A Conversation with Jerome H. Powell

Tuesday, June 25, 2019
Don Pollard
Speaker
Jerome H. Powell

Chair, Board of Governors, Federal Reserve System

Presider
Neil Irwin

Senior Economics Correspondent, New York Times

Jerome Powell discusses the challenges facing the U.S. economy and the policies of the U.S. Federal Reserve.

IRWIN: Good afternoon. Welcome to today’s Council on Foreign Relations C. Peter McColough Series on International Economics.

I am Neil Irwin. I’m a senior economic correspondent at the New York Times, also the author of a new book called How to Win in a Winner-Take-All World about navigating a career in the modern economy. I’m presiding over today’s discussion.

It’s a great honor to have Jerome H. Powell with us today. He is the sixteenth person to chair the Board of Governors of the Federal Reserve System. He joins us today at a fraught moment for the world economy and for the Fed. Previously, he was a Fed governor. Before that, he worked for the Bipartisan Policy Center, Carlyle Group, and the U.S. Treasury Department.

We’ll begin with a few prepared remarks by Chairman Powell. (Applause.)

POWELL: Thank you, Neil, and good afternoon. It is a pleasure to be here today.

So I’m going to begin with a progress report on the broad public review my Federal Reserve colleagues and I are conducting of the strategy, tools, and communication practices we use to achieve the objectives that Congress has assigned to us by law: maximum employment and price stability, the dual mandate. Then I will discuss the outlook for the U.S. economy and monetary policy, and I look forward to our discussion that will follow.

During our public review, we’re seeking perspectives from people across the nation, and we’re doing so through open public meetings livestreamed on the internet. Let me share some of the thinking behind this review, which is the first of its nature we’ve undertaken. The Fed is insulated from short-term political pressures—what is often referred to as our “independence.” Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests. Central banks in major democracies around the world have similar independence.

Along with this independence comes the obligation to explain clearly what we’re doing and why we’re doing it, so that the public and their elected representatives in Congress can hold us accountable. But real accountability demands more of us than a clear explanation. We must listen. We must actively engage those who serve—those we serve to understand how we can more effectively and faithfully use the powers they have entrusted to us. That is why we are formally and publicly opening our decision-making to suggestions, scrutiny, and critique. With unemployment low, the economy growing, and inflation near our symmetric 2 percent objective, this is a good time to undertake such a review.

Another factor motivating the review is that the challenges of monetary policymaking have changed in a fundamental way in recent years. Interest rates are lower than in the past, and likely to remain so. The persistence of lower rates means that when the economy turns down interest rates will more likely fall close to zero, their effective lower bound or ELB as we call it. Proximity to the ELB—sorry—poses new problems to central banks and calls for new ideas. We hope to benefit from the best thinking on these issues.

At the heart of the review are our Fed Listens events, which include town hall-style meetings in all twelve reserve bank districts. These meetings bring together people with wide-ranging perspectives, interests, and expertise. We also want to benefit from the insights of leading economic researchers. We recently held a conference at the Federal Reserve Bank of Chicago that combined research presentations by top scholars with roundtable discussions among leaders of organizations that serve union workers, low- and moderate-income communities, small businesses, and people struggling to find work.

We have been listening. What have we heard? Scholars at the Chicago event offered a range of views on how well our monetary policy tools have effectively promoted our dual mandate. We learned more about cutting-edge ways to measure job conditions. We heard the latest perspectives on what financial and trade links with the rest of the world mean for the conduct of monetary policy. We heard scholarly views on the interplay between monetary policy and financial stability. And we heard a review of the clarity and the efficacy of our communications.

Like many others at the conference, I was particularly struck by two panels that included people who work every day in low- and middle-income communities. What we heard loud and clear was that today’s tight labor markets mean that the benefits of this long recovery are now reaching these communities to a degree that has not been felt for many years. We heard of companies, communities, and schools working together to bring employers the productive workers they need, and we heard of employers working creatively to structure jobs so that employees can do those jobs while coping with the demands of family and life beyond the workplace. We heard that many people who in the past struggled to stay in the workforce are now getting an opportunity to add new and better chapters to their life stories. All of this underscores how important it is to sustain this expansion.

The conference generated vibrant discussions. We heard that we’re doing many things well, that we can—have much we can improve, and that there are different views about which is which. That disagreement is neither surprising nor unwelcome. The questions we are confronting about monetary policymaking and communication, particularly those relating to the effective lower bound, are difficult ones that have grown in urgency over the past two decades. That is why it is so important that we actively seek opinions, ideas, and critiques from people throughout the economy to refine our understanding of how best to use the monetary policy powers that Congress has granted to us.

Beginning soon, the Federal Open Market Committee will devote time at our regular meetings to assess the lessons from these events, supported by analysis from staff throughout the Federal Reserve System. We will publicly report the conclusions of our discussions, likely during the first half of next year. In the meantime, anyone who’s interested in learning more can find information on the Federal Reserve Board’s website.

Let me turn now from the longer-term issues that are the focus of our review to the nearer-term outlook for the economy and for monetary policy. So far this year, the economy has performed reasonably well. Solid fundamentals are supporting continued growth and strong job creation, keeping the unemployment rate near historic lows. Although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market. Along with this favorable picture, we’ve been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. When the FOMC met at the start of May, about eight weeks ago, tentative evidence suggested that these crosscurrents were moderating and we saw no strong case for adjusting our policy rate.

Since then, the picture has changed. The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy. Our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in recent surveys and may be starting to show through to incoming data. For example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier this year.

Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows. Inflation is expected to return to 2 percent over time, but a—at a somewhat slower pace than we foresaw earlier in the year. However, the risks to this favorable baseline outlook appear to have grown.

Last week my FOMC colleagues and I held our regular meeting to assess the stance of monetary policy. We did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. Since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy change. We now state that the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation. Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened, but we are also mindful that monetary policy should not overreact to any individual datapoint or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.

Thanks very much. (Applause.)

IRWIN: Thank you, sir. So as you—as you suggested last week in your press conference and again just now, it looks like cutting interest rates sometime in the coming months is a strong possibility. Just six months ago you and your colleagues raised interest rates and were expecting to do so again in 2019. So what’s changed in these six months? What do you know now that you did not know then?

POWELL: Well, Neil, first of all let me say thanks for being here. And as you pointed out we had an FOMC meeting and a press conference last week, and the things I say about monetary policy here today are intended to be fully consistent with the message that I delivered at that—at that press conference and coming out of the meeting.

So my colleagues today are—and I are tightly focused on our setting of monetary policy and getting it set at the appropriate level to best fulfill our dual-mandate objectives, as I mentioned. You ask what has changed. A lot has changed since December, including, for example, estimates of global growth for 2019 have come down substantially. In fact, quite a lot has changed since May 1, which is only eight weeks ago as I mentioned. At the meeting that ended on May 1 we had coming out of that meeting an excellent job report, very strong job report that Friday. We were looking at what—tentative signs that the—that the crosscurrents were abating. There were tentative reports of progress toward reaching a trade deal with China. There was better data coming out of China, better data coming out of Europe. So all of that changed coming out of that meeting, beginning with the news that the trade negotiations with China had moved away from agreement and toward greater confrontation.

And I think I would just say that my colleagues and I still see a favorable outlook as the most likely outlook, but we do see that the risks to that outlook have increased. We’re very mindful of those risks and prepared to use our policy tools to support activity as needed.

IRWIN: So one way of reading the shifts that have happened in bond yields since December would be this: The Fed overtightened. You raised rates too much last year. That’s pulling down future growth expectations. Did you make a mistake raising four times, a hundred basis points, last year?

POWELL: Again, if I go back to—I go back to May 1, and the committee’s looking at the performance of the economy in the first half of this year, and what it’s seeing is a pretty positive picture, pretty much in keeping with expectations. The committee looked carefully and thought that our policy stance was accommodative—sorry, was appropriate as of that date, as of May 1. And coming out of that meeting, right after the meeting there is that very strong jobs report. It really looked like the policy stance was appropriate.

What’s happened is things have changed since May 1 significantly. The global risk picture has changed really just in the last six to eight weeks, and it’s around trade developments and concerns about global growth. So, again, our focus is looking forward through the windshield at what the right setting is for monetary policy going forward to achieve our goals.

IRWIN: So you emphasized that a lot of the shifts in markets and economic data have happened very recently, since May 1as you say. And I gather the reason you didn’t actually cut rates last week is that you want to see some confirmation of these trends before pulling the trigger. What would have to happen to change your mind or change the direction you seem to be going?

POWELL: So I’d tell you we’re not looking at any one particular thing. We’ll be monitoring the full range of developments on economic data and political developments and such. And the question we’re going to be asking ourselves is whether these uncertainties are going to continue to weigh on the outlook. So I think with reading financial market data that’s always a—market data—it’s always a challenge to know how to react, and I think that’s something that every central bank faces consistently.

IRWIN: I mean, a lot of the movement in the economic data so far, it’s been very subtle stuff. It’s been the ISM and the manufacturing indexes. How much do you interpret it as this is a risk to the real economy in the U.S. that’s imminent?

POWELL: Well, that’s the question. So if you look at—just take the U.S. real economy data. Consumer is very solid, and that makes a ton of sense. You’ve got low unemployment. You’ve got high confidence readings still. You’ve got wages moving up. You’ve got surveys that show that businesses think it’s hard to find good workers and that workers think that jobs are plentiful. So this is a good time for consumers, and spending data for consumers has been strong.

What’s happened is you’ve seen weakness in manufacturing really around the world, and we can talk about that. That’s a story that we’re seeing consistently around the world.

So we’re—again, we’re looking at the—at the overall situation and wanting to see more, frankly, because some of these developments really happened in the second half of the last intervening period. And I think it’s important to—not to overreact in the short term to things which may turn out to be temporary or transient.

IRWIN: So that’s on the data side. There’s the market side, and longer-term, medium-term yields have fallen a lot in the last few weeks. You know, there’s always a tension for a central banker in how much to—how much—you know, you don’t want to overreact to moves that might just be random volatility in markets. You also don’t want to underreact and miss out on important signs that the economic outlook is changing. Can you discuss both the conceptual issue of how to avoid either overreacting or underreacting to market moves, and how that applies in this current circumstance?

POWELL: That is a question. The question of how to incorporate changes in financial conditions and in financial markets into monetary policy is one that central banks face all the time. And of course, anything that matters for the achievement of the dual mandate in principle can matter for us—matter for us. That is true of financial conditions and many other things. Also, financial conditions—our policy sort of works through financial conditions.

In addition, I would tell you that financial markets can be thought of as an aggregator of the views of market participants about the future. So you’re going to learn a lot from listening to them.

But what we always say is that we react—we don’t react to any one financial—it isn’t one thing; it’s the broad range of financial conditions. And we look for sustained changes. We don’t look—we try to look through short-term changes. And of course, sometimes financial markets can be, you know, quite prescient about evolving risks. Other times they can be excessively optimistic. They can look through—excessively exuberant and can—and can ignore risks. So we have to use some judgment and some experience in looking at financial market developments over time to decide what to react to.

But the principle that we articulate is that we’re looking for changes in financial conditions that could affect the achievement of our dual-mandate goals, and those tend to be broad changes in financial conditions that are sustained for a period of time. And that’s part of why we—why our thinking was to wait and see, because so much of what happened happened really in the few weeks before the last meeting.

IRWIN: So I want to ask about a word that you and your colleagues have used a lot over the last few years, which is “normalization.” And you know, it seems like there’s been this real desire to return toward what were more historically normal levels of interest rates and the size of the balance sheet. You know, considering we’re in this world where all the major central banks are stuck near the zero lower bound, have been for a very long time, is that a mistake? I mean, what does “normalization” mean in a world where we seem to be just trapped in this low-rate, low-inflation equilibrium around the world?

POWELL: Well, I think it’s clear that at least for now, and probably for some time, what we think of as the neutral rate of interest has fallen significantly in the wake of the financial crisis by as much as 2 or 3 percentage points. So that would be the rate of interest that is neither pushing up nor pushing down—neither restraining economic activity nor supporting economic activity, sort of a neutral rate. And estimates on the Federal Open Market Committee range sort of between 2 ½ and 3 percent in nominal rates.

And what that means—by the way, that is—that’s true—seems to be true around the world. And the forces that have kind of been behind that involve demographics, slower productivity, aging of the population—a demographic feature—and things like that. So it’s likely that that is going to stay with us over time.

So the implications of that for the economy and for central banking are that we’ll have less policy space to cut. So we would typically have cut over the course of a—of a cutting cycle to battle a downturn about five hundred basis points, 5 full percentage points. That’s since World War II. It’s unlikely we’re going to have something like that in the current environment. The current federal funds rate is only 2.4 percent. So it’s a challenge.

And so that means we have to look at our toolkit—this is partly what we’re doing with the review—look at our full toolkit, which includes the things we did during the financial crisis—forward guidance and large-scale asset purchases—so that we have the tools that we need to carry out our mission for the benefit of the public. But it is—it’s a challenge faced by all central banks around the world.

I would say that a big part of that, though, is keeping inflation up to 2 percent. We’ve seen what’s happened in Japan and now in Europe if—to the extent inflation goes down below 2 percent for a sustained period, that implies that, ultimately, interest rates will be that much lower, too, which means even less policy space. So we’ve chosen to make, you know, a point of fighting to keep inflation—underlying inflation at around 2 percent.

IRWIN: So does the lack of policy space in Europe and Japan and other advanced markets affect your kind of reaction function and your assessment of the global risk profile right now?

POWELL: Well, I think—I think in a world of lower interest rates the research seems to show—and I think this is fairly widely accepted—that it’s better to act preemptively. As a general matter, I think most central banks would want to act preemptively and not let a downturn gather steam, in a sense, the thought being an ounce of prevention is worth a pound of cure. So I do think that that’s in the thinking of central bankers around the world, including in our thinking, so that if you see—if you see weakness it’s better to come in earlier rather than later, just as a general principle.

IRWIN: Sure. So you’ve noted before that the last two expansions in the U.S. didn’t end because of inflation and Fed tightening; they ended because of financial bubbles popping. In light of that history I wonder how concerns over bubbles are being dealt with as the FOMC meets and what the interplay is, as you see it, between monetary policy and kind of financial risks. In particular, you gave a speech a couple of weeks ago—a few weeks ago on some signs of a bubble in leveraged lending and corporate debt markets. You had some concerns, though not quite shouting-from-the-rooftops concerns. I wonder how these types of discussions around financial stability fit into your construct of what’s the appropriate monetary policy.

POWELL: Let me say first it’s—if you think back, the traditional—you know, earlier in our lifetimes the traditional business cycle involved the economy overheating, inflation going up, the Fed tightening. That hasn’t really happened in quite some time. The last couple of business cycles going back it was the financial crisis, and before that it was the dot-com bubble bursting, and before that it was the S&L crisis. So it really hasn’t been a question of the traditional tightening cycle. And so the question is how to—how to incorporate these financial-stability vulnerabilities into monetary policy.

So monetary policy already has two goals, really: maximum employment and stable prices. And ideally, it wouldn’t have to also serve a third goal. It would be better if there were tools that could address a third goal, which is financial stability. Of course, without financial stability you’re not going to have macroeconomic stability. And so I think—and I think most in my business think—that the tools for financial stability are separate from those of monetary policy, separate of interest rates. And that would be things like higher capital standards, higher liquidity standards, the stress tests, the resolution planning, all the things that we’ve done to strengthen and improve the resilience of the financial system since the last crisis.

And I’m happy to report that, you know, the levels of capital liquidity, the understanding of risks that are being run, all of those things are far higher than they were before the crisis. And there’s no question in my mind that the—that the banking system and the financial system is much more resilient than it was. And I think we try hard to look at that as the principal tool to deal with financial stability risks as opposed to using monetary policy.

IRWIN: So what does that imply as you potentially cut rates in the near future? Look, your colleague Lael Brainard has suggested that easier monetary policy should come with more cautious regulatory policy around these things like countercyclical capital buffers. Do you agree? If you guys move toward easing, does that imply you need to be a little tighter on the—on the kind of financial regulatory side?

POWELL: So there could well come a time when we would do—deploy something like the capital—countercyclical capital buffer. But let me come back to that.

First, I want to say that, so, we approach financial stability completely differently than we did in the pre-crisis world. Then, before the crisis, it was more: there is an emergency; get the team together and we’ll fight this. Now we actually have a framework for assessing financial stability vulnerabilities on an ongoing basis. We publish it so everyone can see it and hold us accountable. The FOMC has quarterly briefings on this. And we constantly monitor financial conditions—what’s happening with leverage in the economy, what’s happening with funding conditions, and all of those things. And we reach a judgment about the level of vulnerabilities in the economy, and then we tell the public what that judgment is.

Right now our judgment is that on balance the financial—vulnerabilities to the financial system are at a moderate level. Which is not to say nonexistent; just they’re at a normal level. There will always be vulnerabilities. And I would say, as I said at the beginning, I wouldn’t hesitate to deploy a countercyclical capital buffer if the test for doing so is met under our—under our framework, which is if vulnerabilities are elevated.

So that’s how we think about that.

IRWIN: Let’s talk about the trade wars and the escalation of tariffs in the—in the last few months. You know, this seems to have weighed on your decision last week. I’m struck; as these escalate, I think a lot of the model that some of us had for how tariffs and trade wars affect the economy may have been off as we see these go into effect. You know, you think, OK, tariffs, higher taxes on imports, that raises prices; that’s inflationary. You know, we’re seeing some countervailing effects. We’re seeing commodity price drops that are deflationary. We’re seeing a strong dollar. How do you now—as you guys sit around the—at the Fed trying to figure out how this is going to ripple through the economy, what do you see? What does it look like in your model? Especially, is it inflationary? Is it deflationary? How does all of this net out as you guys analyze this situation?

POWELL: So I think standard thinking on tariffs is that, to the extent tariffs wind up being paid by the consumer, that it represents a one-time increase in the price level, and that as long as inflation expectations remain anchored it shouldn’t mean higher inflation going forward but rather a one-time increase in the price level.

So, in fact—but you asked more broadly how do tariffs figure into our thinking about the economy. The amount of tariffs that are in place right now is not large enough to represent a major—itself, just from sort of a quantitative standpoint—a major threat to the economy. That isn’t really the point, though. It really—the concern is more around a loss of confidence or financial market reaction. Really, those are the bigger factors that can affect economic activity.

And what we’re hearing from our contacts in business and agriculture and all around the country—we collect the thinking of thousands and thousands of people every FOMC cycle, and it gets cumulated into something called the Beige Book, and then the reserve bank presidents talk about it. We’ve been hearing quite a bit about concerns about trade, uncertainty around trade really, all through the course of the last year and a half. And those concerns heightened quite substantially as of the last Beige Book; in fact, the number of mentions of trade concerns doubled in the last Beige Book, the one for this meeting. So that is—that is clearly something that’s on people’s minds, as I mentioned.

And you know, the effects are not so much—I would say that the actual mechanical effects on demand of what we’ve seen so far is meaningful, but not large. I think there is—there is discussion of much greater tariffs, and I think that’s where the uncertainty is and that’s where the concerns are on the part of business.

IRWIN: In your opening remarks you mentioned the Fed review of monetary policy framework, kind of what is going to be the way of operating going forward. That’s the question you and your colleagues are trying to weigh as we speak. I do want to challenge you a little on this. It sounds like you guys are committed to this 2 percent inflation target as the framework for what you do and are considering kind of adaptations to try and make sure you hit that target in a consistent way. Is this just tinkering? You know, is there a—is there a case for something more radical, for really exploring some of these options people are looking at around getting away from the entire kind of NAIRU-Phillips curve concept—some kind of nominal growth target, a higher inflation target? There are some newer ideas around targeting gross labor income, something that’s not the existing framework. How much are you guys open to something other than just playing around the edges of the existing 2 percent target? And how radical should we be in this world we’ve been talking about with low kind of sustained interest rates?

POWELL: Well, I think it’s too early to prejudge what the outcome will be. We’re still in the relatively early stages of this.

Again, to go through what I went through, we’re having a series of events—public events around the country that are streamed on the internet where we meet with all kinds of constituencies—the constituencies that we serve, really—to hear what they think about the job that we’re doing. Then we had this academic conference at the Federal Reserve Bank of Chicago. So we’re putting all that together, and then we’re going to begin shortly a series of FOMC meetings at which we will discuss all of the issues that are on the table, and ways in which we can improve our framework. And this is—this is always a good thing to do, but particularly now, though, with the effective lower bound problems, the problems of being close to the effective lower bound.

In terms of the specifics you asked about, we’ve said that we weren’t going to look at simply raising the inflation target. And there are a couple reasons for that. Two percent has become the global norm among central banks. I think there’s value in low and stable inflation. And some would question whether significantly higher than 2 percent would meet the statutory definition of price stability. I also think there are credibility issues. You know, central banks around the world are fighting hard to get close to their 2 percent objective from below. We’re doing much better than most. But just part of—just saying we’re going for a higher target, I’m not sure how credible that would be. The Bank of Japan did something like that a couple of years ago, and it didn’t—it didn’t work.

So what we’re really looking at is not so much raising the target as looking at framework changes that will make that target more credible, that will allow us to symmetrically achieve 2 percent inflation, so that inflation expectations will be well and truly anchored at 2 percent. And the strategy—you mentioned the strategies. There’s a category of monetary policy strategies called make-up strategies. And the thinking behind this is fairly clever. It is that rather than letting bygones be bygones, if you have a shortfall in inflation during a downturn you would promise to make up for that by inflation a bit above you 2 percent target for a period. And that the public, knowing that you would do that, knowing that after the weak period you would run the economy—you would allow the economy to get—to be strong, and would keep interest rates low so that inflation would overshoot—if they know that’s coming they then would actually bring forward their consumption spending and act on that knowledge.

Now, and in a model this works very well. This is—this is very strong—but a very strong, insightful idea.

IRWIN: The world’s not a model.

POWELL: No, that’s where I’m going. So you know, the world—the world’s not a model. And the world—the real world works differently than models. Notwithstanding that, there—it’s an interesting insight. And we’re looking for—we’re looking at all of those ideas, all those make-up ideas, to try to find a credible, practical, actionable sort of framework that would be—the public would understand and would act on, to some extent. And that’s something we’re looking at very, very carefully.

IRWIN: So put that in light of we’ve seen a lot of measures of inflation expectations, both surveys, breakevens fall in the last few weeks. What does that tell us about where people’s heads are on inflation right now and, as you try and anchor those expectations, something doesn’t seem to be working right now.

POWELL: Well, we think that inflation expectations are anchored near 2 percent. I think earlier in the year—let me take a step back. Inflation ran pretty close to our 2 percent objective throughout most of 2018, and then dropped in the first quarter of this year by a few tenths of a percent. And it was broadly the thinking on the committee that that would be a temporary phenomenon. I would say that the latest data show a couple of things. First, show that that undershoot, if you will, looks like it may be more persistent than we had hoped. And that’s not a good thing. We want inflation to be well and truly at 2 percent, and not sort of close to 2 percent. The second thing that happened is that market-based measures of inflation expectations, what we call breakevens, dropped rather sharply during the last intervening period. As the longer-term sovereign rates around the world dropped, so do breakevens for inflation. And that’s just a—that’s just a market-based measure of what—of what markets are saying inflation will be going forward.

And, you know, we do follow financial markets very closely, and we take these things seriously. We called that out in our—in our statement. And I would say the people on the Federal Open Market Committee are concerned that—it’s another argument, frankly, for providing more policy accommodation. More policy accommodation, lower interest rates, would support economic activity, which would put more upward pressure on inflation, and I would say that’s an argument for lower interest rates.

IRWIN: So I wrote a book on this micro question of how to navigate a career in the winner-take-all economy, this world where there are superstar firms dominating a lot of industries. I wonder if we could talk about the more macro question raised by that trend. You know, there’s some arguments that the rise of kind of superstar firms, industrial concentration, is a factor in some of the problems we see in the labor market—low wage growth, low labor share of national income, you know, low worker bargaining power. Does that—first of all, do you buy some of those theories? Do you think monopsony and corporate power is a factor in the low wage growth we’ve seen? And does this phenomena affect how you do your job in setting monetary policy?

POWELL: So this whole very interesting area of research was actually the topic of the Jackson Hole conference last year, which is our sort of annual system conference. It took on these issues. And what we observed is that the level of concentration across a broad range of industries and our economy is increasing. And that’s—by which I mean, if you take the top ten firms in a given industry, the amount of that industry that they control has increased over time. So you’re seeing measures of concentration increasing over time. At the same time, you’re seeing low productivity. You’re seeing rising inequality. You’re seeing wages not move up as fast as they ought to, given all the things we know about the current state of the economy. And the question is, is the first thing somehow causally related to the second thing?

And so there were a couple of early papers identifying connections between the two, and now there have been some papers sort of pushing back on that. It’s—we don’t know the answer. It’s something that’s definitely under active study and something we look at carefully. I mean, I’ll tell you why it’s complicated. An example is a lot of the consolidation, that concentration that happened, probably the biggest area in the economy, is the retailers and the wholesale distributors who serve them. So that was a tremendous—a lot of mom and pop stores went out of business and what you got was the big box stores. And behind that, you had the distributors, which were small local distributors, coming together as well. So that’s a classic example of much higher concentration.

But it was associated with higher productivity and higher wages. So the connection is not clean or obvious. It’s clear that the two things are happening at the same time. I would just—I would also point out that there are many factors all over the world weighing in inflation, weighing on wage growth, weighing on productivity. And the question is, is this concentration thing—is it—is it also contributing? I don’t rule it out at all, I just think it’s not easy to pin these things down. But it’s something we’re very aware of.

IRWIN: So one last big-picture question before we turn to your questions. Look, this has been a really remarkable period for global economic governance. The financial crisis and its aftermath, the world’s central banks really took a dominant role in guiding the world economy. Now we’re in this era when the major central banks are all near the limits of their abilities. We’ve had a decade of low rates and QE, longer than that in Japan. You know, there’s soon going to be a change of leadership at the ECB and the Bank of England. Are there—you know, the disruptions we’re seeing to the economic order now are not really things that central banks—it’s not really in your wheelhouse to deal with trade wars, or Brexit, or some of the things that are really affecting the outlook.

So I guess my question is, given these shifts, what now for the central banks? What now for the world economy? What do you say to people of what the role of the Fed’s going to be, and your successors’ roles will be in this economic era that’s taking shape, and how do you see it as different from what we’re coming out of?

POWELL: I guess there are a lot of ways to go with that, but I’ll—and I’ll start with sort of how we would react in a crisis, what we can do in a crisis. And the first thing is, our liquidity—our ability to be the so-called lender of last resort to solvent institutions, provide liquidity to institutions in severe stress, we can still do that. We still have those powers and we would use them. The second thing is monetary policy. Will we be able to react with our monetary policy toolkit to support demand? And the answer is yes, subject to what I said earlier, which is that rates are lower. We’re going to have fewer rate cuts that are available, which means we’re—that’s one of the reasons we’re looking for strategies to strengthen our toolkit. And also we may have to rely on our—on the tools that we used, the new tools that we used, during the financial crisis—forward guidance and large-scale asset purchases.

The other thing that we have done and will continue to do is build a more resilient financial system. We’ve done all of that, and we’re not going to get away from that job. We’re going to make sure that the financial system is more resilient because what really happened in the financial crisis the financial system was not resilient enough to handle an economic shock that it should have been strong enough to deal with, and wasn’t, and that’s what ultimately led to much of the damage. So we’re not looking to make that mistake again. So those are things that we can do and will do.

I would also say, though, that almost the more important things about our economy are not really things that the central bank can do, and that we need to—we need to focus on more as a country. So I’m thinking there about things like the potential growth—our potential growth. And that goes to the skills and aptitudes of the workforce. It goes to policies that will get people in the labor force and keep them there. It goes to policies that will lead to investment, and technological advance, and support productivity growth. And also, policies that will give everybody a chance to share in our prosperity. So these are—these are, I think, more important issues than the ones that we at the Fed deal with, but they’re not really consigned to us. They’re really issues that the legislature and the public need to understand and deal with.

IRWIN: Thank you. So at this time, I’d like to invite members to join the conversation with their questions. A reminder, this meeting is on the record, in case the cameras in the back were not clear enough. Please wait for the microphone and speak directly into it. Please stand, state your name and affiliation, and please limit yourself to one question, try to keep it concise to allow as many members as possible to speak. Should we start over here?

Q: Hi. I’m Lew Alexander from Nomura. Thanks very much.

Obviously one of the questions that market participants are trying to think through is the pace of any changes in policy. There are good reasons why you lower rates faster than you raise rates. And I wonder if you could talk a little bit about that. But obviously one of the characteristics of the forecast that we got from the committee last week was there seems to be a pretty significant division between roughly half of the committee that seems convinced that they should be lowering rates, and the other half that is not yet fully convinced. I wonder how you think those two sets of arguments are likely to affect your decisions going forward.

POWELL: Well, Lew, I think so much is really going to depend on the incoming data and the course of events here in the near term. Really the committee has not focused on those specific issues yet. And we’ll be very much driven by the evolving risk picture and the incoming data. That’s really all I can see.

IRWIN: Here.

Q: Hi. Thank you for your service and thank you for doing this today.

Do you treat the U.S. dollar as an endogenous variable in U.S. conditions or an exogenous variable?

POWELL: Well, we take the level of the U.S. dollar—of course, it’s in our models as just another financial condition. And we—you know, so we model the effects of monetary policy on the real economy and on a range of financial conditions. And the dollar is one of many financial conditions that adjusts. I think maybe your question is do we target the dollar. And the answer is, we do not. We—the Treasury Department, the administration is responsible for exchange rate policy, full stop. We are not. We don’t comment on the level of the dollar. We certainly don’t target the level of the dollar. We target domestic economic and financial conditions, as other central banks do.

IRWIN: Over here.

Q: Thank you very much. Paul Sheard, Harvard Kennedy School.

Chair Powell, a lot of economists are coming to the view that there needs to be a much greater role relatively from fiscal policy when monetary policy is constrained by the effective lower bound. How do you assess those arguments? And how, if at all, would you be taking those into account in the context of your review?

POWELL: So we also take fiscal policy as exogenous. But I would second your thought, though, that fiscal policy is so powerful, and particularly in a significant downturn can have great power. And it’s not good to have monetary policy by the main game in town, let alone the only game in town. And so I would—I would like to see fiscal policy to be there, at least in significant downturns, to help us support demand when needed.

IRWIN: Up here closer.

Q: Thank you, Chair Powell. Ellen Zentner, Morgan Stanley.

So going into the most recent FOMC meeting, financial conditions were already supportive of the outlook. And following that meeting, they’ve eased further. I wonder if you could comment on how you take that into account, that the reflexivity between the Fed’s communication and market expectations that financial conditions are easier because the market is expecting a rate cut to be delivered as early as the July meeting. Do you take into account what impact that would have on the outlook if you were to not deliver the cut that the market expects, and those financial conditions then reverse course? Thank you.

POWELL: So we’re not—we’re not looking at short-term movements in financial conditions or trying to provoke short-term movements in financial conditions. We’re really looking at maximum employment, stable prices, the state of the economy, the picture of risks all around the world. And we’re trying to set our policy so that in the medium term it is well-set to further those objectives. We understand that our policy works through financial conditions, but we’re not in the business really of trying to work with short-term movements in financial conditions. We have to look through that and look to the—really the underlying economy for our main guidance.

IRWIN: Over here.

Q: Thank you for a fascinating discussion and for your service. My name is Bhakti Mirchandani. I work at a think tank called FCLT Global.

You spoke a lot about policy space and financial stability. A key tool that you used in the last financial crisis was quantitative easing. And you made various comments about quantitative easing over time. Based on this review that you’ve already done, what are your thoughts on the potential to use quantitative easing in the next crisis? Do you feel that you have less room because the balance sheet is larger? And just love to learn more.

POWELL: So on quantitative easing, we are—first of all, we’re looking at the broad range of tools that—there are tools that we used in the financial crisis. There are tools that other central banks used but we didn’t. And there are tools that nobody used. And in fact, those would be the make-whole strategies. So with quantitative easing, I think most of the research showed that it did have an effect in essentially driving down term premiums and long-term bond rates, and that that supports economic activity through fairly well-understood channels. I Would say policy space is there for it to be used. And but I would say that, you know, the principal tool is still—is still our interest rate tool. That’s what we’re going to be using. And to the extent we have to resort to other tools, it will really depend on the situation and, you know, what the right tool is for that particular situation.

Q: Hi. My name is Alex Yergin. Thank you so much for speaking with us. This has been a great discussion so far.

My question is going back to some of these open sessions that you’ve been having, given changes in the economy, whether it’s in terms of the rise of the tech sector or what have you, is the Fed kind of adjusting what data it looks at in guiding its decision making? And if you could talk a little bit about that, that would be very interesting. Thank you.

POWELL: Yes. So there’s a big industry out there that uses big data to try to assess near-term movements in financial markets. That’s not what we do. That’s not really what we’re into. So—or what is of interest to us. But we have been working with big data and with a lot of the companies that are active, and with the academics who are working on this really, though, to—with the purpose of better understanding the current position of the economy, and therefore what we may expect. So there’s a great deal that you can do with, you know, more timely information lots of timely data about consumer spending, for example. So we—I think we’re close to the frontier. And it’s very much early days working with big data. But really with the sense of, how do we really understand the current situation in the economy and perhaps the near future. It’s quite different from what the investors are doing with big data, but it’s an area of real interest for us and we’ve put significant resources into it.

IRWIN: It’s always seemed odd to me that the CEO of Walmart knows every morning what yesterday’s sales were, but it takes six weeks to get a retail sales report for the country.

POWELL: Yeah. So we’re actually talking to some of the big retailers and credit card companies, and things like that, about getting more current data. And also, payroll data companies, and things like that. So there may be—there may be gains there. The thing is, it’s really hard to measure GDP. As you know, there are so many judgement calls you have to make in trying to measure economic output. And you’ve got to attribute output to non-market things. It’s not easy to measure GDP accurately. So that’s a—there’s a lot of progress to be made there.

IRWIN: Let’s go further back. Is that Bill Dudley?

Q: Chairman Powell, thank you again. Jeff Hammer, Houlihan Lokey.

The shadow banking sector has grown exponentially since the last crisis. And it’s unregulated. And we’re also seeing introduction of technology driving innovation, Facebook announcing Libra. How do you think that’s going to factor into your risk assessment for the economy on a going-forward basis? And do you think there will be regulatory creep into those areas?

POWELL: Well, let me—I’ll start with Libra and then go back to shadow banking more generally. So Libra’s a new thing. We’re looking at it very carefully. And I’ll just echo I think what I said at the press conference, which is that given the possible scale of it, I think that our expectations from a consumer protection standpoint, from a regulatory standpoint, are going to be very, very high. And authority for overseeing Libra is going to be in a number of places, but I think the big picture is we’re going to be looking really carefully at it. And I would want to echo that.

 In terms of, you know, the shadow—so-called shadow banking more generally, it really—you know, most other well-off democracies have almost all intermediating happening in the banking system and small capital markets. We actually have very large and vibrant capital markets. And you know, that’s a positive feature of our financial landscape. But it’s the banks that are highly regulated and have, you know, specific capital requirements. Capital markets are less prudentially regulated. And, you know, in a sense that’s a good thing, because there’s room for, you know, funding, you know, early-stage companies that might have no prospects or they might have prospects of having the next drug that cures an important disease. And so it’s a—it’s a feature of our system as well as presenting significant challenges.

So I think after the financial crisis we looked at many of the things that broke in the financial crisis were actually—were actually financial market things, like the triparty repo system, like money market funds, and things like that. So we’ve sort of systematically gone through after the crisis and looked at places where—that could be systemically important if they go wrong in the capital markets and tried to address those as best we can. And we monitor it. The Financial Stability Oversight Council is the place where all of the regulators get together and where, if things fall between a bunch of different regulators, that’s the place, you know, where that would be sorted out. But it’s both a challenge and a positive feature of our system.

IRWIN: Over here.

Q: Hi. Alison Silver for Allison Silver, 4Context.

We have a president who seems quite comfortable talking publicly about the Fed. And I was just wondering what you think about this. (Laughter.)

POWELL: Well, as I mentioned, I think that the independence of the Fed from direct political direction is—sorry—direct political control is an important institutional feature that has served the country well, served the economy well, served the American public well. And it’s also the same sort of broadly similar protections that other advanced economies, central banks have. And I think we have long experience that when you see central banks lacking those protections, you see bad things happening. And that includes, by the way, our experience here in the United States.

So I do think that that’s important. At the Fed, we are a strictly non-political agency. We are doing our best to serve all Americans with our tools. We understand that we have a very important job, and we’re very focused on doing that job, and desire to play no role in broader political issues, but just to—just to carry out that really important role. We’re human. We’ll make mistakes. I hope not frequently, but we’ll make mistakes. But we won’t make mistakes of integrity or character.

IRWIN: Right behind the previous question.

Q: Thank you. Dan Rosen, Rhodium Group.

If U.S. capital markets were used as a political lever, would that have an effect on their role in resilience the way you see it?

POWELL: I’m sorry, I didn’t follow your question.

Q: There’s been talk about constraining access to American capital markets for political purposes to exert pressure on other nations. Would that have an effect on their contribution resilience, in your equation?

POWELL: You know I wouldn’t—that would—that would be beyond the scope of my responsibilities. I wouldn’t want to comment on that particular hypothetical.

IRWIN: Let’s got to the back here.

Q: Roman Martinez, a private investor.

 I have two questions related to the yield curve. Currently, as we know, we have a slightly inverted curve. I’d like to know your views, how you take that into account in your assessment of the situation. And secondly, the ten-year historically has traded about 2-2 ½ percentage points over inflation. Currently it’s flat. What do you think is the right spread over inflation for the ten-year? (Laughter.)

IRWIN: A price target, and a—

POWELL: (Laughs.) So we do, of course, look at the yield curve, various measures of the yield curve. There are many different measures of the yield curve. It’s something we look at. It’s one financial condition among many that we look at. It’s not—there’s no one thing in the broad financial markets that we see as the dominant thing to look at, the one thing that tells us what’s going to happen. It’s just one of the many things. So but we’re—believe me, we’re well-aware of it. We know the history of it. And it’s something that we monitor. In terms of the ten-year, I’m going to have to pass on what I think the equilibrium price of it would be, but—so thanks. (Laughter.)

IRWIN: Let’s go over here.

Q: Thank you. Rody Costanzo, JPMorgan.

IRWIN: Back there first. Sorry.

Q: Sorry. Rody Costanzo, JPMorgan.

As part of the review, given that you mentioned that the neutral interest rate has gone down substantially since the financial crisis are you considering that also maybe the target inflation rate should no longer be 2 percent, but might have to be at a different level? Thank you.

POWELL: We made a decision not to look a raising the target, as such, but rather to look at keeping—at making the 2 percent target as credible as we can. That’s really how we’ve been looking at it. We did make a decision at the beginning not to look at simply raising the target, for the reasons that I mentioned a little while ago.

IRWIN: Let’s go over here.

Q: Hi. My name’s Nancy Lieberman.

You addressed so many different factors in what goes into your thinking on setting rates and impact on the economy. The one thing you haven’t spoke about, though, or addressed—and maybe it’s because you don’t think of it, but I’m sure you do—is the over $16 trillion national debt. How does that factor into your thinking? And when the next downturn comes, when we’ve got this unprecedented amount of debt hanging out there, how is it going to affect policy?

POWELL: Well, I think it’s widely understood that the U.S. federal budget is not on a sustainable path. And I think this is a—this is a good time to be working on that, when the economy is strong. But fiscal sustainability is really a longer-term problem. It’s not a problem associated with the business cycle, for example. So it doesn’t really feature in monetary policy. It’s not something we think about in setting monetary policy. We’re more—our focus, as I mentioned earlier—our focus is tightly right now on doing what we can to sustain this expansion. The benefits of this expansion are reaching groups that haven’t been reached in a very long time. Unemployment is 3.6 percent. It hasn’t been there since I got my driver’s license in 1969. (Laughter.) So that’s a really good thing. So that’s where our focus is. And also, you know, keeping the job market strong, and keeping inflation at 2 percent.

Fiscal sustainability is really not our job, and it doesn’t actually play that big a role at this point in our thinking on monetary—it doesn’t play any role in monetary policy.

IRWIN: So last one over here, right here.

Q: I’m J. Goldin. Thank you for your service.

Are there tools that are not available to the Fed that are available to other central banks, or are that described in the literature, that you would like to see made available to the Federal Reserve?

POWELL: In monetary policy, no. I think we have the tools that we need, and we have tools that are quite similar to those of the other major central banks. Other central banks have things like plenary control over the payment and things like that, but that’s not really the sense of your—and we don’t—but that’s not the sense of your question. So it’s not so much that we don’t have particular powers. It’s just that having low interest rates really challenges the existing tool kit of central banks. And there are no obvious, easy answers where they could give us a new tool. We have to do some thinking about that and do what we can to put ourselves in a position to carry out the role that we’re assigned.

IRWIN: With that, thank you, Chair Powell, for a stimulating discussion. (Applause.)

(END)

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