hedge fund leverage and 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 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 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, they 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 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. 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 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 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 and you make your own judgments. There has been a tendency, and I take plenty of blame from this in 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. President Lagarde, how do you think about the best levers to boost growth in the Eurozone right now?
Capital Markets Union. 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 2007-8 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 risks 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 whoever takes risks bears 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 Warsh, 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. And I'm not going to give—it's the balance sheet. Okay, we're just among friends. We have a task force for that, too.
We're going to play a drinking game on task forces.
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. As we're hearing an alarm, that must be my way of saying that I've gone too far on the balance sheet.
But we have a task force that you'll find out 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 in 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. Took us 18 years to get out of it; it'll take us more than 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 oar 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.
Well, look, there's a nice sort of sense of irony I appreciate from this conversation because I've been accused of having too big a balance sheet and reducing it too quickly. So really, can I go back to forward guidance for a moment? Because I've really issued forward guidance on the balance sheet. So I really don't step into this world of saying we want ample reserves, we want big reserves, small reserves. My line has always been we will meet the system's demand for reserves because that's the system's demand for liquidity. Now, we will also spend a lot of time, by the way, understanding why the system wants the liquidity it wants. And also, the key other point which Kevin has made very forcefully is that's the way we actually implement monetary policy, through the short-term interest rate transmitting out of our balance sheet into the system, and that works very well. So our world is: look, we will meet the system's demand for reserves. We will seek to understand very closely why it's doing that. The other policy I have is that I want to take interest rate risk off the central bank's balance sheet because with the public balance sheet, interest rate risk should be in the market, not on our balance sheet. And so that's why we're moving to a repo asset side of our balance sheet, because that takes the interest rate risk off our balance sheet, which is what should be the case.
You alluded to the political heat that you get over this issue. Does that influence the way you think about it at all? I know it's not supposed to.
No, I think we must have a sensible policy for moving to a system where our balance sheet reflects the system's demand for reserves. So, yes, it went above that level during the QE period. It's coming down to that level. I want the interest rate risk off our balance sheet. Those are the policies we're pursuing, and I think those are the right policies.
Speaking of politics, do you get let off the hook, Governor Macklem, because the prime minister used to be in this seat?
We get some free advice from elected officials across the country. And as I tell them, I appreciate understanding what's going on. It's a big country. I appreciate understanding what's going on across the country, but I don't appreciate telling me what we should do with interest rates. You've got your job, we've got our job, and that needs to be respected. So I'll just come back to the balance sheet. Interestingly, if you compare different central banks, you'll see a pretty wide range of sizes. In Canada, we didn't do QE in '08-'09. Fortunately, in Canada no banks failed. We did get a big shock, but it wasn't so big that we needed to invoke that emergency policy. We did use QE in the pandemic. It's the only time we have used it. But the fact that we only did it once meant that our balance sheet wasn't as big to start with. And we let the bonds run off, so our balance sheet has run back to its new steady state. And if you compare central banks, as I said, the size of the balance sheets can be pretty different. I mean, the Bank of Canada's balance sheet as a percentage of GDP is about a third of the Fed's.
Now look, Canada is not the world's global reserve currency, so yeah, there might be some differences here. But I think the results of Kevin's task force is going to be very informative to us. And the other thing I'll say about balance sheets is it's a very inside-baseball kind of discussion. It's not the sort of thing most Canadians are really that engaged in. But there is an element of: how do we implement monetary policy? What is the demand for reserves? We've spent the last couple days talking about new kinds of money. What do those potentially mean for our balance sheet? So these are questions we need some thinking on.
In the short time that we had left, President Lagarde, I did want to get to you on this political point because you have been a forceful voice for central bank independence. I know you continue to do so, and unlike these guys, you have to battle more than 20 different governments and leaders.
So you're a pro at that. I'm just curious if you think that there are—if you look out and see serious risks to central bank independence, especially in light of the Supreme Court ruling that we got in the United States letting Fed Governor Lisa Cook keep her job?
I think the best way we can actually all do our jobs is to be number one accountable, number two independent, and the two come together. I go to the European Parliament on a regular basis to report on what we do, to explain what we do. That's the counterpart for this independence that we have. Staying in our mandate, the entirety of the mandate, is also the sine qua non condition for deserving that independence, which is a precious good without which we would not do a good job. That's my view.
How did you feel about the Supreme Court ruling, Chairman Warsh?
We were doing so well. Before the Supreme Court, the Fed acted independently and followed its remit. After the Supreme Court ruling, the Fed will continue to do so. I read the opinion on the plane over here. One of the secrets of the productivity-led economic growth that I was talking about at the outset is because of the constitutional design in the US. It's the foundational element that has given us 250 years of outperforming expectations. I believe in Article III judges. I believe in the rule of law. We'll follow the Supreme Court decision, but day-to-day the decision reaffirms what President Lagarde already said: we are calling balls and strikes as best we can, we're taking seriously the reform objective, and we're going to deliver on the high promise that Congress gave us to deliver price stability in the context of our dual mandate. And when we do that, we don't have to worry about politics. We don't have to worry about judicial intervention. We get to look in front of us because it's a challenging step.
Okay, we have a minute left. So, I'm going to ask everybody two quickies actually. Governor Bailey, I'll start with you. Favorite economic indicator right now?
