Kristalina, Raghuram, thank you very much. Very kind of you to include me today. I think that, as the managing director said, this is a time of huge consequence for the global economy, and inviting me, I take that as a sign that policymakers consider this a time ripe for robust debate and deliberation, testing and truth-telling, and ultimately a time for choosing what policy path we have.
Now, as Raghuram said, there might be an alternative reason why I was invited today. Your first choice as speaker cancelled to become prime minister. For those that are not from the United States, I'm then playing the role of substitute teacher, substitute lecturer. In the US, when the substitute lecturer comes, the students pay no attention. They send paper airplanes. So, but I hope because there's so many non-Americans here, you take this like it's a very serious thing.
For people that have been following my views on questions of central banks and reforms, much of this will not be new, but curiously I hear that there's some new interest in my view. So I will popularize some old themes.
I'm here under no illusions. I think, as the managing director said, this is a time of huge consequence, and I don't exactly think I'm here to the IMF and the World Bank bringing coals to Newcastle.
Modern Wilsonians might not be completely comfortable with my words, but it is not my disposition to grant boundless power to government agencies to fix the world. I come from a different philosophical bent. Some might believe that the greatest threat to our economy in the US and around the world comes from outsiders. That is not my view. I believe the predominant risks come from the choices we make inside the four walls of institutions just like this one.
This is a historic place and it's a historic venue. So it's an honor to be here. It's especially an honor for me. My greatest mentor in my professional life was George Shultz, who passed away at age 100 in the middle of COVID. And George thought that these institutions, including the IMF and the World Bank, the other institutions that helped define the post-war era, made the 20th century more peaceful and more prosperous. But before he passed, he said in our penultimate lunch that this was the greatest hinge point in history of his life at age 100. And that was a few years ago.
I think if he were sitting here with us now, and I feel him here in some sense, he'd believe that's still true. After World War II, the US led a security and economic commons with so many friends, so many allies in this room that advanced the interests of freedom and liberty for much of the 20th century. It included very consequential roles not just for the US, but friends around the world.
But as we sit here a quarter of a century into the 21st century, we have to recognize that the world looks decidedly less kind, especially the least well-off among our citizens. A series of shocks, geopolitical, economic, and others, have been fierce and frequent. And the key economic institutions that served us well for decades have in more recent periods fallen short of their promises. Absent fundamental reform, we need to ask ourselves whether their high summer is passed.
In my view, strengthening economic performance requires improving economic governance. That means new ideas, and I'll talk about a few of them, but I'll also say a word about institutions. It means reforming and in some cases restoring institutions to their first principles.
To be trusted, as most of us know who have been around Washington, other capitals, economic institutions must be trustworthy. To be trustworthy, they must prove themselves to be competent in good times and bad, in all sorts of cycles. Economic institutions must also maintain deep humility. The managing director mentioned that in her remarks, and I think it's a useful reminder for us all. There are limits to what any of us can know about what's happening in markets and the economy, and limits to what we can know about the consequences of our policy choices.
Leaders of these institutions have to abide by other limits. Some imposed by the constitution, others imposed by parliaments and legislatures, and maybe most important, limits imposed by the good judgment of people that are tasked with leading these organizations.
There is an inherent tendency of government organizations to expand their footprint, and leaders need to help police that. Institutions also must be permitted to act. We can't know in any definitive sense what's around the corner over the hill, but we need to act within well-defined ex ante frameworks. It's not all just about cleaning up the mess afterwards. And finally, institutions need to be accountable.
The greater the power of the public institution, and I see a lot of powerful institutions represented in this room, the greater the responsibility to explain and answer questions about their decisions. So I'll turn this a little bit more personally. Every philosophy is a memoir of sorts. So you're going to hear a little bit of my memoir. I think it's Nietzsche who said that. I would want to give proper credit.
So my focus today will be on an economic institution that I'm more familiar with, the Federal Reserve. You can judge whether any of these lessons, any of these stories have consequences for the institutions that you represent. For those who don't know, I was a member of the board of governors at the Fed more than a dozen years ago. I still have the scars to show for the darkest days of the financial crisis in 2008 and '09.
The debates in Chairman Bernanke's office were intense, more intense, frankly, than I've read about in all these books. But they were also quite civil, quite consequential. And where I give Chairman Bernanke the most credit was he surrounded himself not with people who agreed with him on everything, but he surrounded himself truly with a team of rivals. And so we'd have incredible fights about what to do because none of us knew. And he would decide and we would largely fall in line. But that's the right lesson, it strikes me, from that period of crisis.
Nothing about that period was easy. Maybe with the benefit of history, it looks like the outcomes were all quite known. I should say we made plenty of good calls and plenty of mistakes both. Inevitably, the hardest question then, and I think the most salient question for us today, was the Fed's role and responsibility.
I remember after one particularly intense weekend in 2008, we had come up with a new scheme to try to bring some liquidity back to markets, and we were feeling okay about ourselves. Former Chairman Paul Volcker was at the New York Economic Club, and I'll quote what he said, but I remember hearing it in real time. He said, quote, 'The Fed has gone to the very edge of its lawful and implied power, transcending certain long-embedded central banking principles and practices.' Well, we took that as the equivalent of a brushback pitch, high and tight. For the non-Americans, that's a baseball expression. When you want to tell the Hall of Fame batter it's not going to be so easy.
And we were struck. Well, let me speak for myself. I was struck by that. But we continued to work and grind through the crisis. As I sit here today in 2025, I have to admit that Volcker's warning has gone largely unheeded. Even to this day, changes in the role of the US central bank have been so pervasive as to be nearly invisible.
The Fed has assumed a much more expansive role inside of our government on all matters of economic policy. Whether you like it or don't like it, we should admit of that growing role. The Fed has also moved into matters of statecraft and soulcraft too. In my view, as we think back over the most recent period of years, forays far afield, for all seasons and all reasons and with the best of intentions, have led to systematic errors in the conduct of macroeconomic policy. The Fed has acted more as a general-purpose agency of our government than a narrow central bank that preceded my days as a central banker.
Institutional drift has coincided with the Fed's failure to establish and achieve an essential part of its statutory remit, price stability, and the Fed's outsized role and underperformance have weakened the important and worthy case for monetary policy independence.
This could be a parochial view I'm going to express, but the Fed's probably the most important, consequential, influential economic agency in the world. Its policy decisions, its choices are transmitted through several channels. We teach this in macroeconomics to young business school students. We talk about foreign exchange channels and bond market channels and confidence channels, asset price channels.
The most important channel, however, is intellectual. That's what I've come to speak to you about. And I think that's why, as the managing director said, that's why we're all here at this consequential moment. So, my lecture today is more a political treatise than how to guide. My hope is that it's received in the spirit it's intended. It's more a love letter than it is a cold critique, because I was a central banker and understand the essential role that the Fed and so many organizations in this room play.
In order to get to the meat of that philosophy, see if I can first set aside some of what I describe as the fast food of central banking. That's part of the current practice of monetary policy. We can move that aside. I think we can turn to a more nutritious meal.
First, frequent changes to the Fed's metrics, including its professed preferred measure of inflation, are beneath the high standing of any central bank. Central bank credibility is the coin that purchases American economic strength. In Washington, especially in Washington, a central banker can ill afford to be anything other than a straight shooter.
Second, I do not find the current Fed policy, which has gone on from my day, of data dependence to be of much value. When pushed on that, I say there's only two problems with data dependence: the data and the dependence.
We should care very little about what's happening two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing government data from stale national accounts, subject to revision subsequent to significant change, is evidence of false precision in this business that we're in and subject to a lot of analytic complacency. If financial markets want to follow that, that's okay. But we central bankers need to recognize the error in that data.
Third, near-term forecasting. That was just starting to become common when I left the Fed. I view for central bankers it's all too common today. It's a distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers, myself included, reveal their economic forecast to the world, they often become prisoners of their own words. Fed leaders would be well served to skip opportunities to share their latest musings.
The swivel chair problem, as a friend described it to me once, rhetorically waxing and waning with the latest data release, is common and it's counterproductive. Central bankers' jobs is not to have the perfect forecast. It's to make the best decision. So I ask myself whether this frequent repetition of forecasts and dots is helping us get to the right decision when new facts come in, or it's actually hurting.
Fourth, forward guidance. It's a related tool rolled out to great fanfare in the financial crisis. I recall in the darkest days of '08 trying to say that the Fed is locking its own hands behind its back because we wanted markets to know we weren't going to quit. So in crisis times I could be persuaded that forward guidance should come back. But it has little role to play, in my view, in normal times. Moving markets with rolling incantations is tempting but unhelpful to the Fed's deliberations and ultimately its mission. The central bank should find new comfort in working without applause and without the audience at the edge of its seats.
Now that I've gotten that off my chest, we can turn to a more substantial offering. So the question I think that's to me the core issue at this time and place is what happened? How did it happen that we now live in a world of what I describe as central bank dominance?
From the early 1990s until the GFC, the world was rightly impressed, myself included, with the Fed's track record in ensuring price stability and financial stability. Central bank chiefs became household names, their credibility unchallenged. Their opinions were highly sought. They became more recognizable to the man on the street. But I'll add, less recognizable day after day to their predecessors.
In exigent circumstances, the Fed is called into action, extending its reach and amplifying its effect. And that was the reason why the modern Fed was created in 1913, to respond to panics. It was not created to do these other things, but to be a crisis manager. But when panics subside, the Fed, it strikes me, is duty-bound to retrace its steps. And for many decades, after shocks dissipated, economic conditions normalized, the Fed largely and dutifully exited the main stage.
In more recent years, the Fed has found its way onto the front pages of our newspapers, not just in crisis times, but all times. The Fed has found it harder, it strikes me, because Fed leaders are human too, to insulate themselves from all the attention. Its leaders wear their inheritance proudly. When I served, I know I did.
So, my inquiry is not about motivations. We're not in search of some nefarious plot. If that were the case, this would be easy. My review is about capabilities and authorities. And since the panic of 2008, central bank dominance has become a key and new feature of American governance. Let me give a few examples.
I'll first turn to fiscal policy. I won't be making any news here to say that US fiscal policy is on a dangerous trajectory. Irresponsibility in spending has surged, especially in the aftermath of COVID. Today, the US federal government is spending in excess of 60% more than the day before COVID. And I don't remember the day before COVID thinking this is one austere, efficient, well-run government. I remember thinking, well, there's got to be plenty of easy cutting to be done. 60% more. No plausible economic growth can deliver revenues to match that surge in spending.
Now, I struggle to absolve the Fed of the nation's fiscal profligacy. Fed leaders encouraged government spending when times were tough a few years back, but did not call for fiscal discipline when times were good, at times of sustained growth and full employment. Now, left to my own devices, I'd prefer monetary policymakers to steer clear of fiscal commentary altogether.
But if the Fed chooses, especially under exigent circumstances, to cross that line, there should be real and rhetorical symmetry. That, however, is scarcely my chief concern. That one is pretty easily fixed. And I trust the Fed is in the process of trying to fix that. So what's the bigger concern about the Fed and fiscal policy?
The Fed has been the most important buyer of US government debt and other liabilities backed by the US since 2008. The Fed's $7 trillion balance sheet today is nearly an order of magnitude larger than the day I joined the Fed. And I think it's a fair proxy for the Fed's growing imprint on our economy.
Now, from my time long ago as a governor, I bear some measure of responsibility for this creation of asset purchases. We tried to market it as credit easing. That lasted about a week. You all called it quantitative easing, so I'll go with QE. So, in the '08 crisis, we cut interest rates to zero, and it wasn't enough. So, we sought new ways to make monetary policy looser, to make financial markets more liquid. And I strongly supported this crisis-time innovation.
But when the crisis ended, the Fed never retreated. I worried mightily in the fall of 2010, a time of strong growth and financial stability, the decision to buy still more Treasury bonds would involve the Fed in the messy political business of fiscal policy. QE2 was announced. I disagreed with the path of policy and resigned from the Fed shortly thereafter. QE with fits and starts since 2010 have become a near-permanent feature of central bank policy and power.
Fiscal policymakers, you know, the folks at the other end of Constitution Avenue, the elected members of Congress, they found it considerably easier from that day until this to appropriate money knowing the government, central bank would be subsidizing the costs of it.
Economics teaches a couple of lessons. One, lowering the near-term cost of debt tends to increase its quantum. And two, on the current trajectory, the high debt burden threatens to undermine future economic growth.
The Fed presents itself as humble and technocratic, queuing closely to its remit. They say they take fiscal policy decisions as given and then react accordingly. But it's no longer obvious to me whether monetary policy is downstream or upstream from fiscal policy. Irresponsibility has a way of running in both directions.
At conferences like this for decades, the language we would hear would be concerns I thought were quite valid about fiscal dominance, where the nation's debts might constrain monetary policymakers, might make us to make a decision because we're worried about our own nation's debt. It was long thought to be a possible end state.
My view is that monetary dominance rather than fiscal dominance, monetary dominance where the central bank becomes the ultimate arbiter of fiscal policy, is the clearer and more present danger. The line between the central bank and the ostensible fiscal authority has grown harder to identify. The spirit of the Treasury-Fed Accord of 1951 is at odds with recent practice.
Now coming out of COVID, we all to some degree or another became amateur immunologists, myself included, trying to figure out how to ward off this virus. I learned a little immunology which I think might have some application here. At the time, immunologists described a phenomenon where the immune system's response to a virus might impede the response to a subsequent variant. They call that immunological imprinting.
So with that background, let me make another theory that I'll propose to you. I proffer a theory of economic imprinting whereby the policy choices of prior periods make the economy more vulnerable to shocks and less able to adjust organically. Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains. More debt is accumulated, more capital misallocated, more institutional lines crossed, and the risks of future shocks are magnified, causing the Fed obviously to act even more aggressively when harm strikes.
Simply stated, path dependency is driving policy, and we need to sit here at this moment and ask ourselves whether it's driving it into a ditch. It's not just dangerous to our economy and to your economy. It's not just risky business for central bank legitimacy. It's riskiest for the least well-off among our fellow citizens.
So that's my little riff on fiscal policy. Let me say something about when the Fed wanders further. The Enlightenment elevated the role of reason and autonomy in decision-making. You can think of Locke or Rousseau or Immanuel Kant. None could have conceived of a central bank like ours. Still, a fundamental precept of their thinking in the Age of Reason, I think, is readily applicable to the modern Fed. They held out a fierce resistance to whims. Central bankers and bandwagons should be total strangers. It would be better for the Fed's long-term success to focus on the time-honored and the enduring rather than the fashionable and the fleeting.
I observe the modern central bank, at least in my country, to be a bit too willing to traffic in contraband. Others can adjudicate whether matters of cultural import are in the province of the political narrative or civil society, but the Fed's business it is not.
Climate change and inclusion are politically charged issues likely to put half of the crowd into high dudgeon to even mention them. People of good conscience have their own views, their own motivations, their own policy prescriptions. Take no issue with any of that.
Elected officials are the ones tasked with evaluating data, synthesizing views, charting policy, and granting authority, if they so desire, to executive branch agencies. The Fed has neither the expertise nor the prerogative to make political judgments in these areas. The Fed's remit is given to us by Congress. It's not a suggestion or a jumping-off point. And as Supreme Court jurisprudence makes clear, Congress is not in the business of hiding elephants in mouseholes. Let me give a couple of examples to try to make this real.
In
Late 2020, the Fed joined something called the Network of Central Banks and Supervisors for Greening the Financial System. The Fed said it's, quote, 'active and in many cases playing a leading role in climate-related work.' A year later, the Fed said they had intensified their focus on supervisory efforts on evolving threats like climate change. Fast forward to January of 2025, just a few months ago, in a somewhat different political environment, the Fed withdrew from the Greening Group and substantially changed their tune. Some of you might disagree with one of those options or both of those options. I think the match is what bothers me perhaps most of all.
Second, in August of 2020 at Jackson Hole, the Fed announced a new monetary policy framework to much fanfare. As I heard it then and think about it now, the Fed's new regime was their end-of-history declaration. As Cristina said at the beginning, high inflation they thought was vanquished. The dominant risk was that prices would be too low. Well, as we all know, history had other ideas. As part of the new regime, they redefined their legislative remit of maximum employment, the remit given by the Congress as a, quote, 'broad-based and inclusive goal.' The new nomenclature of inclusive employment was understood to underscore the Fed's willingness to accept higher inflation so that certain groups could achieve higher rates of employment. Or so the theory goes.
More recently, Fed leadership has sounded considerably more ambiguous whether the new definition of full employment was at all different from the old. Well, if it's no different in practice, then what was the new language about? Was it politics or was it in fact a change in policy, a new definition that's different? Well, if that's true, shouldn't Congress have had something to say about that? I also have to note the economics of this. The steepest price of the new policy regime has been paid for the last five years by the supposed beneficiaries.
Now, there's a final reason to be uncomfortable with the Fed's focus on groups, and this goes to the profession that we're all practicing. Some in our profession have tended to deemphasize individuals, as if larger forces are in charge. In my view, individuals rather than groups are the core of civil society and, frankly, the core of American prosperity.
A successful Fed policy regime should not view individuals as some cog in the machine or as some fixed member of some readily definable group. What an individual does in the US and around the world when he or she wakes up in the morning matters immeasurably to the path of the economy. More broadly, I'll proffer another theory for you. The central bank should consider adopting a principle of institutional neutrality pioneered in the university context, often associated with the Chicago principles. Neither the modern university nor the modern central bank has a comparative advantage. It strikes me as a social justice organization. Though they both do a lot of good, they should avoid taking positions on issues unless such matters plainly threaten the core missions of those institutions.
The more the Fed opines on matters outside of its remit, the more it jeopardizes its ability to ensure stable prices and full employment, and the more vulnerable it becomes to the body politic. The Fed's expansionist tendencies portend existential risks. Let me turn then to my final two topics: of inflation, and I hesitate to say, independence. On inflation, for about 40 years, the American people didn't have to think about it.
And if the Fed's enviable track record on price stability had continued through this decade, I bet central bankers would have been given a wider berth. I bet the political class and the man on the street might have looked the other way to a fair bit of mission creep. But then the Fed foundered on fundamentals and inflation surged. The intellectual errors that contributed to the great inflation include some mix of the following. The central bank came to believe that its price stability objective was largely self-executing. Inflation was 2% because they said so. They came to believe that these big black-box models, including the DSGE models that are dominant at the Fed and most of the profession, were anchored in reality. Instead, they're just useful ways to help us think about and frame issues to inform what's really happening.
Perhaps the Fed thought that monetary policy had nothing to do with money. That the central bank was a bystander of forces outside of its control. That the surge of Putin and the pandemic were blameworthy for inflation, much more so than the surge of government spending and government printing.
Stable prices, it strikes me, were the Fed's plot armor. For those who aren't familiar with that term, I'll say this. In Hollywood, if you go to your favorite movie — I'm a James Bond fan — we worry time and time again about whether James is going to make it, whether the car is going to go off the cliff with him. But what 007 has is plot armor. Of course, they can't kill him off. What the Fed had was plot armor.
You might not like what the central bank have been doing in this or that, or been critical like I was about wandering away, but my goodness, they're pretty good at those stable prices. So we're going to just have to give them a little bit of license. Like in the movies, it was protections for the star against those who would dare a challenge. But the Fed's roving remit and grand ambitions, however well intended, have expanded its surface area and exposed its vulnerability.
So let's close this with a word on central bank independence. Central bank independence is more often bandied than it is defined. So let's give that a go. Independence is not a policy goal unto itself. It's a means of achieving certain important and particular policy outcomes. Independence is reflexively declared a bit too often for my taste when the Fed is criticized. But Congress has granted important functions to the Federal Reserve far removed from monetary policy. I'm thinking, for example, of banking and supervision. I do not believe the Fed is owed any particular deference in bank regulatory or supervisory policy.
Fed claims of independence in bank matters undermine the case for independence in the conduct of monetary policy. And when the Fed turns away from its creed and traditions, exercising powers that were once in the province of our Treasury Department, or take positions on societal issues, whether popular or not, it further jeopardizes the operational independence in what matters most.
I studied economics more than I studied law. But my parents wanted me to go to law school. So in their spirit, as they're looking down, I'll make a single reference to the courts. Since Marbury v. Madison, a famous case in 1803, Article III courts have been in the business of policing Article I and Article II powers, that is, powers of the Congress and the President. And since McCulloch v. Maryland in 1819, the courts have wrestled time after time about the role and authority of a central bank in our republic. Others are far better situated than I to sort out the constitutional imperatives and legislative authorities of the current conjuncture. But what I believe is this: I strongly believe operational independence in the conduct of monetary policy is a wise political economy decision.
And I believe Fed independence is chiefly up to the Fed. That doesn't mean central bankers should be treated as pampered princes. When monetary policy outcomes are poor, the Fed should be subjected to serious questioning, strong oversight, and even opprobrium. But a narrow central bank, we have to recognize, has more going for it than mere tradition. Our constitutional republic is accepting of an independent central bank only if it sticks to its congressionally directed duty and successfully performs its task.
Ours is, after all, our third experiment in the US with a central bank, not because of the success of its predecessors but their failure. We don't become the third central bank the way you win a third Super Bowl — like, keep at it and we keep giving you more. It's the third because we've struggled with the questions that are in the current policy conjuncture since the founding of the republic. And what's my historical lesson from those old fights about the Bank of the United States? We should remember the revealed preference of the body politic is a deep distaste for inflation, also for bailouts and power grabs. The governance objective, it strikes me, is clear. It's to make the central bank safe for democracy, not to make democracy safe for the central bank.
So, in conclusion, before Ragu comes up here and asks me a series of tough questions, I should say the Fed's current wounds are largely self-inflicted, and its plot armor isn't what it once was. A strategic reset is necessary now more than ever to mitigate losses of credibility, changes in standing, and, most important, worse economic outcomes for our fellow citizens. Now, this all might strike you as quite a surprise to hear, because we central bankers are trained to be careful with our critiques lest the daylight reveal the magic. A bigger risk, it strikes me, is that of the sorcerer's apprentice, the misuse of magical powers producing trouble.
Assembled in this room are dear friends who served with me in the financial crisis, colleagues who served with me on the G30, who are doing their best in our country and around the world to strengthen the economy, to ensure duty to its remits in various places. We're stewards of good and important purposes. We can ill afford the closing of the monetary mind. And if anything today, what I hope for is a richer discourse and a richer inquiry. We should be a bit less worried about violating pieties, prepared to endure periodic frowns of disapproval, because the benefits are huge. We can reclaim our intellectual freedom. We can get policy back on track. We can get stable prices and strong economic outcomes. Central bank legitimacy demands nothing less. I appreciate your time. Thank you for listening. Ragu, please come on up and rough me up a bit.
