 1,000 people registered to listen in over the week. There are lots of central banks from all over the world, commercial banks as well, regulators, deposit insurance schemes, public and private sector investors and asset managers, among others, all joining us over the next few days. So you're in good company. Perhaps this isn't a surprise as the Federal Reserve starts to think out loud about tightening monetary policy, and indeed last week slightly raised the overnight reverse repo rate. Judging by our ONFIF panel after the FOMC last week, we'll talk about that in a moment, and indeed pretty much all of our sessions in all regions, that there is no clear consensus on whether incoming inflation from the COVID recovery should be looked through or not. We'll no doubt be talking about that. But also other key themes such as central bank digital currency and the role of central banks in sustainability and build back better agendas. We've got an excellent group to do that with. We're going to hear from five regional Federal Reserve Presidents and CEOs this week. Patrick Harker from Philadelphia, Raphael Bostic from Atlanta, Eric Rosengren from Boston, Robert Kaplan from Dallas, and James Bullard from the St Louis Federal Reserve. We also have the Congressman Bill Foster from the House Committee on Financial Services on the agenda too. We'll be feeding in audience questions in these sessions too, so do please send us those using the chat function as we go. We're very keen to integrate them into the flow of conversation, so do send them in. I'll give you a brief overview of the week's agenda in a moment, but first I'd like to introduce Patrick Harker for some preliminary remarks. Patrick, who's had an illustrious career in academia, specializing in business, management and operations, took up his post as the 11th President of the Federal Reserve Bank of Philadelphia in 2015. Patrick, welcome. Thank you for joining us, and over to you for your introductory remarks. [00:02:29] Patrick Harker: Patrick Harker: Well, thank you, John, and to everyone, good morning, good afternoon, or good evening. I know we're joined by quite an international audience today, so maybe it's just safer to say hello. So really, on behalf of Amphith and the Philadelphia Federal Reserve, I am delighted to welcome you to Fed Week, and we are all in for a treat. A week of discussions covering the macroeconomic outlook, AI and machine learning, digital currency, equitable and sustainable growth, and financial stability. Now, you may know that our original plan was to hold this week of talks at our bank in Philadelphia. And while by holding this event virtually, I know we're missing out on some fruitful hallway conversations, not to mention some tasty snacks. It is, I think, terrific that we were able to convene such a wide-ranging group with just a click of a few buttons. So again, I want to thank you all for joining us. And thanks as well to all of our panelists, who I know firsthand have very busy schedules. And also, of course, to our partners at Amphith. This morning, you'll be hearing from two of my Fed President colleagues, Jim Bullard, President and CEO of the Federal Reserve Bank of St. Louis, and Robert Kaplan, President and CEO of the Federal Reserve Bank of Dallas. They will be discussing their macroeconomic outlooks. But before we get to that, let me turn things back over to John. Again, thanks. Thanks for being here. I'll see you later in the week. Enjoy the program. [00:04:12] John Orchard: Thank you very much, Patrick, and to you and the team at Philadelphia as our virtual co-host today. So looking forward to being physically in the building again, we hope, next year. We'll turn over to my colleague Mark Sobel, our US Chair, in a moment to open the first session. But first, I'll give you a quick tour of what we'll be discussing this week. Today, we'll be looking at the macroeconomic outlook, discussing the FOMC and also the Fed's dual mandate. Lots to talk about there with markets offering a little amuse-bouche, perhaps, on a potential taper tantrum last week amid perky employment indicators, which Jay Powell has drawn attention to. He seems pleased about those with his modified mandate. All the while, inflation concerns at the moment seem to be being played down. We'll explore all of that. On Tuesday, we're looking at the role and nature of artificial intelligence in markets and its socio-economic impact, whether there is unconscious bias in those systems. And we'll be looking at regulation as well. On Wednesday, we'll be hearing how Congress is looking at central bank digital currency and the work that the Fed is doing to test its practical use. On Fiver spent a lot of time on this theme over the last year or so. And I think it's fair to say that there are lots of fundamental issues still unresolved there broadly where they were last year, notwithstanding huge amounts of development on the technological front and the preparation front. So we'll look at that on Wednesday. On Thursday, we're joined again by Patrick Harker and also Raphael Bostic to look at the Build Back Better agenda, as Patrick's just mentioned. We'll explore how the three crises, health, economic and social, are converging into a key moment in American socio-economic development. And we'll look at the effect COVID has had on the most economically vulnerable. On Friday, Mark Sobel will be back discussing the Fed's Financial Stability Report, and how the US financial system weathered the pandemic. And we'll revisit the topic of CBDCs with the Boston Fed and President Rosengrin. So do log in for all of those. We're looking forward to having you with us for that. Mark, our US Chair, is, as our regulars know, a former US Treasury official with a long career representing the US in international forums such as the IMF, G7, G20. Mark, I might ask you what you made of the meeting in Cornwall in a moment. So thank you for helping Mark put all this together this week. Before we kick off, though, I was interested to get your take briefly on the FOMC discussion that you chaired last week with Christopher Smart and Steve Caccetti. The first time in years, I got the impressions we're mentioning a while ago that monetary policy, including the future path of QE, isn't entirely predictable, albeit that might be a healthy discipline for financial markets, I'd argue. What's your take, Mark, on the immediate response to last week's meeting based on what you heard in that meeting, and indeed, all the meetings that you chaired for us? What's your take at the moment, Mark? [00:07:36] Speaker 3: Well, thank you. Pleased to be here. We had a good discussion with Steve Cicchetti, who's a well-known American monetary policy scholar and Christopher Smart of Bearings. And, you know, I think that our discussion reflected many of the cost currents that we see in the markets, in the public discussion, and frankly, what I expect to hear today from Robert Kaplan and Jim Bullard, and I'm deeply looking forward to that. If I were to give you just a thumbnail sketch of what I think were some of the key points from our discussion. The first was a bit of a debate about how to characterize last week's FOMC, whether it should be seen as hawkish in so far as the data and the dot plots were seen as substantially changed and whether it sent the message of tightening sooner rather than later versus a view that inevitably we had to face the beginning of a transition towards normalization given that the degree of accommodation we have in the United States is not sustainable, particularly as an economy rebounds. There was some questioning also in that regard, and this is a theme one hears increasingly in markets and analysts is whether the FOMC's tolerance for an overshoot might might not be as great as originally thought on given flexible average inflation targeting. Another key takeaway was confusion and uncertainty about the economic situation, particularly labor markets and inflation. In a way, confusion was greater for labor markets, I almost thought. There were comparisons of seasonally adjusted data versus non-seasonally adjusted data. Questions about mismatches, how quick the uptake would be, On inflation, observation that the Fed's inflation estimate in the summary of economic projections suggested that the largely transitory part of the inflation hump was over or would be receding and whether there might be too much optimism. At the same time, while the inflation rates would be higher than originally expected a few months ago, I think there was still buy-in into the proposition that inflation rates would come down and were transitory in that sense. Except unless aggregate demand so outstrips aggregate supply that there was a boost to inflation. And then more from Steve Cicchetti than Christopher, I would say flagging concerns about asset bubbles, froth in markets. So whether leverage, whether we had a good handle on leverage, particularly with regard to non banks, and then some discussion of the increase in the five basis point increase in the repo rate and the interest rate on excess reserves and wondering whether that was too generous and whether that would cause massive shifts. David Cicchetti: Out of paper or back to the Fed, so I think that is, in a nutshell, what was discussed and I frankly think that's what we covered were the debates that are going on in the markets and the debates, the discussion we're going to have today. [00:11:59] John Orchard: David Cicchetti: Thank you, Mark, as I mentioned, there was a mini version of the taper tantrum very mini version of the taper tantrum at the end of last week, but it seemed survivable, do you think. David Cicchetti: And this will be guesswork on your behalf of the moment, do you think that the Fed will think that was a proportionate response that gives them confidence, perhaps to gently carry on with the gradual tightening. David Cicchetti: um. [00:12:29] Speaker 3: David Cicchetti: Well, you know the 10 the short rates are anchored the longer rates are not, but the longer rates have come down. David Cicchetti: they're down to. David Cicchetti: 10 year to in the one for. David Cicchetti: range I I think that. David Cicchetti: I think that. David Cicchetti: As you said, we're in a transition period, but I think the Fed can feel fairly comfortable with its communications, more or less at this point. [00:12:58] John Orchard: David Cicchetti: Good okay i'm sure you'll explore that in a moment with your colleagues just very briefly away from from. David Cicchetti: Monetary policy on to a political economy, I mentioned your role with the US Treasury the g7 g20 IMF and so forth and you've written recently about. David Cicchetti: The flawed but useful utility of the g7 for on fifth that was that's the most read thing with us so far this month and so well done on that. David Cicchetti: And what would be your immediate reflection on how the g7 went from the US's point of view. [00:13:32] Speaker 3: David Cicchetti: Well, I think, from the US point of view, it went very, very well, it was the President's first foreign. David Cicchetti: trip I think he was able to make very convincingly and clearly the point that the US. David Cicchetti: has strong roots and multilateralism and. David Cicchetti: That this administration believes in the multilateral roots of America that we're going to work with our allies, I think that had become in question in past years. David Cicchetti: And so. David Cicchetti: From that standpoint, great success. David Cicchetti: And great messaging for the administration. David Cicchetti: I think it's interesting that the seven which. David Cicchetti: As you and I've discussed in the past took a backseat in. David Cicchetti: After the global financial crisis remember at the Pittsburgh summit, we said that the g20 is the premier or international for forum for cooperation. David Cicchetti: There seems to be shifting back towards the seven I think that the last decade has witnessed huge changes in terms of how. David Cicchetti: The g20 interacts it's it's bulky China and Russia there some of the focus we now have is on. David Cicchetti: cyber and money laundering where people have a very different view of China and Russia and activities that diminish the scope for cooperation. David Cicchetti: And I think that by inviting a lot of additional players to such as Australia and Korea that the g7 was able to emphasize kind of a democratic democratic front at the leaders level. David Cicchetti: So, and the g7 did make progress on tax and. David Cicchetti: issues the international tax issues so. David Cicchetti: Good progress. David Cicchetti: But. David Cicchetti: You know it's it's a messy world, the seven don't have the cloud to run at the g20 is is bulky and so I think there's also going to have to be a lot of. David Cicchetti: What I would call variable geometry geometry where you have shifting coal coalitions. David Cicchetti: And you know, of course, you know, Germany very well we've seen today remarks in the FT from last yet, probably the incoming chance of Germany saying. [00:15:44] John Orchard: David Cicchetti: don't moan about Russia and China too much and so we'll we'll we'll see how that unfolds so mark, thank you very much that helpful introduction and over to you for your panel, which I'm sure will be excellent, thank you very much for joining us everyone today over to you mark. [00:16:02] Speaker 3: David Cicchetti: Well, thank you so today I have the great honor of hosting office opening fed week session on the economic outlook with Robert Kaplan and Jim bullard. David Cicchetti: Robert Kaplan has been President of the Dallas fed since 2015 after a distinguished career at Goldman Sachs and Harvard. David Cicchetti: Jim bullard has been President and CEO of the St. Louis fed since 2008 an institution he joined in 1990 prolific author as is Robert. David Cicchetti: And both are so well known. David Cicchetti: They need little further introduction. David Cicchetti: So i'm just going to raise a number of questions to set the table with our guests for the first half of the session. David Cicchetti: i'll then turn it over to the audience which may submit questions via the slide of function, which is located to the right hand side of your screen i'm told, and you can also register. David Cicchetti: For other on fifth fed week events. David Cicchetti: As well. David Cicchetti: So Jim and rob welcome and let's dig in. David Cicchetti: So if it's said, may you live in interesting times our hopes have been realized. David Cicchetti: A booming US economy is perhaps throwing up more questions than answers about the outlook. David Cicchetti: The FOMC just met a meeting, including a summary of economic projections with interesting changes on the near term inflation outlook and interest rate path. David Cicchetti: Perhaps both of you could briefly offer your take on the US outlook and last week's FOMC. David Cicchetti: Let me start with rob. [00:17:36] Speaker 4: Rob McClendon: Thank you and it's great to be here. Rob McClendon: With with both of you. Rob McClendon: So our our Dallas fed forecast. Rob McClendon: Ironically did not change that dramatically since March. Rob McClendon: And for the last couple of months, we still expect GDP growth of approximately six and a half percent for this year. Rob McClendon: At this point we're probably a little bit shy of other more aggressive projections, but we're we're we're staying with a baseline about six and a half percent. Rob McClendon: We expect the unemployment rate is going to drift down toward the end of the year approaching 4% somewhere between four four and a half percent. Rob McClendon: The one change we made is further marking up our headline PCE estimate for this year with 3.4% but we were elevated in our SEP three months ago, and I think all you're seeing and you're seeing it reflected since our December meeting. Rob McClendon: We've seen much more accelerated vaccinations than we would have expected here at the Dallas fed at the start of the year. Rob McClendon: Substantially more fiscal policy than we might have expected and certainly much greater than the aftermath of the Great Recession and. Rob McClendon: And I think as a result of those changes we see greater mobility greater mobility and engagement and we've marked up since the start of the year our forecasts and I and I think what you're seeing probably in the SEP is. Rob McClendon: So we're seeing some of the monetary policymakers simply reacting. Rob McClendon: To the dramatically improved economic outlook and some of the changes I just referred to. Rob McClendon: Thank you for that, Jim. [00:19:27] Speaker 5: Jim McClendon: Thanks very much and and thanks for having me today it's a pleasure to be here, as always. Jim McClendon: yeah I would go back to the December FOMC meeting that was a period when the vaccines had just come online and and we were trying to make. Jim McClendon: A forecast for how the economy would react and if you look at the SEP in December. Jim McClendon: You know the median was about 4% growth and I think importantly 1.8% on inflation court PC core inflation, which is the. Jim McClendon: One of the favorite measures of the of the committee, so that was a that was a projection that indicated that the real, yes, it would be a strong year in 2021. Jim McClendon: Yes, it would likely be a reopening and, yes, the vaccines would be successful, but in the last six months it's all been much greater than that, as as rob was alluding to here. Jim McClendon: I think when we got to march the. Jim McClendon: It was it was clearer that we're going to get the pandemic under control, but it's still. Jim McClendon: You know there's a lot of risk at that point at that meeting and so i'm not sure you saw all of this reflected in the SEP at that point, so by the time we get to June here. Jim McClendon: This most recent meeting the SEP media and inflation rate now for core PC inflation moved up to 3% so now you gotta you gotta and you got the growth rate instead of 4% for 2021 at 7% so I think. Jim McClendon: You really got a big upgrade I think rob mentioned you know more fiscal policy than you would have anticipated at the December meeting, although I did think there would be one bill at that point, but we could debate about that, but. Jim McClendon: So I just think we're in a much stronger position with respect to reopening than we would have anticipated and the inflation has come along with us, so I think. Jim McClendon: The good news is, I think, is that we announced a new framework, the Chair gave a speech at Jackson Hole last year. Jim McClendon: The essence of that framework is that we would allow inflation to run above target for some time it looks like we're going to achieve that. Jim McClendon: You know headline PC inflation projected by the committee to be 3.4% according to the median. Jim McClendon: In 2021. Jim McClendon: core PC inflation 3% so I think some of that will persist into 2022 i've got penciled in two and a half percent core PC inflation for 2022 so if we really get that then. Jim McClendon: we'll have run inflation above target for some time and then after that will approach 2% inflation from the high side and then, if you average that across past years, you know you get something pretty close to 2% inflation now. Jim McClendon: This is a period of high volatility is as you outlined at the beginning mark. Jim McClendon: No one really knows how this is all going to unfold, but we have to be ready for the idea that there's upside risk to inflation. Jim McClendon: could go higher than what i've outlined here and we have to be ready on both sides, I think, to be able to react to that to be state contingent to be nimble. Jim McClendon: Just as nimble coming out of the pandemic, as I think we had to be going into the pandemic where we made a lot of what now is looking like very good moves in in March and April of last year, I think we have to be just as nimble on this side. [00:23:23] Speaker 3: Jim McClendon: Well, thank you for that. Jim McClendon: Well, let's turn a bit then to Jim McClendon: Labor markets and inflation, given the dual mandate. Jim McClendon: Because, as you suggested labor markets and price trends are pretty confusing. Jim McClendon: So I'm on labor markets unemployment near 6% Jim McClendon: It's much higher than Nehru you six is 10% labor force participation is well down. Jim McClendon: The last two payroll figures were seen as a short of expectation. So one conclusion might be that there's a lot of slack in the economy, but businesses are desperately looking for workers workers are upping wage demands job openings are at an all time high. Jim McClendon: So, Jim, I read recently a quote in the FT from you. I'm evolving towards a judgment where labor markets should be interpreted as fairly tight. Jim McClendon: And I've also recently seen a Dallas Fed blog, a very good one, which I think made the exact same point and went through some interesting data points. So let me start off with Jim. But what's going on with labor markets. [00:24:37] Speaker 5: Jim McClendon: Yeah, it's a it's a great question. Certainly the anecdotal evidence is overwhelming that this is a very tight labor market. You're hearing all kinds of stories about trying to recruit workers. Jim McClendon: Through say one time bonus payments, higher wages, better Jim McClendon: More flexible working conditions, all kinds of things that are symptomatic of a very tight labor market. So I think one statistic that you can look at that's consistent with that is the unemployment to vacancies ratio, which is about a 1.1 right now. Jim McClendon: That means, you know, approximately one one job available for every officially unemployed worker. That sounds pretty good if you can just get a matched up. Jim McClendon: And I'm not sure they're, you know, they're matching up quite as fast as as we might have thought. But, but that suggests that the situation that we're in and just for comparison. Jim McClendon: After the global financial crisis, that number was a six. So there were there were six unemployed workers for every job opening and that only came down very slowly. So we're in a much different situation today coming out of this pandemic than we were after the global financial crisis. Jim McClendon: Also, I would say about labor markets that the, you know, the extent of improvement has been dramatic. You had an unemployment, an official unemployment rate of 14.7%. Now we're down to 5.8%. I expect lots of improvement in the months and quarters ahead. Jim McClendon: So I'm not really worried about the labor market side and Chair Powell said this in the press conference last week that he's anticipating, you know, very good labor market. Jim McClendon: Going forward because we've seen such great improvement and you've got an economy growing at 7% faster than China. Jim McClendon: That that's all very promising. So the committee is only now starting to talk about tapering and that will take some time to get that organized and get that up and running and Jim McClendon: Only talking about Jim McClendon: You know, later in 2022 or 2023 and some some members even later than that talking about some kind of change in interest rate policy. So by the time we get to that point, Jim McClendon: it's pretty clear that we'll have a strong labor market, no matter how you cut it. And so I'm not really worried about that side of the mandate here. We're going to give plenty of leeway for the labor market to continue to improve. [00:27:16] Speaker 3: Jim McClendon: Rob, please. [00:27:19] Speaker 4: Rob Markman: Yeah, so building on what what Jim said in our in our in the in the research blog we wrote a couple of weeks ago. Rob Markman: We noted that in excess of two and a half million workers have self identified since February of 2020 as being retired. Rob Markman: And you got to remember that in the aftermath of the Great Recession, many older workers said, because of debt and loss of value in their homes, I'm going to have to extend my career delay my retirement and work longer. Rob Markman: We go to the current situation home prices have appreciated household balance sheets while not perfect or in much better shape. Rob Markman: And so we've had a number of pent up some of the pent up retirements from 18 and 19. Rob Markman: Have have worked through to today, where we have sort of a catch up in retirements and probably some excess retirements and and people financially are in much better shape. Rob Markman: So the jury's out on how many of those folks will decide in the future to un retire, and I would also note the record level of merger activity being driven by a number of factors, including loose financial conditions. Rob Markman: Have also is also accelerating that and one of the things that happen out of these mergers is oftentimes the first thing they do is try to reduce workforce and offer buyouts to older workers. Rob Markman: And so that's a loss of supply, then we we estimate another one and a half million workers are staying at home as caregivers. Rob Markman: Many of them are women with children. Rob Markman: And so that's a big chunk out of the labor force and we'll have to see how many of those workers come up. Rob Markman: And then, in addition, we still have the issue of fear of infection. Rob Markman: Lack of access to childcare. Rob Markman: And and then there's been much made as a piece of the puzzle unemployment benefits, where if you make $12 to $15 an hour, the economics don't work so well versus unemployment benefits and coming back to work. Rob Markman: And so we're wrestling with many supply issues in the aftermath of the Great Recession, we were we were wrestling with a lack of demand. Rob Markman: Here demand appears from every measure very strong. Rob Markman: And what we're seeing is supply constraints, and I would also note, while the reopening has has increased demand for workers, we still haven't fully returned to as much in person work as we will, by the fall. Rob Markman: Schools will will be back in person in the fall that will help in many ways. Rob Markman: And, in addition, business travel and a lot of other activities while leisure travel is up business travel still lags far behind. Rob Markman: So actually demand for workers could firm somewhat further and so we've got a very unusual labor market and tracking supply and demand and we're going to have to be patient. Rob Markman: And allow time for these matches to occur one other element i'll mention which concerns us here at the Dallas fed and we're seeing here but we're seeing nationwide is a loss of enrollment in skills training. Rob Markman: we've had a dramatic drop in skills training and that's very critical that we get back to skills training enrollment because not only do we have difficulty finding workers at the low end. Rob Markman: We also have difficulty finding skilled workers and middle skilled workers and the skill training pipeline having that restored is another necessary agreement that I think will help this supply demand balance. Rob Markman: improve as we go through the rest of this year and into next year. [00:31:13] Speaker 3: Rob Markman: Okay, well, thank you for that well let's let's turn to prices, which are perhaps even more confusing for me at least. Rob Markman: So the Dallas fed uses a trim mean price measure which takes out the fat tails and it's fairly quiescent I would say. Rob Markman: Market break evens quiescent. Rob Markman: Analysts talk about slack anchored expectations temporary base effects and supply disruptions and we're always told don't confuse general and relative price changes so that's one side on the other. Rob Markman: Core measures have been higher in recent months and perhaps inspected expected there's flexible and sticky prices. Rob Markman: And we haven't seen the sticky prices adjust maybe they will particularly there's discussion about rents which have not been moving so much higher, but may. Rob Markman: start to catch up with home prices which have been doing well. Rob Markman: Which is the other side um you know I I haven't ever heard the fed define what is transitory or persistent I presume your concern would be if you had overheating boosting prices or second round wage effects. Rob Markman: Don Cohn a brilliant man, I had the pleasure of working with when I was at the Treasury at the fed. Rob Markman: He recently said the supply demand bounce may not correct as quickly as the fed thinks he thinks the fourth quarter will be key, so what should we be looking out for what would. Rob Markman: When would higher prices no longer be transitory and when is an overshoot no longer an overshoot but something more pernicious. [00:32:53] Speaker 4: Rob Markman: All right, so let me just you want me to go first you want Jim. [00:32:58] Speaker 3: Rob Markman: I was going to turn to us why I mentioned the Dallas trimmed me right at the beginning. [00:33:03] Speaker 4: Rob Markman: All right, so let me let me start, let me talk about what we're seeing. Rob Markman: And I've avoided since this all got started I probably stay away and we stay away here at the Dallas fed. Rob Markman: At this transitory versus persistent and we tend to look more at what's going on as the cyclical elements. Rob Markman: And the more structural elements and here's what we're seeing and here's what we're hearing from context we've been hearing it for a while. Rob Markman: We just talked about supply demand elements. Rob Markman: In the labor force, some of those are structural the skill training issue I mentioned is a structural element. Rob Markman: This issue of retirements is a little bit more structural, so we think the wage issues could be a little bit more persistent because they may be a little bit more structural. Rob Markman: Secondly, on on other supply demand imbalances for semiconductors and a whole range of materials, some of them we think will resolve themselves. Rob Markman: In the next six to 12 months but again some of them, we think are likely to be more persistent driven by. Rob Markman: A number of structural changes in the economy, one of them is the energy transition. Rob Markman: There is going to be trillions of dollars spent over the next many years on. Rob Markman: Electrification. Rob Markman: Smarter devices systems that connect them. Rob Markman: All these things are going to require not only more semiconductors, but a number of greater demands for raw materials. Rob Markman: And what we're seeing in the energy sector, as well as raw materials generally, is shareholders are putting a lot of pressure on these companies to return more capital. Rob Markman: In the form of dividends and share repurchase and so our forecast of the Dallas Fed is that headline inflation PC will be approximately 2.4%. Rob Markman: But we think the risks are to the upside. Rob Markman: And on the Dallas trim mean, which you mentioned. Rob Markman: So there's things the Dallas trim mean tells you and there's certain things that doesn't tell you. Rob Markman: When you have extreme price moves, as we've had, the Dallas trim mean X's those out, so it's been fairly muted through this year. Rob Markman: Our forecast for the Dallas trim mean, though, is that we'll gravitate up to 2.4%, consistent with our headline PCE estimate. Rob Markman: It'll gravitate up to 2.4% next year. Rob Markman: Why is that? Rob Markman: A lot of these individual items and these inflation pressures will bleed out into a broader range of items. Rob Markman: And will persist through 2022. Rob Markman: So the issue for us at the Dallas Fed is not to fall intellectually in love with any one outcome or characterization, but to realize there's a range of outcomes. Rob Markman: And I think this is where the Fed, I believe, as a central banker, we should be applying risk management approaches. Rob Markman: Understanding that there's some upside risk. Rob Markman: On the other hand, the base effects will wear off some of this may settle down. Rob Markman: And i've been i've been more of a fan of. Rob Markman: Doing some things, maybe to take our foot gently off the accelerator sooner rather than later. Rob Markman: So that we can manage these risks and we have we can avoid and make it more likely to avoid having to press the brakes down the road. Rob Markman: So that would be my response to the range of issues we're seeing on prices. Rob Markman: Thank you, Jim. [00:36:38] Speaker 5: Rob Markman: yeah thanks on the Dallas Fed trim mean and i've been one to us cited at various points in the past, and I do think it's interesting that the. Rob Markman: Dallas Fed thinks it's going to increase in the future and catch up with. Rob Markman: core PC inflation, but I would just say this the the committee has looked at which inflation measure it wants to focus on the answer to that question is headline PC inflation. Rob Markman: And we've been trying headline and core PC inflation by putting it in the SEP so from a credibility perspective what we're saying is, this is the measure that we want to stabilize and so. Rob Markman: When we say we're going to hit 2% is going to be on these on these measures, especially the headline measure. Rob Markman: And i'm not a fan of telling people some of the prices, you have to pay our ones that we're going to throw out, so I think the only purpose of. Rob Markman: Something like the Dallas Fed trim mean or the core PC is to try to get a read. Rob Markman: shorter term on transit inflation, but people actually have to pay the headline numbers and and you have to be sympathetic with them and and understand that if you're in those markets, those are the prices, you have to pay so. Rob Markman: I think. Rob Markman: That. Rob Markman: we're in a new era where inflation is above target and is expected to be above target in 2021 I don't there doesn't seem to be much doubt about that. Rob Markman: It does look like core PC inflation according to everybody is going to be higher this year than anything we've experienced in the recent past. Rob Markman: And the question is how quickly will that dissipate and does the committee have the right posture to do the risk management that rob was talking about if we get higher inflation risk that we're in we're anticipating so. Rob Markman: Like I said i've got inflation coming down to 2.4% in 2022 I know some but I would just stress the SEP even the SEP says 3% core PC inflation in 2021 and above 2% in subsequent years it's just not as much above as i've got it, but. Rob Markman: That would be all consistent with the flexible average inflation targeting I think the debate I think it's a healthy debate is where does monetary policy have to be in order to get that outcome that gentle glide back. Rob Markman: To 2% and what does it mean for the committee to say above 2% for some time what's the timeframe for that and and what's the magnitude. Rob Markman: Of that, so I think that's a healthy debate to have, but I think it's all consistent with what we said we would do, which is have flexible. Rob Markman: Average inflation targeting we would get inflation above 2% and glide down to 2% from the high side that's going to cement longer running inflation expectations at 2% and get to a better equilibrium for the US economy. [00:40:05] Speaker 3: Rob Markman: Thank you, so since we've mentioned prices and we've mentioned labor markets, let me now turn that into taper given that. Rob Markman: The fed has said it will continue its assets purchases till substantial further progress has been made towards those goals. Rob Markman: I think Randy coral said at a recent event he's a wonderful gentleman, one of my former bosses and favorites he said that in terms of price stability. Rob Markman: We were there, but not on maximum employment, do you agree and then just two other questions one. Rob Markman: Two others on this theme one is whether tapering should start with agencies, given the hot national housing market, this is the question that many discuss and then already from the audience several questions are coming in that basically ask you if the. Rob Markman: If the. Rob Markman: If the f1c intended that markets focus on the dot plots rather than the taper signal last week. Rob Markman: So Jim. [00:41:10] Speaker 5: Rob Markman: yeah i'm on tapering that I think the Chair said at the at the press conference that he was going to retire the phrase talking about talking about tapering. Rob Markman: So I think the debate is open and it's a I think it's appropriate I didn't want to open the debate until the pandemic was more clearly under control, but I think we're at that point now. Rob Markman: And. Rob Markman: I know from previous debates about this that it has. Rob Markman: There are many parameters that have to be set it's it's kind of complicated you've got. Rob Markman: treasuries versus mbs you've got when to start you've got the pace of tapering and you've got the degree of state contingency. Rob Markman: How would you speed it up would you slow it down or not, are you going to be on automatic pilot and and I guess my. Rob Markman: comment on this is that I don't think that this is an environment where you can just go on automatic pilot you've got too much going on there's a lot of volatility in the macroeconomic data so we're probably going to have to be. Rob Markman: A little bit more ready than we were in 2014 to possibly make adjustments to our taper strategy, so all of that has to be debated the chair has to set up somehow heard the cats and and and get the. Rob Markman: Get the debate going I think it'll be healthy debate is it's a good debate we've done it before, and we did it ultimately in 2014 we did it without. Rob Markman: Any problems, so I think it can be can be done and we're doing it and then in an environment of a very strong economy 7% real GDP growth this year that's that's something you don't see in us. Rob Markman: very often and and very strong above potential GDP growth in 2022 so it's not like. Rob Markman: we're on. Rob Markman: In a situation where the economy is exceptionally weak and we're wondering what to do here we're coming from a position of strength. Rob Markman: On the MBS I think I think it is a legitimate debate and an important point, frankly, I think, going into the crisis here. Rob Markman: We expected to see problems in the housing market. Rob Markman: Maybe. Rob Markman: Maybe. Rob Markman: echoes of the global financial crisis, this is March and April of 2020 none of that materialized and and, in fact, the housing market went the other way it boomed partly fed by. Rob Markman: People wanting to. Rob Markman: buy houses and and transition away from commute type work arrangements. Rob Markman: And that has persisted right up until today and and really has some people talking even about housing bubble, so I think is there's a good question there about. Rob Markman: Whether it's time to retire our intervention in the MBS market. Rob Markman: And mark you'd be a good one to answer this, some people say that treasuries and MBS are pretty much the same thing anyway, and so you might as well now worry about trying to draw sanctions here but. Rob Markman: So I don't know where that debate is going to come out, but I think it's a very legitimate debate to have. [00:44:46] Speaker 3: Rob Markman: Thank you, I still remember Hank Paulson discussing that little point there about the equivalence between the two. Rob Markman: But Rob please. [00:44:56] Speaker 4: Rob Markman: yeah I agree. Rob Markman: That now allowing a open debate. Rob Markman: about adjusting our purchases and all the elements with that when we might start the pace and all the other elements, I think it's a healthy thing I have a lot of confidence. Rob Markman: In this FOMC group our colleagues around the table, then we have an open debate we exchange views and we we hash things out we've we've got the ability to come to good decisions and i'm. Rob Markman: i'm i'm i'm optimistic that we will in this case also, but I think the key is being able to have the discussion have the debate, and I think that we're doing that is very healthy. Rob Markman: I would say we Jim mentioned a little bit about the the the great recession coming out of the great recession, as I mentioned earlier, the big challenge was lack of demand. Rob Markman: And in that regard the purchases that were put in place QE were intended to spur more demand and and at least for me I thought that made sense debate the tactics, but it made sense. Rob Markman: And in 20 and 21 when we had a lockdown we didn't know how things were going to recover, I also think these purchases had their place and made sense it now though is it's clear we're weathering the pandemic and we're moving forward. Rob Markman: The issues seem to be less with lack of demand, I think we have very strong demand, a lot of it has to do with very strong fiscal policy. Rob Markman: The issues are more with supply and supply demand and balances purchases of treasuries and mortgage backed securities probably not well designed. Rob Markman: To deal with supply issues they're much better designed to deal with demand issues and when you talk about the housing market. Rob Markman: One we're seeing prices historically elevated number two we're also hearing increased anecdotes and we talked to real estate participants. Rob Markman: Broadly, including brokers in communities, we talked to heads of Head Start community leaders and what we're seeing is more often than not these days the winning bidder in many of these. Rob Markman: House auctions sometimes is not a family it's a post office box in Delaware, which is an investor who's never seen the house. Rob Markman: wants the house furnished and is going to buy it for investment purposes and rerent it so we're seeing increasingly single family. Rob Markman: buyers are getting squeezed out of the market and we're also seen in our district and at risk communities. Rob Markman: With a lag you're going to see an increase in rents property taxes and other burdens, particularly on those who are least able to tolerate it, you know, at risk communities. Rob Markman: We've been talking here and I've been talking about the fact that at this stage, we're questioning whether the housing market really needs this fed support of 40 billion a month and option adjusted spreads being not historically low and sometimes negative. Rob Markman: And are there unintended side effects and unintended consequences of these purchases for myself I think would be healthier again as we're making progress. Rob Markman: In weathering the pandemic and achieving our goals to start adjusting these purchases treasuries and mortgage backed securities sooner rather than later, and I think it may actually increase the likelihood. Rob Markman: That we sustainably achieve our dual mandate objectives. Rob Markman: The timing of tapering last comment. Rob Markman: Has an impact on. Rob Markman: On what we may do down the road and maybe in a way people haven't have might surprise people in that if you wait too long to taper. Rob Markman: And you have increasing buildup and excesses and balances for us at the Dallas fed our own analysis is it may make it more likely that you need to take additional actions down the road. Rob Markman: That you would prefer not to take I would rather see a stack sooner rather than later. Rob Markman: On asset purchases and then we'll make decisions as Jim said down the road and 22 and beyond about what additional steps are necessary, but I think the issue on the table today and in the near term is the timing of adjustment of these purchases. Rob Markman: Okay, well, thank you um. [00:49:24] Speaker 3: Rob Markman: let's turn to flexible average inflation targeting getting a few questions in on that. Rob Markman: The framework is designed for low inflation environment, in my view bill Dudley somebody you know recently expressed concern that the fed may react too late to an overshoot that takes prices above 2% and then he'll get behind the curve given lags. Rob Markman: Others Martin wolf and FT echo this sentiment, I guess Larry summers has as well. Rob Markman: And then, in the last few days i've seen market commentary that some have said that in the wake of the FMC that the dots showed maybe a limited tolerance for an overshoot or. Rob Markman: A more limited tolerance than might have been perceived earlier. Rob Markman: With the articulation of the flexible average inflationing framework um so let me ask you for your thoughts and let me start with rob this time. [00:50:19] Speaker 4: Rob Markman: yeah so I am a strong supporter of the framework. Rob Markman: And I believe the framework is as workable I think the debate is let for me is not about the framework. Rob Markman: it's about how we execute the framework that the framework says that we're going to. Rob Markman: We want to average inflation at approximately 2% that we're willing to have a moderate. Rob Markman: overshoot of that 2% for some time in the service of achieving 2% average and we have a responsibility based on that framework to anchor inflation at 2%. Rob Markman: I think some of the debate is about then how do we execute that framework. Rob Markman: And for me. Rob Markman: This gets into risk management and tolerance for risk. Rob Markman: I'm committed to see us anchor inflation expectations at 2% but I also want to see us. Rob Markman: exercise risk management to moderate the tail risk to the upside. Rob Markman: And in that regard. Rob Markman: Again, there's there's nothing in the framework about asset purchases. Rob Markman: And I think moderating those sooner rather than later, I think may actually increase the likelihood we're able to achieve the objectives of the framework on inflation. Rob Markman: And I would say a second issue framework doesn't talk about where we should set rates. Rob Markman: It basically says we're going to be less preemptive and anticipating inflation in service of having more inclusive and may be able to get to lower levels of unemployment. Rob Markman: In that regard, again, I think it doesn't say you need to keep rates at zero. Rob Markman: For me, my interpretation, it means you should be highly accommodative. Rob Markman: And again, this gets back to I think if you drive a little, a little slower, maybe go 65 miles an hour. Rob Markman: I think we we may versus say 85 or 90 miles an hour, I think it may make it more likely that we successfully on a sustainable period of time, average inflation at 2%, which you don't want is stop go. Rob Markman: And my only concern that I've raised is if you go too fast in the short run, it may make it more likely you have to take more action down the road. Rob Markman: But I think stop go actually will make it harder to achieve the objectives of the new framework which I strongly support. [00:52:57] Speaker 3: Rob Markman: Well, thank you, Jim, and of course there's the issue of how forward looking versus backward looking one is when one is applying flexible average inflation targeting. [00:53:09] Speaker 5: Jim O' Yeah, the framework itself did have unanimous support on the committee, so I think it is an improvement. Jim O' Okay, so I think that's a little bit more on our approach to monetary policy in this very low interest rate low inflation era. Jim O' That era is not ending anytime soon, it looks like in in Japan or in Europe. Jim O' So we're going to be operating in that for a long time here, but what we've said is that we're going to be more. Jim O' tolerant when an inflation impulse comes along and that's exactly what has happened that we've got an inflationary. Jim O' Impulse here and we're going to be more patient with it. Jim O' We're going to allow inflation to be above target for some time and then we'll approach inflation from the high side. Jim O' And come back down to 2% so actually, you know. Jim O' We got the chance to test the framework within the first year of it being in place, it didn't have to happen this way, but it did. Jim O' And so this will give us a chance to flesh out a lot of these parameters. Jim O' We did not say very much about well how far in the past would you look and how far in the future would you look when you're trying to average. Jim O' But we did say that we would tolerate overshoot and it does look like we're going to get an overshoot. Jim O' And and you know we will keep inflation under control, but not so much under control that we again drive inflation back down and get back into the situation that we were in. Jim O' For the last decade or so, where we kept it missing inflation, our inflation target to the low side, and that eroded our credibility of our inflation target. Jim O' So I think actually this is going very well sitting here today, this is going very well. Jim O' But but this is a volatile environment we've got upside inflation risk here, and I agree with Rob that creating some optionality for the committee might be really useful here and that that'll be part of the taper debate. Jim O' And I think that's a very important point, and I think that's a very important point, and I think that's a very important point. Jim O' And I think that's a very important point, and I think that's a very important point, and I think that's a very important point, and I think that's a very important point. Jim O' But actually I've said last Friday that I welcome input from the private sector as well as to how we can execute this in a reasonable way, a smooth way, as the pandemic comes to a close. Jim O' We don't need the emergency policies every anymore, everyone knows that, but we want to do this in a way that is well telegraphed to markets well ahead of time and and people understand how this fits in with the new framework. [00:56:11] Speaker 3: Jim O' Thank you well, the Fed is a proud independent central bank it served our nation well and to that we owe as a country tremendous thanks to individuals such as yourselves, as well as the really strong outstanding teams that back you up. Jim O' As economists, you know that fiscal and monetary policy interact and that monetary policy is less potent around the zero lower bound. Jim O' Last year, Jay Powell went to great lengths to call for fiscal support, he got it, some would say he got far more than he needed. Jim O' So going forward, what fiscal policy would be most helpful to the FOMC and carrying out the fulfillment of its mandate and. Jim O' And and question I always like to ask people, do you worry about fiscal dominance weakening the feds control over its rate instruments at some point in the future so Jim start with you. [00:57:15] Speaker 5: Jim O' yeah i'd be happy to talk at length about fiscal policy, I think that the fiscal policy response to this pandemic actually was excellent. Jim O' You got a bipartisan reaction in a divisive political environment in March and April. Jim O' And I would describe the fiscal policy, maybe a little bit differently than many, I would say that. Jim O' The pandemic came along and disrupted a lot of high physical contact workers. Jim O' We immediately recognized that that's what would happen. Jim O' We have to go to those workers and say. Jim O' I'm very sorry but you'll you won't be able to do your job. Jim O' During this pandemic as we're trying to get the public health situation under control. Jim O' But we also said don't worry we're going to do the very best that we can to provide insurance to you. Jim O' So that you're able to pay. Jim O' You're able to pay your rent you're able to pay your monthly expenses and you're able to maintain your lifestyles. Jim O' We try to get this pandemic under control. Jim O' That worked very well. Jim O' The private sector households saved a lot of that, but I think that that makes perfect sense because they weren't sure how long the pandemic was going to go on. Jim O' And they weren't sure if Congress would reappropriate more funds later on. Jim O' So all of this actually worked quite well is a little bit skeptical and for those of you that follow me at the early part of the pandemic that the vaccine strategy would actually work, but lo and behold fantastic results from the science community vaccines come online about a year ahead of time. Jim O' And we got additional appropriation from Congress to continue to maintain this insurance aspect for the disrupted households so if ever there was a time to borrow money on international markets and support your workers. Jim O' So that you don't do further damage to the economy while you're trying to deal with the pandemic, this is a this is a beautiful response and I would interpret that as you know once every hundred years something like this happens we don't have anything written down. Jim O' In any law anywhere, but this is how we're going to respond we're going to ensure that disrupted workers through that process and we're going to maintain the integrity integrity of the economy as we're going through the pandemic. Jim O' So I think this was all very well done now at least as with higher debt. Jim O' And but if ever there was a time to take on higher debt for for a good purpose, this was this was it and we're still in a low interest rate environment and likely to to be in one broadly speaking. Jim O' In the years to come, so I think all of that was good now you've got this infrastructure debate going on on Capitol Hill. Jim O' I also think that's a good debate. Jim O' Because Congress should always be talking about the public capital stock, they should always be talking about what's the. Jim O' Have we maintained the public capital stock appropriately are we doing the right things to support the longer term growth of the US economy. Jim O' And they're talking about how to fund it, so this is something where. Jim O' You know you're making the appropriate public, you know if you can argue about the details of the debate, but you're you're talking about. Jim O' The appropriate level of public capital of the US economy supported by the appropriate level of of taxes as decided by the Congress. Jim O' This is something that would play out over 10 to 15 years, because this is infrastructure, I don't see that as a near term. Jim O' factor really for monetary policy, but I do see it as a medium and longer term factor for the long run growth prospects in the in the US economy, so I think that's a great debate to have as well. Jim O' To me that's the infrastructure debate is over here, the the pandemic response is is something very different, and so those are just two different aspects of monetary policy or i'm sorry fiscal policy. [01:01:33] Speaker 3: Jim O' Okay, well, thank you i'll ask turn to rob then. Jim O' And. Jim O' I hope. Jim O' That you can hone in, perhaps a little bit on given that we're coming out of the pandemic. Jim O' And infrastructure is a longer term proposition as a stabilization policy matter where do you see, where do you think it would be helpful for fiscal policy to head to help the FOMC's contract monetary policy in the coming years. [01:02:04] Speaker 4: Jim O' So, as you know, we're always careful at the Fed, we're always careful, I'm careful not to talk much about fiscal policy, and that it's, it's another part of the government and and because of Fed independence. Jim O' You know, as I always say, we don't get to deal the cards, but we do have to play the cards and on this we play the cards that were dealt having said that. Jim O' You saw something a little unusual from us and I include myself early in the pandemic to Jim's point we it was up to us to call out. Jim O' When you have a forced lockdown, there are limits to what monetary policy can do. Jim O' And when you've got millions of people through no fault of their own who are unemployed and there's no amount of monetary policy that's going to rectify that and so. Jim O' A number of us were vocal and calling that out at and talking about the need for fiscal policy, particularly unemployment benefits. Jim O' And other actions that could protect those and sustain those who are going to have a hard time making ends meet. Jim O' Because of the pandemic and small businesses and businesses generally that needed access to capital, either through PPP or stabilizing the financial markets. Jim O' So in that regard, yes, we we did comment on it. Jim O' I think beyond that, I would I would probably stay away from the size and the magnitude of what's going on in fiscal policy. Jim O' I would comment and I have commented, though, on infrastructure spending and just to point out, it's of character different than other types of fiscal spending that supports consumption. Jim O' Fiscal policy that supports infrastructure, as Jim said, is a long term investment, it could help improve productivity, it could help improve sustainable GDP growth. Jim O' And so it's of a different character. Jim O' And I think that's worth mentioning. Jim O' I do think and I've talked about pre pandemic, I talked about the fact, we did a lot of work at the Dallas Fed saying that the path of US government debt to GDP was likely not sustainable. Jim O' I said that in January of 2020. Jim O' We're now gone from 77% dead held by the public to approximately 100%. Jim O' And the present value of unfunded entitlements is 65 trillion and growing. Jim O' And the only reason the US is able to manage this is the dollar is the world's reserve currency. Jim O' I hope that will continue for a long time, but I think it would be wise not to rely on that presumption to last indefinitely or so heavily. Jim O' And so I'm sure there's going to be a lot of tough discussions. Jim O' How do we grow faster, which is part of the puzzle. Jim O' How do we moderate our spending growth. Jim O' And that includes a lot of touchy issues about entitlement reform generating revenues. Jim O' But I think that discussions probably going to be necessary. Jim O' I think our job as central bankers at the Fed is to understand these proposals. Jim O' And when they're enacted to adapt monetary policy accordingly. [01:05:16] Speaker 3: Jim O' Okay, well, I'm getting mindful over timing. Jim O' But just on the on the if I can get a 15 second answer out of Jim on fiscal dominance. Jim O' I think I've heard you in the past say, you know, the Fed's independent, you're not worried about it, but it's something that the Fed should keep an eye out that we should be mindful of. Jim O' Is that a decent characterization? [01:05:40] Speaker 5: Jim O' Yeah, I'm not worried about fiscal dominance. Jim O' I think. Jim O' I think we're an independent central bank and will continue to be independent. [01:05:50] Speaker 3: Jim O' Great. Jim O' Okay. Jim O' You know, on top of your dual mandate, the Fed has important financial stability responsibilities. Jim O' So many analysts see significant froth in US markets. Jim O' They point to equity housing we've discussed their spread compressions. Jim O' There's archegos and that episode. Jim O' So to separate monetary policy from financial stability concerns, it's argued strong micro and macro prudential oversight are needed. Jim O' The banks have weathered the storm well, it seems, but non banks often pose huge risks which can hit the FOMC's ability to meet its dual mandate. Jim O' And yet they're outside the Fed's remit. Jim O' So how concerned are you about froth? Jim O' And then, how concerned are you about financial stability risks, particularly if they're emanating from outside the Fed's remit and what should be done? Jim O' Rob, please. [01:06:46] Speaker 4: Jim O' Yeah, so I've talked about the fact when you have a very accommodative monetary policy, as we've needed to have due to the pandemic, and you've got this level of asset purchases and liquidity being injected in the system. Jim O' One of the side effects you have to recognize, and I think we're wise to acknowledge it, has a material effect on financial assets. Jim O' And I do worry, and I've said this consistently, I do worry about excess risk taking in non-bank financials, which looks benign while it's going on, but when you notice it is when people need to de-risk. Jim O' And so, when you have this level of actions that we're taking, I think it does encourage people to go out the risk curve, and I think that is what's happening. Jim O' As you said, not only do we not have jurisdiction over non-bank financials, I don't think we have great transparency on what's going on in non-bank financials. Jim O' And some recent events have sort of demonstrated that. Jim O' I think you tend to learn about some of these excesses after the fact. Jim O' There's debt and margin debt, which you can see. Jim O' It's harder to see derivatives and use of those, which is another form of debt. Jim O' And so, I think it's wise to, I'm not worried that this is going to create undue financial instability, but I do worry about this amount of risk taking. Jim O' If you get to a period where there's a de-risking, even a modest de-risking, and when you have intermediation not quite able to manage it, you can have a severe tightening abruptly in financial conditions. Jim O' I think we should be worried about that and cognizant of it. Jim O' And that's one other reason why, if we can find our way clear sooner rather than later to start making some adjustment to these asset purchases, I think would be far healthier. Jim O' And Mark, you may have frozen a little bit here. Jim O' He's frozen on my screen, too. Jim O' Okay, I don't know if you got the end of that, Mark. Jim O' Yes. [01:09:15] Speaker 3: Jim O' More or less, but I've just come in frozen. Jim, please, do you have any thoughts on this? [01:09:21] Speaker 5: Jim O' Well, I think that the FOMC has made a lot of changes since the global financial crisis. Jim O' We have much better radar, much better intelligence on trying to track excesses in financial markets, trying to pin down more tightly what we mean by froth, in particular markets, concepts of fair value and equilibrium in various places in financial markets. Jim O' I think we benefit from very much from having Rob and others on the committee that have direct experience in financial markets. Jim O' Because macro economists view of these things like I would have is, you know, our models are not very good at tracing these kinds of things. Jim O' So I think this is a place where direct experience really plays an important role. Jim O' And so I think we're doing the best we can on this. Jim O' I think we are in a situation where we could possibly see bubbles develop and possibly they're developing today. Jim O' That's something that we can continue to debate. Jim O' This has been a debate that has been going on ever since the rational exuberance speech in 1996. Jim O' And I don't think the central bank has really come to a very good answer to it after all that time. Jim O' But I think the good news is that our radar is quite a bit better than it would have been before the global financial crisis. Jim O' And the FOMC does get regular briefings on this and does regularly, regularly comment on this. Jim O' So I think that's a good sign for the future. [01:11:30] Speaker 3: Jim O' Okay, well, thank you for that. Jim O' And I agree that the Fed does a much better job on financial stability and I like your reports. Jim O' I think that's a wonderful innovation. Jim O' So I congratulate you and the FOMC on that. Jim O' Okay, we're running out of time. Jim O' Let me just ask maybe one or two more quick questions. Jim O' The FOMC just announced it would conduct overnight reverse repo operations at five basis points. Jim O' This was portrayed as a largely technical matter and providing a floor for money market rates. Jim O' As I mentioned earlier, Steve Cicchetti at an on fifth event characterized this as a giveaway to money market funds on top of the Jim O' Fed's efforts to sustain the money market fund model in 2008 and 2020. Jim O' And Zoltan pose are who's a credit Swiss analyst who's one of the best on financial market plumbing basically said five basis points was too generous. Jim O' And would cause huge shifts from treasuries to parking cash at the reverse repo facility. Jim O' I think a few people have asked that from the audience. Jim O' Do either of you want to offer a quick thought on this. Jim O' Should I start with Rob, since you have a good background in markets? Rob McClendon: Yeah. [01:12:45] Speaker 4: Rob McClendon: It's intended as a largely technical matter. Rob McClendon: I think these issues that others have raised is something we need to monitor very carefully. [01:12:55] Speaker 5: Rob McClendon: Yeah, I would say, you know, our focus is on control of the policy rate, which is the federal funds rate. Rob McClendon: And these are technical adjustments driven by the New York desk on what has to be done in order to maintain control over short term and to the market. [01:13:15] Speaker 3: Rob McClendon: Maybe a last provocative question, then you defend anchors the short end of the market, not the long end. Rob McClendon: And yet. Rob McClendon: Here we've had massive fiscal stimulus. Rob McClendon: And being inflation outlook is changing substantially. Rob McClendon: And yet the 10 years. Rob McClendon: Sitting at the 1.4 today. Rob McClendon: Is this set. Rob McClendon: Do you have any thoughts for us obviously difficult subject, but is it fed credibility don't fight the fed or is this just fed purchases and the Treasury cash management practices. Rob McClendon: At this time, do you have any thoughts or insights for us. Rob McClendon: Start with Jim this time. Rob McClendon: Okay. [01:14:09] Speaker 5: Rob McClendon: I think. Rob McClendon: Markets themselves are a little bit confused about the recent moves. Rob McClendon: I do think. Rob McClendon: we're going to allow. Rob McClendon: Inflation to be above target as i've been stressing here so that has to get priced in but but, in addition. Rob McClendon: You still got very low rates in in Europe and Japan I just don't see how US rates can go. Rob McClendon: Too much higher than where they are in in Europe and Japan and that's I in my opinion i've always stressed that that's what's capping US rates what prevented them from going to 2% earlier, so I mean. Rob McClendon: A lot of factors in this market, so no one really knows exactly how these trades are occurring but. Rob McClendon: That would be my overall impression. [01:15:04] Speaker 4: Rob McClendon: So I just build on what Jim said, because I agree with it, there are three or four factors going on. Rob McClendon: Yes, the Fed purchases has some effect. Rob McClendon: On the one side, on the other hand, if you get out over the horizon, we have an aging society workforce growth is decelerating. Rob McClendon: I think people in the bond market are very aware of that, that over the horizon, unless we improve productivity to offset slowing workforce growth. Rob McClendon: We're going to have sluggish GDP growth, not just the United States, but globally. Rob McClendon: And yes, US rates are relatively speaking lower than many other parts of the world and there's an enormous amount of pension fund money. Rob McClendon: And global money available that wants to own the 10 year treasury and be in the dollar. Rob McClendon: And so there's a whole range of factors and cross currents that that make this a very complex thing, but there's a strong bid for the US Treasury and I think there will be for an extended period of time. Rob McClendon: Maybe it's somewhat higher rates, but there's a there's a strong bid for the US Treasury. Rob McClendon: Well, thank you for that. [01:16:16] Speaker 3: Rob McClendon: Well, the two of you have spent a bit over an hour with me that's more than many people can tolerate. Rob McClendon: So I want to let you get to your day jobs. Rob McClendon: So I want to thank Robert Kaplan and Jim Bullard for a wonderful discussion today. I know I greatly benefit benefited from it. I'm sure the audience did so as well. I also thank the audience for joining us. Rob McClendon: And then last but not least tomorrow's tomorrow office Fed week will continue with a discussion on the economics of artificial intelligence and machine learning by leading experts, including from the Philadelphia Federal Reserve until then Rob McClendon: We'll see your we'll see you tomorrow. And once again, thank you to Jim Bullard and Rob Kaplan. This was wonderful. Thank you. Rob Kaplan: Thanks very much, Mark. Great to see you. [01:17:09] Speaker 5: Rob McClendon: Pleasure. Thank you. [01:17:11] Speaker 3: Thank you. Bye-bye.