Until we failed to do our jobs. So, yes, we have a period in Canada where the economy is weak, unemployment is a little high at 6.6, inflation is 3.2. Those are not double-digit numbers and that inflation is not going to be persistent. Inflation expectations are well anchored. We are going to keep them well anchored. So, this whole word of stagflation does not apply to the situation we have today. You have to distinguish between rising unemployment and inflation and stagflation. They are not the same thing.
Right. Some people just think of it as slower growth and higher inflation. But clearly that is not where you guys...
It is 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 have seen central banks in recent years. I know you kind of got rid of forward guidance in 2021. You said you did. 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. And all of us are making policy which will have effect in the future. We start from that position. I think forward guidance has been very difficult because you can get locked into it very easily. It is much easier to put it in place than to take it away. So before you put it in place, think about what we will have to deal with over time because it becomes quite problematic after a while. It overstays its welcome. I am also very cautious. I recognize that anything we say about the outlook for the economy can be interpreted as a view of the future. We have to do that. But we have to be very careful about getting tied into views on where rates are going to go. That is more problematic.
But isn't it important, Chairman Powell, to give the market a sense of how you are thinking about policy? You do not have to give them a pre-commitment, but the whole reaction function, how you think of how you are going to make policy.
So, I think the most important thing we can do is to get policy right. If our communication tools, our models, the way we have 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 is an obstacle, we should get rid of it. It is said in recent weeks that we need to know more about your reaction function. But if I look at trigger pullers, people making decisions in the bond market and other markets, volatility is not up, it is down. Yields are not up, they are down. Inflation expectations are down. So I hear this as if people do not understand, but I think they understand quite well. I feel incredible comfort that I am 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 have all been burdened with many of the policies that 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 are doing. At the Fed, we have five outside task forces to shed new light on this. And I am encouraged because each of us is making our own monetary policy, but each of our policies affect one another. I am honored to be on stage with three colleagues who have been in the fight for 15 or 20 years with me and without me. I will not be surprised if six or 12 months from now, each of us is on a better path to deliver on what we have said we are going to do.
Who is leading these task forces?
We have news to come. I can tell you likely next week who the outside experts will be. Some of them would have been folks in seats like this in prior years. Some would have been academics in the audience. We really tried to find the best minds in the economics profession among practitioners, people with experience, including people from countries outside the US. We are not asking for Tocqueville to come to America, but sometimes we need a foreigner to see things clearly. The idea of these is not to prejudge the outcomes. I am certainly not going to do that. As we make progress, some of the lessons learned may not just be for the American central banker who is new to this group, but for 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. Under the leadership of Philip Lane, our chief economist, we did bring in expert committees, groups. It took a couple of years before we all agreed on the key principles, the reaction function, the elements we would take into account, the measurements of the nature of supply shocks and their origin. It does not happen overnight. It is complicated. It sounds simple at the end of the supply chain, but the whole process is complicated. So I really celebrate the fact that you are going into this task force exercise and are prepared to let the best minds participate in that.
You know, there has also been a lot of talk here about coordination and influence on each other. I am curious, President Lagarde, now you do have a bit of policy divergence. You guys might be going in different directions. Is that a good thing or a bad thing ultimately?
Policy. I mean, you are raising rates, they are not raising rates. Is that disruptive?
I totally endorse the comments made by both Tiff and Andrew. We started from different places. We were at 2% interest rates. I think the Fed was at 3.50 and you were at 3.25. Inflations were at different levels as well, and markets were expecting cuts in various corners. So the situation was entirely different. I do not regard that as divergence. The commitment is the same: maintaining price stability and doing what it takes to deliver on that commitment.
You see wild swings. The dollar-yen is at the highest level in 40 years. Is that okay, Chairman Powell?
Well, before we came here, each of us told a small story about Governor Ueda, who has been a great colleague, and we are 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 is staying in its lane on monetary policy. So if you think I am going to wander into yen policy in Japan, you are way too much of it.
Well, it is making a move, that is all. Governor Macklem, on the markets, you recently warned about excess given the AI trade speculation. I think that is very much on the market's mind. Do you see signs of that? Thinking of irrational exuberance of the great Alan Greenspan?
Yeah, we have been warning of two things. I am going to draw Andrew into this. Andrew chairs the Financial Stability Board. I chair the Vulnerabilities Committee. As Governor of the Bank of Canada, I look at this from a Canadian perspective, but at the FSB, we look at it from a global perspective. I would highlight a couple of vulnerabilities. There is so much potential to raise productivity growth with the adoption and diffusion of AI. But we have seen this before with a new breakthrough technology. The internet proved to be better than anyone imagined and created whole new businesses, but we still got the dot-com bubble. That does not mean there cannot be a period where the market gets ahead of itself and we see a retrenchment. It takes two sides to make a market. We are not in the business of giving investment advice as central bankers. But from a financial stability point of view, you look at historical benchmarks like PE ratios and forward ratios. Things look stretched compared to those. That does not mean there is a problem, but you need to take that risk on board. The other risk we have been highlighting is the very large growth of hedge funds in the sovereign debt market. To some extent, that has been welcome. They have been efficient in buying and distributing government debt. There is lots of issuance out there; governments need investors. But a lot of this is done with a lot of leverage, very short-term leverage, often overnight in the repo market. That makes you nervous. If there were a period of volatility and haircuts in repo markets went up or there was a disruption, you could get a rapid unwind. Part of our job is to point out that markets do a good job of seeing the risks they face individually but have a harder time seeing systemic risks. These trades are very low risk for each hedge fund, but when they are all doing something similar, there could be a systemic overlay. If we can point that out, the market can guard against that risk.
Yeah, I mean, Kevin referred to the financial crisis a few times, and he is absolutely right to do that. One of the big questions at that time was whether the subprime mortgage market would be the trigger and cause of a wider financial crisis. We did not get that call particularly right. The thing we have to bear in mind is we are looking for tail risk. Is there something in these markets that could trigger a wider consequence for financial stability? That is what we are 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. We have seen an increase in leverage in equity markets. We look at hedge fund leverage in equity markets, leveraged ETF markets. Those things are changing. We are asking whether these are things that can move from tail risk to broader consequences. We have to identify the channels. At the Bank of England, we are doing a second system-wide exploratory scenario to ask that question about private credit. That is our job.
Do you see any other broader risks emerging? And do you agree with the characterization of stretched for the market?
So, I look, we are obviously looking at asset valuations because you are living in a world where over recent months there has been quite a divergence between how bond yields and equity markets are moving. I think a lot of this comes back to what Kevin was saying about AI. It is explicable in broader economic terms. But the question is whether that will lead to wider stability issues. That is on the list. And going back to what I was saying, frontier AI is also high on the risk list. So we have quite a list of things we are looking at.
I wonder if you, Chairman Warsh, see any signs of excess, trillion-dollar IPOs, high margin debt that was referenced. Other things in this market that remind you of those other times.
Well, I would say I have 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 is part of the reason why each of us at the core has 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. In my first four weeks at the Fed, my attention has been focused on monetary policy, but our governments tend to give us larger jobs than that. We take it all seriously. I am not prepared to make a broad comment denoting risks in the system, but I will say this: This is the biggest time of consequence to each of our economies in our lifetime. Maybe absent the shocks of 2008 and COVID, the dramatic change in how businesses do business, how households think about employment and inflation. So this is a time we have to go back to first principles. At the Federal Reserve, with my colleagues, we are doing that. I do not want to sound complacent, but for the United States, this is a time of huge opportunity. If the Fed can deliver on its remit to deliver price stability, I have 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 are playing Mad Libs now? Um...
So, I would just say this. Over the last four quarters in the US, structural productivity is in the high 2% range. Potential growth looks like it has trended up. Labor market hours worked are relatively flat. History says 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 before the surge in what AI can do, I think there is reason to be optimistic. Does that optimism convey into policy in the next six or nine months? Still too soon to say.
But strong, strong outlook, sounds like.
You are back to forward guidance. I am going to disabuse you of trying to extract that. My view, and my colleagues have said this better than I, is that financial markets and the real economy work best when you look at what is happening in the real economy and make your own judgments. There has been a tendency, and I take plenty of blame from the 2008 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 we have now. Sometimes unlearning is harder than learning, and I am going to keep at it.
Okay. So how about what are the, President Lagarde, how do you think about the best levers to boost growth in the Eurozone right now?
Capital markets union. 28 regime and boost 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 that is well regulated and well supervised. We should be cautious about what we are throwing away by way of simplification. We do simplify things, and I am delighted that the ECB has done away with 40 different sets of declaration disclosures that were unnecessary out of the 130-plus. We have to go through that process. But we have to be cautious about how risks move. Risks were squarely in the banking system in 2007-2008 when we were fighting the 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 and taking risks. The question is who eventually ends up taking the risk and sweeping the mess. So I would contend that the regulatory work we did at the time needs to be carefully attended to, as Andrew suggested, to make sure that risks that have moved to different structures, bodies, and names are also looked at carefully, and the right measures are taken to protect the public good and the principle that those who take risks bear the responsibility.
