Well, it's good to see everybody, a lot of you I haven't seen in many years. And thank you, Athanasios, thank you for the opportunity to be part of this very worthy celebration. In support of the theme of this conference, I do have some thoughts on the Shadow Open Market Committee's contributions to the policy debate, in particular its advocacy for policy rules. But before I get to that, I'm gonna exercise the keynote speaker's freedom to talk about whatever I want. To that end, I want to take a few minutes to offer my views on the economic outlook and its implications for monetary policy. So let me start there, and afterward I will discuss the role that monetary policy rules play in my decision making and in the deliberations of the Federal Open Market Committee. So this is kind of a two-for-one speech. In the three weeks or so since the most recent FOMC meeting, data we have received has been uneven, as it sometimes has been over the past year. I continue to judge that the US economy is on a solid footing, with unemployment near the FOMC's maximum employment objective and inflation in the vicinity of our target. Even though the latest inflation data was disappointing, real gross domestic product, or GDP, grew at a 2.2% annual rate in the first half of 2024, and I expect it to grow a bit faster in the third quarter. The Blue Chip consensus of private sector forecast predicts 2.3%, while the Atlanta Fed's GDPNow model, based on up-to-the-moment data, is predicting real growth of 3.2%. Now, earlier there were concerns that GDP in the first half of this year was overstating the strength of the economy, since gross domestic income, or GDI, was estimated to have grown a mere 1.3% in the first half of this year, suggesting a big downward revision to GDP was coming. But revisions received after our most recent FOMC meeting showed just the opposite. GDI growth was revised up substantially to 3.2%. This change in turn led to an upward revision in the personal saving rate of about two percentage points in the second quarter, leaving it at 5.2% in June. Now, this revision suggests that household resources for future consumption are actually in good shape. Although data and anecdotal evidence suggest that lower income groups are struggling, these revisions suggest that the economy is much stronger than previously thought, with little indication of a major slowdown in economic activity. That outlook is supported by consumer spending that has been and continues to be strong. Though the growth in personal consumption expenditures, or PCE, has moderated since the second half of 2023, it has continued at an average pace of close to 2.5% so far this year. Also, my business contacts believe there is considerable pent-up demand for durable goods, home improvements, and other big-ticket items, demand that built up due to high interest rates for credit cards and home equity loans. Now that rates have started to come down, and are expected to come down, more consumers will be eager to make those purchases. For business spending, purchasing managers for manufacturers describe ongoing weakness in that sector, but those for the large majority of businesses outside of manufacturing continue to report a solid expansion of activity. Now let me talk about the labor market. Only a couple of months ago, it appeared that the labor market was cooling too quickly. Low numbers for job creation and a jump in the unemployment rate from 4.1 to 4.3% in July raised risk that the labor market was actually beginning to deteriorate. To remind you of how bad the markets viewed that July data, some Fed watchers were calling for an emergency FOMC meeting to discuss a rate cut. While the unemployment rate ticked down in August, job growth was once again well below expectations. Many were arguing that the labor market was on the verge of a serious deterioration and that the Fed was behind the curve, even though a 50 basis point cut occurred at the September FOMC meeting. And then we got the September employment report. Job creation in September was unexpectedly strong at 254,000 jobs, and the unemployment rate fell back down to 4.1%, which is where it was in June. The report also showed upward revisions to payroll gains for the previous two months. So together, the message was loud and clear: while job creation has moderated and the unemployment rate has risen over the past year, the labor market remains quite healthy. Along with other new data on the labor market, the evidence is that labor supply and demand have come into balance. The number of job vacancies, a sign of strength in the labor market, has fallen gradually since the beginning of the year, even though it popped up earlier this month. The ratio of vacancies to unemployed is at 1.2, about the level it was at in 2019, which was a pretty strong job market, to put that number in perspective. Recent research has shown that the ratio of vacancies to the number of people looking for a job has been above one only three times since 1960. The quits rate, another sign of labor market strength, has fallen lower than it was in 2019, a decrease which partly reflects the hiring rate has fallen as labor supply and demand have come into better balance. So, in sum, based on payrolls, the unemployment rate, and job revisions, there's been a very gradual moderation in labor demand relative to supply, but not a deterioration. The stability of the labor market, as reflected in these two measures as well as other metrics I mentioned, bolsters my confidence that we can achieve further progress towards the FOMC's inflation goal while supporting a healthy labor market that adds jobs, boosts wages, and living standards for workers. I will be looking for more evidence to support this outlook in the weeks and months to come. But unfortunately, it won't be easy to interpret the October jobs report to be released just before the November FOMC meeting. This report will most likely show a significant but temporary loss of jobs from the two recent hurricanes and the strike at Boeing. I expect these factors may reduce employment growth by more than 100,000 jobs. And there may be a small effect on the unemployment rate, but I'm not sure it will be that visible. Since the jobs report will come out during the usual blackout period for policymakers commenting on the economy, you won't have any of us trying to put out what this low reading might mean, but I hope others do. Looking ahead, I expect payroll gains to moderate from their current pace, but continue at a solid rate. The unemployment rate may drift a bit higher, but is likely to remain low in historical terms. While I believe the labor market is on a solid footing, I will continue to watch the full range of data for signs of weakness. Meanwhile, inflation, after showing considerable progress for several months towards the FOMC's 2% target, likely moved up in September. The consumer price index, or CPI, grew 0.2% over the last month, 2.1% over the past three months, 1.6% over six months, and 2.4% in the past year. Oil prices fell over most of the summer, but then recently surged. Excluding energy and food, which likewise tend to be volatile, and just as it did in August, core CPI printed at 0.3% in September and 3.3% over the last year. Private sector forecasts are predicting that PCE inflation, the FOMC's preferred measure, will move up in September. Core PCE prices are expected to have risen about 0.25% last month. While not a welcome development, if the monthly core PCE inflation number comes in around this level, over the last five months it is still running very close to 2% on an annualized basis. So we have made a lot of progress on inflation over the course of the last year and a half, but that progress has clearly been uneven. And trust me, at times it feels like you're on a roller coaster. Whether or not this month's inflation reading is just noise, or if it signals some ongoing increases, is yet to be seen. I'll be watching the data carefully to see how persistent this recent uptick is. The FOMC's inflation goal is an average of 2% over the longer run, and there are some good reasons to think that price increases will be modest going forward. I'm hearing reports from firms across the country that their pricing power seems to have waned as consumers have become more sensitive to price changes. There's been a steady slowing in the growth of labor compensation. Now, it's true that average hourly earnings ticked up in September to 4% over the last year. And although it might seem like wage increases of 4% a year would put upward pressure on inflation near 2%, that might not be true if one considers productivity, which has grown at an average annual rate of 2.9% in the past five quarters. Now, some of this strength was making up for productivity that shrank during the pandemic. But the longer it continues, up 2.5% in the second quarter, the better productivity supports wage growth of 4% or even higher without driving up inflation. With the labor market in rough balance, employment near its maximum level, and inflation generally running close to our target over the past several months, I wanna do what I can as a policymaker to keep the economy on this path. For me, the central question is how much and how fast to reduce the target rate for the federal funds rate, which I believe is currently set at a restrictive level. Now, to help answer questions like this, I often look at various monetary policy rules to assess the appropriate setting of policy. Policy rules have long been of serious interest to the Shadow Open Market Committee. So before I turn my views to the future path of policy, I thought I would talk about monetary policy rules versus discretion, and begin with some background about the use of rules at the FOMC. For a brief overview of the history of the advent of rules at the Board, I've been directed to the second chapter of the Taylor Rule and the Transformation of Monetary Policy, written by George Kahn. And I have also consulted the memories of longtime members of the Board staff. Now, rules came along in the 1990s as the Fed was moving away from monetary targeting, focusing more on interest rate policy, and taking its first major steps towards increased transparency. There was immediate interest in Taylor-type rules among Fed staff and even some contributions to research on policy rules. There was a presentation to the FOMC on rules in 1995, and that was the same year that John Taylor's Bay Area colleague Janet Yellen was apparently the first policymaker to mention the Taylor rule at an FOMC meeting. While FOMC decisions mimicked the Taylor rule much of the time under Chairman Alan Greenspan, he was famously an advocate of constructive ambiguity in communication. And he and other central bankers since have resisted the suggestion that decisions be handed over to strict rules. Now, today, of course, a number of rules-based analyses are included in the material submitted to policymakers ahead of every FOMC meeting. And we publish the policy prescriptions of different rules as part of the Board's Semiannual Monetary Policy Report. Rules have become part of the furniture in modern policymaking. As everyone here knows, but for the benefit of other listeners on this live stream, Taylor rules relate the level of the policy interest rate to a limited number of other economic variables, most often including the deviation of inflation from a target and a measure of resource use in the economy relative to some long-term trend. Now, there are various forms of the Taylor rule, but they generally fall, in my view, into two categories. The first of these is what's called an inertial rule, and it has the property that the policy rate changes only slowly over time. I tend to think of it as an approach that captures the reaction function of a policymaker in a stable economy, where the forces that would tend to change the economy and policy build up over time. When change does occur, a gradual response may give policymakers time to assess the true state of the economy and the possible effects of their decision. One example I can use is the steadfastness of policymakers in the latter part of 2023, when inflation fell more rapidly than was widely expected, and again in early 2024, when it briefly escalated. The FOMC did not change course either time, an approach validated by inertial rules. Now, a non-inertial rule, on the other hand, allows and in fact calls for relatively quick adjustments to policy. The guidance from these rules is more useful when there is a turning point in the economy, and policymakers need to stay ahead of events. One saw these non-inertial rules prescribe a sharper rise in the policy rate above the effective lower bound starting in 2021, as inflation began climbing above the FOMC's 2% target. So non-inertial rules are also more useful in the face of major shocks to the economy, such as the 2008 financial crisis and the start of the pandemic in 2020. The great promise of rules is that they provide a simple and reliable guide to policy. But what should one do when different rules recommend different policy actions given the same economic conditions? Right now, inertial rules tell us to move slowly in reducing the policy rate toward a neutral stance that neither restricts nor stimulates the economy. On the other hand, non-inertial rules tell us to cut the policy rate more aggressively right now, subject to the caveat, of course, that one is certain of the values of all of the star variables: u-star, y-star, r-star. I think the answer is that while rules are valuable in helping analyze policy options, they do have limitations. Among these are the limits of the data considered, which is typically narrower than the range of data that policymakers use to make decisions, and also the fact that simple policy rules do not take into account risk management, which is often a critical consideration in policy decisions. So while policy rules serve as a good check on discretionary policy, I still believe there are times when some discretion is needed. As a result, I often prefer to think of them as policy rules of thumb. Now, turning to my view for the path of policy, let me discuss three scenarios that I have in mind to manage the risk of upcoming decisions in the medium term. The first scenario is one where the overall strong economic developments that I have described today continue, with inflation nearing the FOMC's target and the unemployment rate moving up only slightly. This scenario implies to me that we can proceed with moving policy toward a neutral stance at a deliberate pace. This path would be based on the judgment that the risks to both sides of our dual mandate are balanced. In this circumstance, our job is to keep inflation near 2% and not slow the economy unnecessarily. Another scenario, which is probably less likely in light of recent data, is that inflation falls materially below 2% for some time and/or the labor market significantly deteriorates. The message here would be that demand is falling, the FOMC may suddenly be behind the curve, and that message would argue for moving to neutral more quickly by front-loading rate cuts to get the policy rate near neutral faster. The third scenario applies if inflation unexpectedly escalates, either because of stronger than expected consumer demand or wage pressures, or because of some shock to supply that pushes up inflation. As we learned in the recovery from the pandemic recession, when demand was stronger and supply was weaker than initially expected, such surprises do occur. In this circumstance, as long as the labor market isn't deteriorating, we can pause rate cuts until progress resumes and uncertainty diminishes. So most recently we have seen upward revisions to GDI, an increase in job vacancies, high GDP growth forecasts, a strong jobs report, and a hotter than expected core CPI report. This data is signaling that the economy may not be slowing as much as desired. While we do not wanna overreact to this data or look through it, I view the totality of this data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting. I'll be watching to see whether data due out before our next meeting on inflation, the labor market, and economic activity confirms or undercuts my inclination to be more cautious about loosening monetary policy. Now, whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year. The median rate for FOMC participants at the end of 2025 is 3.4%, so most of my colleagues likewise expect to reduce policy over the next year. There's less certainty about the final destination. The median estimated longer-run level of the federal funds rate in the Committee's Survey of Economic Projections is 2.9%, but with quite a wide dispersion ranging from 2.4% to 3.8%. While much attention is given to the size of cuts over the next meeting or two, I think the larger message of the SEP is that there is a considerable extent of policy accommodation to remove in the coming year, and if the economy continues in its current sweet spot, this will happen gradually. Thank you again for the opportunity to be part of today's conference and for allowing me to share some thoughts relevant to monetary policy rules and my day job back in Washington. The Shadow Committee has elevated the public debate about monetary policy. May you continue to play that role for many years to come. And thank you.
Right, so the first thing I'd make on the balance sheet is we wanna make a distinction between the size and the composition of your assets and liabilities. If our balance sheet was the current size and it was all currency, you wouldn't be talking about R-star or anything like that. So the size is not the issue. It's like, what are you buying? What are you holding that somehow is affecting market rates? So I think that's the first question. Not the size, but what are you holding that somehow does this? Now, I've said this, and if somebody can prove me wrong, let me know, cuz I've been saying this for years. There is no economic theory for how large the central bank balance sheet should be. And we have examples in the world of central bank balance sheets that are 100% of GDP and they're running very low inflation. They don't seem to be causing any problems. Switzerland, where'd you go? So it's not obvious just from looking around the world that the size of a central bank's balance sheet drives the performance or outcome of a lot of these variables. Now, in terms of the balance sheet, a lot of what we did was when you're at the zero lower bound, you're trying to put downward pressure on longer-term rates. You go out, you buy, you try to push up the price, drive down the yields. How big of an effect that is? Various estimates have about a trillion dollars of purchases might give you 25 basis points. So it has potentially some effect. It's not clear it has a really big effect. So if you take a trillion dollars out, it can't have really a potentially big effect either. Now, a lot of times when I talked at the US Monetary Policy Forum back in February, one of the arguments I made, and I personally think a lot of this is like putting out a fire. You have a bad economic outcome, you pour water on the fire, and then when the fire's out, you drain the water away. And when the water drains away, the fire doesn't restart. And that's the asymmetry of policy actions at a time. They do certain things in one direction that they don't necessarily have the same effect going the other way. So I think right now, a lot of what we're doing in shrinking the balance sheet, we're just draining all this liquidity that we put in the system. And if we tell the markets like we did in 2022, roughly how much you're gonna take out, at what pace, you can price it in immediately. If you go back to when we put this out, long-term treasury went up about 37 basis points based on about $1.7 trillion expectation. Sounds about what the estimates were.
