Until we failed to do our jobs. So, yes, you know, we have a period in Canada, the economy's weak, unemployment's a little high at 6.6, inflation's 3.2. Those are not double-digit numbers and inflation isn't going to be persistent. Inflation expectations are well anchored. We're going to keep them well anchored. So this whole word of stagflation doesn't apply to the situation we have today. You got to distinguish between rising unemployment and inflation and stagflation. They're not the same thing.
Right. Some people just think of it as slower growth and higher inflation. But clearly that's not where you guys...
It's a much more loaded word than that.
Yeah. Um Governor Bailey, on this topic of forward guidance, we make light of it, but it is a bit of a change and departure from where we've seen central banks in recent years. I know you kind of got rid of forward guidance in 2021. You said you did, and how do we determine the difference between a reaction function and forward guidance?
Well, look, I think we have to tread carefully through this debate, not least because of the question you just asked. Almost anything we say can be interpreted as forward guidance. The second thing I would observe is that all of us are making policy which is going to have effect in the future. So we start with that position. I think where forward guidance has been very difficult, and therefore I'm in a very similar place to my colleagues, is that you can get locked into it very easily. I've said a number of times in our committee, it's much easier to put it in place than to take it away. And before you go and put it in place, think about what we're going to have to deal with as time goes by, because it becomes quite problematic after a while. It overstays its welcome. So I'm also very cautious. But I recognize that anything we say about the outlook for the economy can be interpreted as a view of the future. And we have to do that. But I think we have to be very careful about getting tied into views on where rates are going to go. That's the thing that is much more problematic.
But isn't it important, Chairman Powell, to give the market a sense of how you're thinking about policy? You don't have to give them a pre-commitment, but the whole reaction function, how you think of how you're going to make policy.
So, I think the most important thing we can do is to get policy right. If our communications tools, if our models, if the way we've been playing things makes it harder for us to go into these meetings, have a family fight with our colleagues, and make the best decision in pursuit of our mandates, if that's an obstacle, we should get rid of it. It is said in recent weeks, well, we need to know more about your reaction function. If I look at trigger pullers, people that are making decisions in the bond market, in a range of markets, volatility is not up, it's down. Yields aren't up, they're down. Inflation expectations are down. So I hear this as if people don't understand; I think they actually understand quite well. I feel incredible comfort that I'm not sure I had internalized, that there is a willingness by my colleagues in the central banking community around the world to go back to first principles. We all want to make the best decisions we can. We've all been burdened with many of the policies that in some sense the Fed created in the 2008 financial crisis. This is a rare moment for us to go back to first principles, ask hard questions, review what we're doing. At the Fed, we've got five outside task forces to shed new light on this. And I'm encouraged because in some sense, we each think we're making our own monetary policy, but each of our monetary policies affect one another. And I'm honored to be on a stage with three colleagues who have been in the fight for 15 or 20 years with me and without me. And I won't at all be surprised if six or 12 months from now, each of us are on a better path to deliver on what we've said we're going to do.
Who's leading these task forces?
We have news to come. I can tell you likely next week who will be the outside experts. Some of them would have been folks in seats like this in prior years. Some would have been academics in the audience. But we really tried to find the best minds in the economics profession among practitioners, people with experienced hands, including people from countries outside the US. We're not asking for the Tocqueville to come to America, but sometimes we need a foreigner to see things clearly. And the idea is not to prejudge the outcomes. I'm certainly not going to do it. But I think as we make progress on this, some of the lessons learned might not just be for the American central banker who's new to this group, but my colleagues on the stage.
I was going to volunteer.
At the ECB, we went through the same process. When we started the strategy review, it takes time. And we did bring under the leadership of Philip Lane, our chief economist, it did take time to bring in experts. We didn't call it task force, but we had expert committees, groups, and it took a couple of years before we actually settled down and all agreed on the key principles, the reaction function, the elements that we would take into account, the measurements of the nature of the supply shocks and the origin, and so on. It doesn't happen overnight. It's complicated. It sounds simple when you're at the end of the supply chain, but the whole process is complicated. So I really celebrate the fact that you're going into this task force exercise and are prepared to let the best minds participate in that.
You know, there's also been a lot of talk here about coordination and influence on each other. And I am curious, President Lagarde, now you do have a little bit policy divergence. You guys going maybe in different directions. Is that a good thing or a bad thing ultimately?
Policy. I mean, you're raising rates, they're not raising rates. Is that disruptive?
I totally endorse the comments made by, I think it was both Tiff and Andrew. We started from different places. We were at 2% interest rates. I think the Fed was at 3.5% thereabouts, and you were at 3.25%. Inflations were at different levels as well, and the markets were expecting cuts in various corners. So the situation was entirely different. I don't regard that as a divergence. I think the commitment is the same to maintaining price stability and doing what it takes to deliver on that commitment.
You see wild swings, and I mean, the dollar-yen for instance is at the highest level in 40 years. Is that okay? Chairman Powell?
Well, before we came here, we each told a small story about Governor Ueda, who's been a great colleague of many of ours, and we're rooting for his good health so that he can join us on panels like this in a couple of months. If this central bank stands for anything, it's staying in its lane on monetary policy. So if you think I'm going to wander into yen policy in Japan, you're way too optimistic.
Well, it's making a move, that's all. You know, Governor Macklem, on the markets, you recently I think warned about excess given the AI trade speculation. I think that's very much on the market's mind. Do you see signs of that thinking of irrational exuberance of the great Alan Greenspan?
Yeah, we've been warning really of two things, and I'm going to draw Andrew into this. Andrew chairs the Financial Stability Board. I chair the Vulnerabilities Committee. So as Governor of the Bank of Canada, I'm looking at this from a Canadian perspective, but at the FSB, we're looking at it from a more global perspective. And yeah, I would highlight a couple of vulnerabilities. As we've already said, there is so much potential to raise productivity growth with the adoption of AI, with the diffusion of AI. But we've seen this before when there's a new breakthrough technology. The internet proved to be better than anybody imagined, created whole new businesses, but we still got the dot-com bubble. It doesn't mean there can't be a period where the market gets ahead of itself and you see a retrenchment. So, it takes two sides to make the market. We're not in the business of giving investment advice as central bankers. But from a financial stability point of view, you look at historical benchmarks, PE ratios, forward ratios. Yeah, things look stretched compared to those. That doesn't mean there's a problem, but it does mean you need to take that risk on board. The other risk we've been highlighting is we've seen very large growth of hedge funds in the sovereign debt market, and to some extent that's been very welcome. They've been very efficient in buying and distributing government debt. There's lots of issuance out there. Governments need investors. But a lot of this is being done with a lot of leverage, very short-term leverage. And that does make you a lot of it overnight in the repo market. That does make you nervous that if there was a period of volatility and haircuts in repo markets went up or there was some disruption in repo markets, you could get a rapid unwind. Again, part of our job is to turn off... Markets do a good job of seeing the risks they face individually. They have a harder time seeing the systemic risks. These trades are very low risk for each hedge fund, but when they're all doing something similar, there could be a systemic overlay. The idea is if we can point that out, the market can guard against that risk.
Yeah, I mean, look, Kevin referred to the financial crisis a few times, and he's absolutely right to do that. One of the big questions at that time or before it was: is the subprime mortgage market going to be the trigger and the cause of a wider financial crisis? And we didn't get that call particularly right, frankly. But the thing we have to bear in mind is what we're trying to look for here is tail risk. Is there something in these markets that could trigger a wider consequence in terms of financial stability? And that's, as Tiff said, what we're trying to do. Tiff leads the work in the Financial Stability Board globally to do that. So we look at the increase in leverage in core government bond markets. These markets have changed substantially. In the last few months, there's been an increase in leverage in equity markets. You look at hedge fund leverage in equity markets, leveraged exchange-traded fund markets. Those things are changing. If you look at private credit, the questions we are asking are: are those the things that can move from tail risk into a broader consequence? So we have to say, what are the channels through which it can happen? At the Bank of England, we're doing a second system-wide exploratory scenario to ask that very question about private credit. That's our job.
Do you see any other broader risks emerging? And do you agree with the characterization of stretched for the market?
So, we are looking obviously yes, we do look at asset valuations because you are living in a world where you've seen over recent months quite a divergence between bond yields and equity markets. I think a lot of this comes back to what Kevin was saying about AI. I think it's explicable in broader economic terms. But the question is, is that going to lead to some wider stability issues? So that's on the list. And going back to what I was saying, frontier AI is obviously high on the risk as well. So we've got quite a list of things that we're looking at at the moment.
I wonder if you, Chairman Warsh, see any signs of excess, trillion-dollar IPOs, high margin debt that was referenced. I mean, other things that are going on in this market that remind you of those other times.
Well, I would say I've been out of this business for 15 years, but I still have the scars from the global financial crisis. I suspect my colleagues do too. We take risks seriously. That's part of the reason why each of us, I think, at the core have a reformer's heart on this. What can we be doing in the conduct of monetary policy? How should we be revisiting fundamental reforms to supervision and regulation? How should we think about the payment systems that connect us all? This conference is principally about monetary policy. I must admit my first four weeks at the Fed, my attention has been focused on monetary policy, but our governments have tended to give us larger jobs than that. We take it all very seriously. I'm not prepared to make a broad comment denoting risks that are available in the system, but I will say this. This is the biggest time of consequence to each of our economies, I think, in our lifetime. Maybe absent the shocks of 2008 and the COVID shocks, the dramatic change in how businesses do business, how households are thinking about employment and inflation. So this is a time we have to go back to first principles. I know at the Federal Reserve, with my colleagues, many of whom are here, we're doing that. So I don't want to sound complacent. At the same time, I do want to say, at least for the United States, this is a time of huge opportunity. If the Fed can deliver on its remit to deliver price stability, I've never been more optimistic about what the growth engine of the US could produce.
The growth outlook of the US economy this year is...
We're playing Mad Libs now?
So, I would just say this. Over the last four quarters in the US, structural productivity is in the high 2% range. So potential growth looks like it's trended up. This is a time when labor market hours worked are relatively flat. History says that we go from periods of low productivity to periods of high productivity. Nothing is in the bank at this time of consequence, but if the last four quarters are an indication, which is really largely before the advent of the new surge in what artificial intelligence can do, I think there's reason to be optimistic. Now, does that optimism convey into policy in the next 6 or 9 months? Still too soon to say.
But strong, strong outlook, sounds like.
You're back to forward guidance. I'm going to disabuse you of trying to extract that. My view and my colleagues I think have said this better than I. My view is financial markets and the real economy work best when you look at what's happening in the real economy, you make your own judgments. There has been a tendency and I take plenty of blame from the '08 crisis where we were trying to suppress volatility, where we thought we needed to spoon-feed markets to get out of that. That was the right policy for a crisis. It is not the right policy for the time that we have now. And so sometimes unlearning is harder than learning and I'm going to keep at it.
Okay. So how do you think about the best levers to boost growth in the Eurozone right now, President Lagarde?
Capital markets union. 28th regime and boost the venture capital. That would be on the growth front. But I would like to add one thing. Thanks to the veterans at this podium and a few other people, we have a strong, solid, robust banking system which is strongly, well regulated, well supervised. And I think we should be cautious about what we are throwing away by way of simplification. So we do simplify things, and I'm delighted that for instance the ECB has done away with 40 different sets of declaration disclosures that were unnecessary out of the 130 plus. So we have to go through that process. But I think we have to be cautious about how risks actually move and risks were squarely in the banking system back in 2007-2008 when we were all together fighting this global financial crisis. Risks travel fast. And there is no limit to the imagination of those in the financial sector who are trying to make money as is their business and who are taking risks. But the question is who eventually ends up taking the risk and sweeping the mess. So I would contend that this regulatory work that we did at the time, we need to be very attentive as Andrew suggested to make sure that the risks that have moved and traveled afar through different structures, bodies, and in different names are also looked at carefully and that the right measures are taken to protect the public good and to protect the principle that those who take risks bear the responsibility that goes with it.
The other big topic that I know you all think about and is part of your remit is the balance sheet. And Chairman Walsh, you have talked about before you became Fed Chairman that the balance sheet was too big in the United States. So it's at 6.7 trillion right now. What level would you be comfortable with it at?
[laughter] No forward guidance. And I'm not going to give... It's the balance sheet. We have a task force for that too. We're going to play a drinking game on task force. I'll say this: there is no secret that from the 2011 period when I was leaving the Fed through now, I wanted the Fed's balance sheet to be smaller, and I long wrote about and described that interest rates should be the dominant means through which we make monetary policy. If we're in a crisis, there could be a different set of rules. It's always struck me that interest rate policy is the fairest of the broad constellation of our citizens. Interest rate policy, whether we move it up or down, transmits its way into a new mortgage, credit card debt, transmits its way through a lending channel and credit channel. I've always had a view that the balance sheet works mostly through asset prices, works mostly through signaling effects. My four weeks at the Fed haven't disabused me of that idea. But we have a task force of outside people that are going to debate this topic, bring it back to my colleagues and me to see whether we can have a judgment about whether the balance sheet should be made smaller. The only thing that I'll repeat here, which I've said repeatedly, is if there's a change in balance sheet policy, it'll be a change of my colleagues and the FOMC and the board. Those decisions will be well deliberated publicly, well understood, and will not be implemented until financial markets have come to understand what those are. It took us about 18 years to find our way into this big balance sheet, which again, in my biased view, borders on fiscal policy. It took us 18 years to get out of it. It won't take us 18 weeks to bring it down to size. I'm open-minded on the question. We're not going to prejudge it, but I want interest rate policy to be the working tool for monetary policy.
Governor Bailey, you've been focused on the balance sheet. I guess at one point we were asking how big can your balance sheets get, and now I'm wondering how small they can get.
