Janet Yellen. Miss Yellen, thank you very much for being with us today. It's really a dream coming true. Since I joined XP 6 years ago, we've been dreaming about having you here with us. Um someone that took the most important jobs than an economist could dream of taking. So, thank you very much for being here.
Thank you so much for the invitation. This is an absolutely amazing gathering and it's an honor to take part in it. Looking forward to our conversation.
Very nice. Very good. Thank you. So, let's jump into our our themes here and uh I will start with inflation and monetary policy. So, during your tenure as uh chairman of the Federal Reserve, the main task at that moment was trying to bring inflation up. Really, inflation was actually too low. Uh and now especially after pandemics it's changed. Now all the central banks in the world and in the Federal Reserve as well they're trying to bring inflation down. How do you see this change? What economic forces have changed that we move from trying to raise inflation and the risk of deflation for the moment that we are living now.
So during the time that I was chair and vice chair, it was after the financial crisis which was had a really devastating effect on the economy. It pushed inflation way down. Unemployment rose to close to double digits and um we lowered the Fed funds rate to zero in December of 2008. And most people at the time in the markets thought maybe a year or so it will stay at zero. Well, the economy didn't recover quickly. It was really badly impacted by the crisis. But also as the years went by with high unemployment, we realized a second thing, which is that the normal level of interest rates, the so-called neutral level of interest rates had really been drifting down for decades prior to the crisis. And it looked like what's technically called our star or the normal level of real interest rates was going to be very low. And that meant it was a struggle. Um we lowered interest rates to zero. They stayed there for 7 years at zero. And um we struggled to find ways to stimulate the economy and worried that inflation expectations would drift down, making it yet harder to get inflation uh up back to our 2% objective. And that's when we experimented with um communications about forward guidance to try to influence market expectations and also quantitative easing.
Well, then the pandemic came along and in the first year again very high unemployment, very low inflation, but then everything changed and suddenly we're in a world of very substantial supply shocks, huge changes in patterns of spending. People stop spending on services. Um they start spending on goods. We have shipping bottlenecks, semiconductor shortages, um shortages of the kinds of things people want to buy for their homes. And inflation shot up more than any of us expected. And really, we've never, the Fed has never, it's been a series of supply shocks, and the Fed has never succeeded in getting back to 2% inflation.
Um, a as the shocks from the pandemic began to wash out and it looked like inflation would come down, President Trump imposes enormous tariffs that causes inflation to shoot up.
We're going to talk about them in a
Now, that that should be transitory, something that maybe takes a year or two to get into prices, but then inflation comes down to normal. Um, and just as maybe that's beginning to happen now that the impact of tariffs is washing out, we have um all of the disruptions in the Middle East. And while two weeks ago it looked hopeful we'd have a ceasefire, oil prices had come down. The latest inflation readings in the US were very positive. Now uh I guess yesterday uh oil rose again above $100 a barrel. There's seems to be an extension of the hostilities and no obvious end in sight. And so inflation is likely to another supply shock inflation is likely to stay elevated for at least the next year or more. And then a further thing we're seeing, I think I would view it as a supply shock as well, is that the huge buildout that's taking place of data centers for AI is caused a surge in demand for semiconductors and electricity. That's again pushing prices in those sectors up. um it's filtered through to consumer electronics. iPhones have risen in price that it's it's going to have more effects. So now we're looking at five years and counting above with inflation meaningfully higher than the Fed's 2% objective.
And while I don't at this point see inflationary pressure coming from the labor market through wages and amazingly inflationary expectations still seem to be in line with the Fed's target, there is concern that there could be second round effects. So I think some at the Fed in this point and if I were a voting member I would be thinking about this that I would love to be able to wait out these supply shocks, let them fade. Inflation will come down. Maybe we don't need to tighten policy more. It would probably damage the labor market. I would still be very worried about upside inflation risk and I would be watching very carefully inflation expectations. My guess is that for the time being the Fed is on hold, but I think they're um very ready to raise rates. And if this latest round of um Middle East turmoil continues or intensified, if I were a betting person, I would bet we would see at least some rate increases meant to contain inflation.
No, this is a very important point because oil prices are an an important input for the Fed and for inflation and over the last two months we had oil prices at 100 then 70 then back to 80 and it's 100 again. So this is one sort of uh uncertainty that I would like to hear from you. How how how to navigate on on such shake waters? And on on top of that to to put another another element in the analysis, uh we have the artificial intelligence productivity shock that may be similar to the shock that we saw when internet came in back on Greenspman days. uh those two issues, how do how would you put in your analysis for the for the Federal Reserve and monetary policy?
Well, um I remember well the second half of the '9s and I served on the FOMC at the time that Greenspan tried to make the case that even though unemployment was falling in the United States and it had fallen below levels that most people thought were um consist consistent with stable inflation. They were really worried about upward pressures on inflation. Greenspan argued that productivity growth was increasing and he just didn't see firms um their profits were high. The cost pressure you would expect maybe to be coming from wages. He didn't see it. He didn't see inflationary pressure. and he thought, you know, they're experiencing an improvement in productivity. It's holding down their costs and we can let this thing run. And I will always remember the meeting of September of 1996. And I believe that virtually every member of the FOMC thought the right thing was to raise rates. And I was probably the most sympathetic person to Greenspan's argument. and I thought we should raise rates and he pleaded with the committee not to raise rates and the productivity data didn't show any improvement in productivity growth and people really thought he's got some screws loose but they really respected him and they said all right we'll hold off and history proved him to be right and when the statistics got revised yes productivity growth had gone up meaningfully and he was right. And um the economy did did just great. And I ended up later writing a a book called The Fabulous Decade. I mean, unemployment fell to levels we hadn't seen in decades and inflation was low.
And that could happen again, but we're not really seeing evidence yet of any meaningful improvement in aggregate productivity. Although AI is clearly having an effect in some sectors and we're not seeing evidence of disinflationary pressures and instead there are another set of influences from AI to the economy that we are seeing play out and they're inflationary impacts. So first we have this huge investment in artificial intelligence and um that spurt in AI investment you mentioned is pushing up semiconductor prices. It's pushing up electricity prices. It's creating a lot of demand. It's keeping the labor market going strong. And then we've got an enormous boost in consumption spending coming from the stock market which has just been booming mainly on account of the expectation of future profits. So right now AI I think is demonstrabably raising inflation rather than the opposite. So, I don't think the Federal Open Market Committee would dream right now of um lowering rates because of AI, but maybe over the medium term, over the next couple of years, they would see something that would justify the same sort of things we saw in the second half of the '9s, but not yet. So more short-term inflation pressures and then maybe some productivity gains and some relief over time.
Yes. Uh still on on monetary policy and on the Fed, the the new chairman Kevin Worsh, he just established a couple of task forces in order to try to improve the way that the Fed conducts monetary policy. Uh and in particularly we Brazilians are proud to see Armeno Fraga in one of those task forces. Uh so it's it's interesting how the Fed is trying to bring experiences for for other places. Um do you see room for improvements where where on those tax forces you you would see more room to discussion to improvement maybe on communications f uh uh chairman wars had been talking about the dot plots that are the forecasts that the funk members do. How do you see this this new task force and room for improvement?
So, um, since serving on the FOMC, Kevin Walsh has been quite critical of monetary policy and the Fed and how it looks at data and particularly how it conducts communications and the size of the Fed's balance sheet. And I think it's natural and appropriate that walking in as a new person who has had criticisms of the conduct of policy, he wants to take a fresh look at critical aspects of policy and and many central banks do have outside reviews. Now, the Fed itself is looking and has looked and continually looks at these issues. So thinking about all the things the task forces are doing um this is not something new to the FOMC but having a group of outsiders and you mentioned Armin's participation in general the members of these task forces are well-known experts who were highly respected and whose views I think can um help Worsh if he wants to make changes and they're recommended by these task forces can help to give them credibility both internally with the Federal Open Market Committee and externally. So I think this is a reasonable thing to do. Um some of the task forces are studying things like inflation, the impact of AI. I I don't think there'll be immediate policy relevance, but um communications, you know, perhaps there could be changes there that would make communications more effective.
Uh Worsh has been very critical of a tool called the dot plot, which is uh a way of trying to communicate to the public um how the members of the committee see the likely trajectory of uh the economy, GDP growth, unemployment and inflation, and the monetary policy path at least over the next couple years they think is appropriate. did in light of that outlook. Um, it's I think it provides I I have to confess that I chaired the committee that introduced it, so I may have some biases here, but I think it provides useful information to the public. On the other hand, it isn't perfect. Um, for example, you might see two dots. One person thinks it's appropriate to raise the funds rate a lot. The other person, no, doesn't think so. And you think, ah, I'm looking at a hawk and a dove. They have very different views. But when you look at the forecast for the Fed funds rate, you don't know what economic forecast went with it. And it might be that it's just that the person who thinks the funds rate needs to go up a lot. That's somebody who believes inflation's going to stay high and growth is going to be strong. And the person with the low dot doesn't see much need for funds rate. That's a person who thinks inflation's coming right down and the labor market is going to weaken because higher oil prices are going to impact spending negatively. They may just have different views of the economy. So, it's hard to really you can't line up the economic forecast with the policy. Um, that could be changed. Many central banks release a full-blown forecast and different scenarios that show how monetary policy could react to different economic outcomes. Um there are enhancements in communications maybe that could make it more effective. So um I that would be my hope if they do change things it will be an improvement.
I tend I tend to agree. I tend to to agree that some visibility on at least the the the degree of uncertainty. Sometimes the dot plot shows the degree of uncertainty that everybody has on the economy. So when they are close together there are less uncertainty. When they are more spread out there are more uncertainty. So it's also a way that uh for us to see how difficult it is is not not just for us but also for the more the the policy makers isn't it?
Right. Right. I would like to change gears here to the exchange rate. Like to talk about the dollar a bit. So there's this discussion on the dollar continuing to be the main currency in the world. So discussions about um the the so-cal American. Yeah. And u how do you see the role of the dollar going forward? We we saw some depreciation of the dollar recently. But it has to do with market forces. Do you see the dollar losing uh space on the global transactions and so on uh or not? Do you still see dollar continue to be uh the main currency and if you have a guess if the dollar is going to strengthen or weaken going forward?
Well, I don't I'm always very reluctant to forecast exchange rates, so I'm not going to do that. But in terms of the role of the dollar globally as a reserve currency, I think gradually we're seeing some erosion at the margin of the dollar's role. It now represents just over 50% of global reserves and it that's down from 70 plus% at one point. Um you're seeing an increase in gold held as in central bank reserves. Um I was involved in 2022 in the decision which I think was very consequential that um the G7 and some other countries made to freeze Russia's assets after it invaded Ukraine. But it was clear that one of the risks is that countries would worry that it held dollars in reserves that if they got on the wrong side of the United States that um they could face a similar um threat. And I think um the increase in gold partly reflects wanting to be less dependent on dollars um which where the United States can impose sanctions. Um but this you know there really is no currency that can take the place of the dollar. You have deep liquid markets the treasury market. There is no other market that has that depth and liquidity, rule of law, institutional backing. Um, you know, you don't really have a single EU or euroawwide um set of bonds that um are comparable to the dollar as something that can be held as a reserve. China still has capital controls. Um,
No, people talk about the UN taking some space from the dollar, but that is the problem.
It's very it's very marginal at this point. And in terms of transactions, you know, the United States has used sanctions, the fact that the vast share of crossber transactions involve dollars. If people um in Brazil want to buy something from France, most likely they do it by exchanging Brazilian realale for dollars and dollars um for euros. And so many I think still over 90% of transactions crossborder are intermediated through the dollar. uh and the the depth of foreign exchange markets that don't involve dollars is is very thin but there is are a lot of countries China Russia um other countries that have faced sanctions you know you're using the financial system when you use dollars you're using the US banks and the US treasury that I headed we have the ability a tool Um, we think it's a lot better than shooting at people, but it's a it's a an important sanction to levy against countries that really violate international norms in the way that Russia has with Ukraine or Iran had. And they don't want to be subject to sanctions and they're looking hard for alternatives and beginning to develop them. So I I also see some erosion on that front. But on the other hand, stable coins are growing as a way of making crossborder transactions and they're largely dollarbased and that that in a way extends the role of the dollar rather than the opposite.
Talking about stable coins and and cryptos and so on. H where are you on the the debate on the regulation on those new currencies, new new markets? What the role of the central banks? How do you see that? Well, stable coins to me stable coins and cryptocurrencies are quite different because stable coins are promised to be um exchangeable for dollars on a onetoone basis and are very similar to bank deposits or deposits in money market funds. They um purport to be stable valued um assets and um any stable valued asset is potentially subject to runs and um the regulation that um needs to be in place I think on stable coins should be comparable to that that we use for money market funds or bank deposits. I think they need full backing. There needs to be supervision to um have outside verification that there is backing of those uh stable coins with um w with safe safe assets like tra t treasury bills. um there needs to be customer protection and it you know to the extent that I think there innovations that could um make crossborder payments faster and cheaper and I I think that would be welcome. So I think there is some potential there. Tokenized deposits are an alternative. So this is an area where I think um innovation by the private sector is welcome. It could bring benefits but there also has to be regulation. And if there isn't and they assume a large enough role in the financial in the payment system we could see real financial stability risks.
