support. But you know we think it's about the right level to keep inflation contained. The other thing I would say though is, and this gets a bit back to your forward guidance question, I mean we got to be humble. There's a lot of uncertainty out there. Those risks could shift quickly and the other part of our message is if the situation changes we're prepared. We're prepared to take action.
Do you think, Chairman Worsh, that the inflationary spark that everyone's seeing and feeling is a temporary phenomenon as a result of the rise of energy prices, which have already started reversing pretty sharply?
Does temporary sound like transitory? Is that what you were trying to sneak into? Is it transitory?
Um, so I'll build on what Governor Mlin just said. By the way, the four of us all served together in the global financial crisis in different roles. So I would say for us to be back on this stage in this circumstance is great and they've been incredibly warm to me. President Lagarde has sort of welcomed and encouraged these sorts of new ideas that we've talked about at the Federal Reserve on these series of task forces. And Sarah, my hope is that the results of these can be a public good if we make progress in thinking about the effect of productivity, the effect of data, new inflation frameworks, this is something we can all borrow and use from.
The other thing I'll add is that monetary policy spills over from one of our economies to the other and it spills back. I think the way Governor Mlin said it right, which is we're all being hit by a series of shocks. In the US, the AI shock is leading to a boom in capital expenditures. We see that first and foremost in demand, but I'm confident we're going to see it in supply at some point. So, we're spending most of our time trying to monitor those developments.
Is it inflationary? Well in the near term we can observe it on the demand side but it's up to the central bank to decide whether it's inflationary.
That's why I'm asking whether in fact it finds its way into a broader set of goods.
I don't have any news for you on that but I would certainly rather be in a position where we have two things where we recommit the way I know my colleagues have to deliver price stability. And the other piece that I'll take note of which shows some difference I think among our nations is the AI boom is showing itself first and very prominently in the United States. I'd certainly rather have this problem where we have massive capital expenditures instead of thinking years back where we had financial engineering where we had companies that weren't able to deliver profits. So they would do shareholder buybacks. Well, right now they're investing in the future because their expectation is the supply side of the economy will expand. And if it does, that has huge implications for monetary policy. But again, I'm not going to make a judgment now. We'll meet again in four weeks. But this is as exciting a time and also as a consequential a time to be a central banker that I can think of at any point, maybe outside of a crisis in my adult lifetime.
Can I pick up on a point that my friend Kevin made? It's the speed at which things change and that is clearly accelerated by AI.
And the only way we got out of it was we had to have a big recession to re-anchor expectations. If that happens, you know, we have fundamentally failed to do our jobs. So yes, you know, we have a period, I mean Canada, yeah, the economy is weak. Unemployment's a little bit, you know, it's high. It's 6.6. Inflation's 3.2. Those are not double-digit numbers and you know that inflation 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, it doesn't apply to the situation we have today. You got to distinguish between a rise in 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...
It's a much more loaded word than that. Yeah.
Governor Bailey, you know, on this topic of forward guidance, we make light of it, but it is a bit of a change, a departure from where we've seen central banks in recent years. I know, I mean, you kind of got rid of forward guidance in 2021. You said you did. And how do we determine the difference between a reaction function and forward guidance?
Well, look, I mean, you know, I think we have to sort of tread carefully through this debate, not least because the question you've just asked, but I mean, almost anything we say of course can attempt to be interpreted as forward guidance. And the second thing I would observe is that of course all of us are making policy which is going to have effect in the future. So we sort of start with that position. I mean I think where forward guidance has been very difficult and therefore I'm in the very similar place to my colleagues is that you can get locked into it very easily. You know I've said a number of times in our committee it's much easier to put it in place than it is to take it away. And therefore before you actually go and put it in place just think about what we're going to have to deal with as time goes by. Because you know it becomes quite problematic after a while it overstays its welcome so you know I'm also very cautious now. But I recognize that you know anything we say about the outlook for the economy can be interpreted as a view of the future and of course that we have to sort of in a sense 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 German Wars 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 action function. If I look at trigger pullers, people that are making decisions in the bond market, you know, range of markets, volatility is not up, it's down. Yields aren't up, they're down. Inflation expectations are down. So, I hear this that as if people don't understand, I think they actually understand quite well. I feel incredible comfort that I'm not sure I had internalized that there is a willingness by my colleagues in the central banking community around the world to go back to first principles. We all want to make the best decisions we can. We've all been burdened with many of the policies that in some sense the Fed created in the 2008 financial crisis. This is a rare moment for us to go back to first principles, ask hard questions, review what we're doing at the Fed. We've got five outside task forces to shed new light on this. And I'm encouraged because in some sense, we each think we're making our own monetary policy, but each of our monetary policies affect one another. And I'm honored to be on a stage with three colleagues who have been in the fight for 15 or 20 years with me and without me. And I won't at all be surprised if six or 12 months from now each of us are on a better path to deliver on what we've said we're going to do.
Who's leading these task forces?
Um 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 experienced hands including people from countries outside the US. We're not asking for De Tocqueville to come to America but sometimes we need a foreigner to sort of see things clearly and the idea of these is not to prejudge the outcomes. I'm certainly not going to do it. But I think as we make progress on this, I think some of the lessons learned might not just be for the American central banker who's new to this crew, but my colleagues on the stage.
I was going to volunteer force at the ECB, we went through the same process. And when we started the strategy review, it takes time and we did bring under the leadership of Philip Lane, our chief economist, it did take time to bring the, we didn't call it task force, but we had expert committees, we had groups and it took a couple of years before we actually settled down and all agreed on the key principles, the reaction function, the elements that we would take into account, the measurements of the nature of the supply shocks and the origin and blah blah blah. 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 Lagard, now that you do have a little bit policy divergence. You guys going maybe in different directions. Is that a good thing or is that a bad thing?
Ultimately, the divergence between who and who?
Policy I mean, you're raising rates, they're not raising rates, you know, is that disrupting?
I totally endorse the comments made by I think it was both Tiff and Andrew. We started from different places. We were at 2% interest rates. I think the Fed was at 350 thereabout and you were at...
Inflations were at different levels as well. And the markets were expecting cuts in various corners. So it's the different, the situation was entirely different. I don't regard that as a divergence. I think the commitment is the same to maintaining price stability and doing what it takes to actually deliver on that commitment.
But sometimes you see wild swings in, I mean the dollar yen for instance is at the highest level in 40 years. Is that okay Chairman War?
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 the 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 asking way too much of it.
Well, it's making a move, that's all. You know, Governor Macklem, on the markets, you recently, I think, warned about excess just given the AI trade speculation. I think that's very much on the market's mind. Do you see signs of that? Thinking of irrational exuberance of the great Alan Greenspan.
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 I mean, you know, as governor of the Bank of Canada, I'm looking at this from a Canadian perspective, but at the FSB, we're looking at it from a more global perspective. And yeah, I would highlight a couple of vulnerabilities. You know, as we've already said, look, there is so much potential to raise productivity growth with the adoption of AI, with the diffusion of AI. But there, you know, we've seen this before when there's a new breakthrough technology. I mean the internet proved to be better than anybody imagined, created whole new businesses. But we still got the dot-com bubble. That doesn't mean there can't be a period where the market gets ahead of itself and you see a retrenchment. So look, it takes two sides to make the market. We're not in the business of giving investment advice as central bankers. So but you know from a financial stability point of view you look at the sort of historical benchmarks, PE ratios, forward ratios, yeah things look stretched compared to those. So 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. And 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. You know, again, part of our job is to sort of, markets do a good job of seeing the risks that they face individually. They have a harder time seeing the systemic risks. These trades are very low risk for each hedge fund, but when they're all doing something similar, there could be a systemic overlay. And the idea is if we can point that out, the market can guard against that risk.
So yeah, I mean, look, Kevin referred to the financial crisis a few times and he's absolutely right to do that. And one of the big questions you 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 you know we didn't get that call particularly right frankly but the thing that we have to bear in mind is what we're trying to look for here is sort of tail risk. You know, is there something in these markets that could trigger a wider consequence in terms of financial stability? And that's, as Tiff said, that's what we're trying to do. You know, Tiff leads the work in the financial stability board globally to do that. So, yeah, we're absolutely right. So, we look at the increase in leverage in core government bond markets. I mean, these markets have changed substantially. I think the thing we've seen actually in the course of the last few months is an increase in leverage in equity markets. So if you look at hedge fund leverage in equity markets, you look at leveraged exchange traded fund markets, those things are changing. If you look at private credit, the questions we're asking is are those the things that actually can move from tail risk into a broader consequence. So then you have to say what are the channels through which it can happen. So at the Bank of England, we're doing a second systemwide exploratory scenario to ask that very question about private credit. That's our job.
Do you see any other broader risks emerging?
And to agree with the characterization of stretched for the market. So I look, I mean we are looking obviously yes we do look at asset valuations because you are living in a world I mean you've seen this obviously over recent months where you've got quite a divergence between how bond yields are moving and how equity markets are moving. Now I think a lot of this comes back to what Kevin was saying about AI. I think it's explicable in broad economic terms but the question is is that going to lead to some wider stability issues. So that's on the list. And then going back to what I was saying earlier, want to reopen it again, but Frontier AI is obviously high on the risk as well. So we've got quite a list of things that we're looking at at the moment.
I wonder if you Chairman Worsh 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. And that's part of the reason why each of us, I think, at the core, have sort of 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? So, this conference is principally about monetary policy. I must admit, my first four weeks at the Fed, my attention's been focused on monetary policy, but our governments have tended to give us larger jobs than that. We take it all very seriously. I'm not prepared to sort of make a broad comment denoting risks that are available in the system. But I will say this, this is the biggest time of consequence to each of our economies, I think, in our lifetime. Maybe absent the shocks of 2008 and the COVID shocks, the dramatic change in how businesses do business, how households are thinking about employment and inflation. And so this is 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. And if the Fed can deliver on its remit to deliver prices, I've never been more optimistic about what the growth engine of the 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 that the labor markets 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 six or nine months? Still too soon to say.
But 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 this the 08 crisis where we were trying to suppress volatility where we thought we needed to spoon feed markets to get out of that. That was the right policy for a crisis. It is not the right policy for the time that we have now. And so sometimes unlearning is harder than learning and I'm going to keep at it.
Okay. So what are the, President Lagard, how do you think about the best levers to boost growth in the euro zone right now?
Capital market union, 28th regime and boost the venture capital. Okay. So that would be on the growth front. But I would like to add one thing. Thanks to the veterans at this podium and a few other people, we have a strong, solid, robust banking system which is strongly well regulated, well supervised and I think we should be cautious about what we are throwing away by way of simplification. So we do simplify things and I'm delighted that for instance the ECB has done away with 40 different set of declaration disclosures that were unnecessary out of the 130 plus. So we have to go through that process but I think we have to be cautious about how risks actually move and risks were squarely in the banking system back in 2007-08 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 really who eventually ends up taking the risk and sweeping the mess.
So I would contend that this regulatory work that we did at the time we need to be very attentive as Andrew suggested to make sure that the risk that have moved and traveled afar through different structures, bodies under different names are also looked at carefully and that the right measures are taken to protect the public good and to protect the principle of who takes risks bear the responsibility that goes with it.
The other big topic that I know that you all think about and is part of your remit is the balance sheet and Chairman Wars 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?
No forward guidance. No forward guidance and I'm not going to give balance sheet, not going to give, it's the balance sheet. Okay, just we're just among friends. We have a task force for that too.
