Thank you all very much. Good afternoon and welcome to the 823rd meeting of the Economic Club of New York. My name is Bob Steele and it's a pleasure to welcome all of you here today as the chair of your club. We're recognized as the premier nonpartisan forum in the nation. The Economic Club stands as a leading platform for all of us to come together to discuss economic, social, and political matters. For more than a century, the club has hosted over 1,000 preeminent guest speakers contributing to a great tradition of excellence and dialogue. Today, let me also issue a warm welcome to the students who are joining us virtually from Pace and Mercy University as well as to the members of the 2025 class of fellows of the Economic Club. This is a select group of diverse rising next-gen business thought leaders and we're happy to have them with us. We'd also note that we're now taking applications for the next class of these young leaders and that's on our website. If you have people that you know from your businesses or your community, feel free. We're excited to get nominations from all of you. So, now it's exciting for me to be able to introduce our special guest today, Beth Hammack. Beth, as you know, is the president and chief executive of the Federal Reserve Bank of Cleveland, where she's been serving us for more than a year now. In this capacity, she participates in the formulation of US monetary policy and oversees 1,100 employees in the bank's Cleveland, Cincinnati, and Pittsburgh offices. Prior to her appointment to the Cleveland Fed president, Beth was co-head of the global financing group at Goldman Sachs and a member of the firm's management committee. Beth joined Goldman Sachs in 1983 as an analyst in capital markets before moving to interest rate products trading desk. She was named a managing director initially in 2003 and a partner seven years later in 2010. She served on several of the very important firmwide committees including the management committee, diversity committee, and other important groups. She's also worked in the past with important US policy makers as chair of the TBAC Treasury Borrowing Advisory Committee offering information and perspective on macro and global trends so that policy makers could have the benefit of what she saw from her position at Goldman Sachs. During her 30 plus years in capital and financial markets, she's worked to develop and sponsor emerging talent within the industry and has also sponsored a professional women's networking program. Beth also volunteers her time and skills to support nonprofits. She serves as chair of the board of the nonprofit Math for America and is a member of the University Hospitals board. The plan for Beth today is for Beth to be able to speak to us with prepared remarks from this podium. And once she's delivered those comments, then she's going to be interviewed by our former leader of the club, Bill Dudley, who will serve as moderator. Bill, as you know, is the former president and CEO of the Federal Reserve Bank of New York and also most importantly, chair of the Economic Club of New York. So now let me introduce Beth to you who will begin our program with her remarks and then followed by the conversation. Beth, thank you.
Well, my thanks to the Economic Club of New York for hosting me today and for inviting me and thanks to Bill for offering to moderate our conversation. I'm sure it's going to be a very engaging one. As many of you know, I lived and worked in New York for about 30 years before moving to Cleveland. And while I love going around Cleveland and talking to people about all the fantastic things to do in Northeast Ohio, I have to chuckle every time someone in Cleveland wants to talk about traffic. You know, the traffic in Cleveland probably lasts about 7 minutes from 5:03 to 5:10. And that's nothing compared to the gridlock that you get in New York City. Obviously before we had the congestion tax that came in place. But some of you might be thinking then, okay, well, if the traffic is so awful, why don't you just take the subway? And I often did take the subway, but you know, when I lived here, you always had that thought when you got in the subway and the one train is pulling in the station and you're like, 'Oh, do I jump on the local?' But it says the three train is only four minutes away. Like, which am I supposed to do? You know, this is a fine balancing act when you think about it, right? That you in New York getting around is kind of trying to optimize every minute of every day and trying to balance things. And balancing act I think right now is the perfect metaphor for what we're doing with monetary policy. If the economy is a tight rope, policy makers are tasked with walking a fine line to keep our dual mandate goals of maximum employment and price stability in balance. Today I'm going to talk about why I believe policy should be at a mildly restrictive setting to strike the right balance between our goals. But let me stress the 'I' part of that sentence and indicate as always that the remarks that I give are that the views are mine and not necessarily those of my colleagues on the Federal Open Market Committee or at the Federal Reserve system. So this is a challenging time for monetary policy. Oftentimes policymakers are faced with high inflation or high unemployment, but at the moment there's pressure on both sides of the mandate. Inflation continues to be above our 2% objective and the labor market is showing signs of softening. High inflation usually calls for raising interest rates to bring inflation down. But a slowdown in job growth typically calls for reducing interest rates to support the labor market. Under these conditions, balancing misses to both the maximum employment and price stability sides of the Fed's dual mandate is like walking a tight rope. At times, it's necessary to use your available tools, whether it's a balancing pole or interest rates, to counterbalance the greater threat. If you lean too far in either direction, you might lose your footing. The concept of balance is at the heart of the FOMC's statement on longer-run goals and monetary policy strategy. In the most recent update to the statement, the committee said that it would follow a balanced approach to promoting its goals during times when the objectives are not complimentary, which is a pretty fair characterization of today's situation. With both inflation and unemployment under some pressure, we need to assess how much and for how long we are missing on each side of the mandate and then determine which way policy should tilt to compensate for those misses. Applying this framework to the current economic environment, I remain concerned about high inflation and believe policy should be leaning against it. After last week's meeting, I see monetary policy as barely restrictive, if at all, and it's not obvious to me that monetary policy should do more at this time. But the future is inherently uncertain, and I'm watching developments closely. So, let me share in more depth what I'm seeing in the economy that frames my view of appropriate policy. I'll begin with inflation. The government shutdown has meant that we don't have access to as much official data as usual. But there are other sources we can look to. Compared with our 2% objective, inflation is too high and it's still trending in the wrong direction. In the most recently available reading, which was in August, PCE inflation was 2.7%. Somewhat higher than its corresponding reading from 2024. Core PCE inflation, which excludes the volatility coming from food and energy prices, was 2.9%. Meanwhile, the September CPI report for inflation showed both headline and core measures at 3%. The Cleveland Fed Center for Inflation Research calculates multiple measures of the trend inflation, and those are also elevated. So, how do we make decisions while the official statistics are limited? In addition to using other data releases and results from surveys conducted both inside and outside the Fed, one way I stay current on economic developments is by talking frequently with businesses and community contacts in the fourth Federal Reserve District. I meet regularly with our three boards of directors and our 14 advisory councils and I supplement these with individual meetings. I always find these engagements helpful, but they've taken on added importance recently given the more limited official data releases. The data and real life stories suggest that there are a variety of forces at play that are contributing to elevated inflation. Business and community leaders frequently mentioned to us that sharply rising health and property insurance premiums are a key cost pressure. Rising electricity costs are also top of mind for many businesses. I spoke with the leader of a grocery store chain in the fourth district a couple of weeks ago who had shared that margins are low and costs are higher including extremely high electricity costs. As a result, the company is trying to identify efficiencies to minimize how much of this cost to pass along to consumers. Advances in artificial intelligence hold promise for raising productivity, but I hear from businesses that the new technologies are lifting costs in the near term. Tariffs also loom large for many firms, especially retailers, manufacturers, and construction companies that use parts that come from abroad. These businesses are making tough decisions about which costs to absorb and which ones they need to pass through to consumers, a balancing act of their own. Cleveland Fed surveys find that the more a firm is reliant on imports, the greater the expected pass through. That helps explain why more than two-thirds of our construction contacts told us that they expect to pass all or most of their tariff related cost increases onto their customers. Last month, I heard from a range of business and community leaders, including insurance companies, construction contacts, auto manufacturers, and nonprofit executives during roundtable discussions in Cleveland and Columbus. Among the businesses, virtually no one wanted to be the first to raise prices. But given the cost pressures they're facing, a number of those business leaders said the reality is that they will likely have to do so early next year. Reflecting the balancing act going on in the economy, other business leaders have said that they would like to raise their prices, but for now they don't think they can because of softer demand. Some inflation measures that should be relatively unaffected by tariffs are also stuck above pre-pandemic levels. Inflation in core services excluding housing was 3.4% in August. Little changed from the 3.6% reading in August of 2024. This inflation rate had moved a little higher compared with where it had been earlier this year. I'm also watching inflation expectations. Right now, short-term expectations are elevated while longer-term inflation expectations have been more stable. How all this plays out remains uncertain. Economic theory tells us that it's reasonable to believe that a small and one-time change in tariffs would eventually produce a one-time increase in the price level without persistently affecting inflation. The situation today is that inflation is coming from several directions and has been running above our objective for the last four and a half years. Additionally, the tariff changes have been large, dynamic, and ongoing, far from a textbook implementation. Based on all of these considerations, I don't see elevated inflation as a purely transitory phenomenon that I should look through. My base case has PCE inflation rising to around 3% by the end of this year. It then remains elevated through much of 2026 and only gradually comes down thereafter. I am firmly committed to achieving our 2% inflation objective in a timely fashion. Policy cannot offset every short-lived miss of our goals, but it should limit the duration of persistent misses. Otherwise, consumers, businesses, and markets may come to doubt our commitment to the inflation objective. High inflation has real costs for the economy. We see and feel those costs on Main Street every time we go to the store, pay for a service, or shop online. Elevated inflation makes it hard for consumers and businesses to plan for the future. This is especially true for lower-income Americans who spend proportionately more on food, housing, and energy and often experience higher inflation rates than others. Recent survey work by the Cleveland Fed finds that the top concern affecting low and moderate income households was the ongoing impact of rising prices on budgets. As monetary policy walks along the tight rope, we need to balance those inflation developments with the Fed's other mandate, maximum employment. Here, labor market conditions remain generally healthy, but they have softened and there is a risk of further slowing. Let me start with the good news. The unemployment rate, a useful statistic to summarize the overall state of the business cycle, remains low. The unemployment rate was 4.3% in August, up only one-tenth of 1 percentage point over the last 12 months. In fact, the unemployment rate is very close to my estimate of its longer-run level of 4 and a quarter percent. A number of other metrics have been consistent with stable, healthy labor market conditions. This includes initial claims for unemployment insurance, which look like they've remained low through late October. Warn notices of mass layoffs were relatively low through September, though recent announcements bear watching. Recent changes in immigration policies have sharply reduced net migration to the United States. Fewer immigrants entering the US labor force imply slower growth in labor supply. This means the economy doesn't need to add as many jobs compared with what it needed a couple of years ago to keep the unemployment rate steady. And indeed, we have been seeing a softening in payroll growth. Which brings me to the not so good news. The most recent report from the Bureau of Labor Statistics estimated that employers added 29,000 jobs per month on average in June, July, and August. In early 2023, job gains averaged nearly 300,000 per month. Historically, market slowdowns in job gains have usually, though not always, been associated with stress in the labor market. Additionally, the unemployment rates for certain parts of the population who are often most affected during economic downturns, such as younger workers and black workers, have risen considerably over the last year. Together, these signs suggest that the downside risks to the labor market have been rising. Based on the slowing labor market, I expect the unemployment rate will tick up in coming months, ending this year just above its longer-run value. Looking further ahead, the US economy has proven very resilient. Financial conditions are quite accommodative, reflecting recent gains in equity prices and easy credit conditions. As uncertainty subsides and businesses take advantage of the strong capital markets landscape, I expect that economic growth next year will pick up from its fourth quarter pace, eventually putting some downward pressure on the unemployment rate. In practice, sound policy requires both considering the most likely outcomes and managing risks. There is an element of juggling while on the highwire. I see inflation misses starting 2026 around 1 percentage point, which will take two to three years to resolve. If this happens, it would mean inflation exceeded our 2% objective for the better part of a decade. Now, this is just a forecast and I could be wrong, but without appropriately restrictive policy, this long stretch of elevated inflation could eventually cause high inflation to become embedded into the economy. On the labor market side, I see the unemployment rate starting 2026 a couple of tenths of a percentage point above its longer-run value before coming down over two to three years. A range of other indicators, including consumer spending and GDP growth, point to ongoing health in the broader economy. So, I do not currently put high odds of a labor market downturn, but subdued job growth may indicate more fragility in the labor market. Policy makers may differ on the weights they place on the two misses, their baseline forecasts and their risk assessments, but to me, comparing the size and persistence of our mandate misses and the risks, inflation is the more pressing concern. This argues for a mildly restrictive stance for our policy rate to ensure that inflation returns to 2% in a timely fashion. In the tightrope metaphor, I'm using my balancing pole to help lean against inflation because under these conditions, keeping the pole equally balanced seems like a good way to lose my footing. But the lean is only a slight one, hence the mildly to balance the labor market's concerns. Determining the right lean is important, but we also need to find the center. A key technique used by tightrope walkers is known as focusing. By fixing their gaze on a steady point, they can keep their body aligned and maintain stability while taking steps across the wire. The central banker's equivalent to focusing might be our star, the estimate of the medium-run real neutral funds rate that neither stimulates nor restricts the economy. This can help tell us how restrictive policy is today, guiding our assessment of appropriate actions to achieve our dual mandate objectives. Right now, my estimate of R-star leads me to see monetary policy as only barely restrictive, if at all. I base this view on three main reasons that I'll try to cover briefly in the interest of getting to your questions. There are many interesting developments influencing our star, such as AI and immigration, but I'll have to leave a deeper discussion of those for another day. First is the economy's recent performance. GDP growth has been right around my estimate of its longer-run trend and the unemployment rate is close to my estimate of its long-run level. Inflation has been above our 2% objective and is now trending up again. A straightforward interpretation of these indicators is that policy hasn't been very restrictive. With the nominal federal funds rate now 50 basis points lower than it had been in August, policy is now less restrictive, which will put less downward pressure on inflation. A second factor in forming my estimate of neutral comes from economic modeling. Recent estimates from Thomas Laubach and John Williams' seminal model put our star around 1.4%, notably higher than it was after the global financial crisis. Recent Cleveland Fed research has proposed a model that simultaneously captures many unobservable star variables including our star. This model also estimates that our star has been trending up and was 1.5% as of the second quarter of this year. There's considerable uncertainty around all estimates of R-star, but the upward trends in these and other estimates suggest to me that the neutral real rate is rising. Finally, I'm taking some cues on the whereabouts of R-star from financial markets. Rather than being restrictive, broad financial conditions appear to me to be quite accommodative. Equity prices are high, credit spreads are narrow, and interest rates have come down from their post-pandemic highs. Recently, the 10-year Treasury yield has been in the low 4% range, similar to readings from the early 2000s before the global financial crisis, and real forward rates from TIPS have returned to their pre-GFC levels. As well, in my conversations with businesses, interest rates are not typically described as being overly restrictive. I hear more about trade policy uncertainty and high construction costs as impediments to investment. In the 1990s, the 10-year Treasury yield averaged more than 6 and a half percent. There was plenty of lending, borrowing, and M&A activity during those earlier periods, consistent with the view that the economy is able to adapt to higher interest rate environments. My growing sense is that the period of ultra-low rates and low R-star that we experienced following the GFC, which was coupled with household deleveraging and regulatory tightening, was an anomaly rather than a new normal. So, let's return one last time to the FOMC's balancing act. On one side, inflation is too high and trending in the wrong direction. On the other, the labor market conditions have softened but remain generally healthy. As I navigate the economic highwire, I see an important role for the balancing pole to help counter the misses to the inflation side of our mandate. This means monetary policy should be mildly restrictive to return to our 2% inflation objective in a timely fashion while limiting the misses for maximum employment. And with my focus guided by our star, I see policy is only barely restrictive, if that. At this point, I don't think there is more that monetary policy can do without risking a fall off the wire. Like a careful tightrope walker, I'm mindful that the winds could start blowing from either direction and that there could be swings in the environment. I'm taking this one step at a time, alert to developments that could change my forecast and my view of appropriate policy. In the meantime, I thank you for your attention and look forward to your questions.
I have two words. Well said.
So you raised in your remarks this is you know there's a number of issues going around on monetary policy right now. One is how far are you away from your objectives on inflation and employment? Number two, what are the risks to inflation and employment relative to your objectives? And three, what's the current stance of monetary policy? How do you parse it out between those three things?
Well, thank you. Thank you very much for being here, Bill. I really appreciate it. You know, this is a really challenging time for policy makers. Normally you're challenged on one side of the mandate and you don't have to face those challenges both ways. You know, as I talked about in the speech, I do think we're missing when I just look objectively at the misses. And when I think about what we're supposed to do under our new framework, it's really think about by how much and for how long we're going to deviate from those misses. And I will acknowledge that we can take the four and a half years of having missed on inflation and make that a bygones. I worry that that could embed in people's minds for inflation expectations. But when I'm thinking about policy, I really am thinking about the forward. And what I see is that we're missing by a full percentage point on the inflation side and that's likely not going to get back to target for a couple of years. Whereas on the unemployment side, we're only missing by a couple of tenths and that probably will take you know two to three years but maybe a little less than that. But when you look at the integral under the curve of both those misses, to me the bigger miss is still on the inflation side. And I appreciate that a number of my colleagues have talked about some of that miss is coming from tariff policy and trade policy and we are seeing goods prices rise more than we had seen. But we're also seeing core services ex-housing trending up and that to me is much less likely to be impacted by tariffs. And so when we back out what we think the impact from tariffs has been on inflation at the Cleveland Fed, we come up with a number around 0.4.5. And so even if you take that out of where we are, which I'm not sure you can do, but even if you did, you're still missing by a pretty significant amount. And again, the misses that we see on this core services and core services ex-housing to me that have been persistent and actually increasing recently, that to me really tells me why we need to stay more restrictive. Now, how we are, I have one of the higher dots for our star for my longer run neutral as I talked about. So, I think we're kind of right there in terms of neutral policy. I think we're pretty close to neutral right now, which makes me a little bit nervous given that I see the bigger miss on the inflation side than the employment side.
So, you're worried that there could be a policy mistake. You assume that policy is restrictive. It's not restrictive. You cut rates into accommodative territory, not understanding that that's what you're doing, and then you actually have an inflation problem.
Yeah, I certainly wouldn't want to be cutting rates into accommodative territory. Again, I have a lot of humility, so I recognize that my view of R-star is just one person's view and there's tremendous uncertainty surrounding it. So, we need time to see how things play out and to see how the economy is performing. But as I talked about, to me, I think the best indication we get is just the performance of the economy. And when I look at the growth numbers, when I look at the consumption numbers, it seems like we're in a pretty robust healthy economy right now.
Yeah. I mean, Chair Powell has actually said we know our star by its work. So he obviously has some sympathy with that perspective. Let's turn to inflation expectations because that's obviously a key issue in the outlook. And I guess the question I have there is you said short-term expectations a little bit elevated. Long-term still seem to be pretty well anchored. Two questions there. How much comfort can we take from that that that's where we are today? And number two, how much of that depends on what the Fed actually does subsequently?
I don't take a lot of comfort from anywhere at this point because I feel like my job is to worry about everything and to be concerned about all the different things that could go wrong and try to help steer the economy as best I can. I think the fact that we've seen inflation moving upwards and we've seen inflation expectations largely stay anchored gives me some comfort that the markets and the public generally believe that we are committed to our inflation objective and that we are going to do what we need to to bring inflation back down to target. But I am watching closely for signs that inflation expectations could shift because I think one of the lessons of history is that when you lose that anchoring of inflation expectations and it starts to become more embedded in the economy, if individuals start expecting three, four, 5% inflation because that's what they've gotten used to, that feeds into their price behaviors and that could really shift things more materially. We're not there right now.
And presumably make the Fed's job a lot more difficult.
Much more difficult to bring it down. So once it's out of the you have an ongoing problem. You mentioned AI in your speech very briefly. So I want to dig a little deeper there because there's a lot going on in AI. One, there's a huge investment boom of spending which presumably is lifting the economy today. Two, there's some questions about unemployment. Is that actually contributing to the weakness that we're seeing in the labor force? And then three, there's this question of productivity growth. And then four, there's a question of how does this influence our star? So there's a lot of stuff there. So what are your thoughts? I mean, recognizing that nobody knows exactly where we're going here. What are your thoughts at this point?
Yeah, it's hard to go through a meeting with a business and not talk about AI. It comes up in almost every conversation. It's really top of mind I think for a lot of companies as they're trying to navigate the current environment. You know, with any new technology there are real exciting possibilities that can come from this. But I think there's a lot of caution and skepticism. I think there's a variety of degrees of adoption and the success rates that you're seeing from it. In some places, I've heard about examples of businesses that are using AI to build their staffing schedules. And so, you know, a process that would take two days of trying to put Bill and Mary's preferences together and figure out what the right schedule was, the AI can do for them in minutes. And so, I think there's some really positives from that. What I'm hearing more from businesses around AI is not that they're using that to save headcount or to reduce their workforce by and large. It's to improve the customer experience or that they are using attrition and the AI is kind of backfilling from the normal attrition that they'd have and so they may not be again it's this low hiring low firing environment that we've been in for quite some time looks like it's persisting and I think AI is part of that story. On the investment side, there's a tremendous amount of investment that's happening. And I think if you look at equity prices, there's a lot of excitement about the possibility of what this can mean. And like anytime you have an exciting new technology, there's going to be some you know, some...
Could be a little extra exuberance.
Yeah, I was trying not to use that word. I'll just go with excitement. I think there's a lot of optimism about what it can bring and what dividends it may ultimately yield. But we don't know how it's ultimately going to play out. So it could be that the investment we're seeing now is absolutely the bare minimum of what we need and you hear from a lot of the tech companies that they can't keep up with the demand that they're seeing and so it seems very...
So, you're worried that there could be a policy mistake. You assume that policy is restrictive. It's not restrictive. You cut rates into accommodative territory, not understanding that that's what you're doing, and then you actually have an inflation problem.
Yeah, I certainly wouldn't want to be cutting rates into accommodative territory. Again, I have a lot of humility, so I recognize that my view of R-star is just one person's view and there's tremendous uncertainty surrounding it. So, we need time to see how things play out and to see how the economy is performing. But as I talked about, to me, I think the best indication we get is just the performance of the economy. And when I look at the growth numbers, when I look at the consumption numbers, it seems like we're in a pretty robust healthy economy right now.
Yeah. I mean, Chair Powell has actually said we know our star by its work. So he obviously has some sympathy with that perspective. Let's turn to inflation expectations because that's obviously a key issue in the outlook. And I guess the question I have there is you said short-term expectations a little bit elevated. Long-term still seem to be pretty well anchored. Two questions there. How much comfort can we take from that that that's where we are today? And number two, how much of that depends on what the Fed actually does subsequently?
I don't take a lot of comfort from anywhere at this point because I feel like my job is to worry about everything and to be concerned about all the different things that could go wrong and try to help steer the economy as best I can. I think the fact that we've seen inflation moving upwards and we've seen inflation expectations largely stay anchored gives me some comfort that the markets and the public generally believe that we are committed to our inflation objective and that we are going to do what we need to to bring inflation back down to target. But I am watching closely for signs that inflation expectations could shift because I think one of the lessons of history is that when you lose that anchoring of inflation expectations and it starts to become more embedded in the economy, if individuals start expecting three, four, 5% inflation because that's what they've gotten used to, that feeds into their price behaviors and that could really shift things more materially. We're not there right now.
And presumably make the Fed's job a lot more difficult.
Much more difficult to bring it down. So once it's out of the you have an ongoing problem. You mentioned AI in your speech very briefly. So I want to dig a little deeper there because there's a lot going on in AI. One, there's a huge investment boom of spending which presumably is lifting the economy today. Two, there's some questions about unemployment. Is that actually contributing to the weakness that we're seeing in the labor force? And then three, there's this question of productivity growth. And then four, there's a question of how does this influence our star? So there's a lot of stuff there. So what are your thoughts? I mean, recognizing that nobody knows exactly where we're going here. What are your thoughts at this point?
Yeah, it's hard to go through a meeting with a business and not talk about AI. It comes up in almost every conversation. It's really top of mind I think for a lot of companies as they're trying to navigate the current environment. You know, with any new technology there are real exciting possibilities that can come from this. But I think there's a lot of caution and skepticism. I think there's a variety of degrees of adoption and the success rates that you're seeing from it. In some places, I've heard about examples of businesses that are using AI to build their staffing schedules. And so, you know, a process that would take two days of trying to put Bill and Mary's preferences together and figure out what the right schedule was, the AI can do for them in minutes. And so, I think there's some really positives from that. What I'm hearing more from businesses around AI is not that they're using that to save headcount or to reduce their workforce by and large. It's to improve the customer experience or that they are using attrition and the AI is kind of backfilling from the normal attrition that they'd have and so they may not be again it's this low hiring low firing environment that we've been in for quite some time looks like it's persisting and I think AI is part of that story. On the investment side, there's a tremendous amount of investment that's happening. And I think if you look at equity prices, there's a lot of excitement about the possibility of what this can mean. And like anytime you have an exciting new technology, there's going to be some you know, some...
Could be a little extra exuberance.
Yeah, I was trying not to use that word. I'll just go with excitement. I think there's a lot of optimism about what it can bring and what dividends it may ultimately yield. But we don't know how it's ultimately going to play out. So it could be that the investment we're seeing now is absolutely the bare minimum of what we need and you hear from a lot of the tech companies that they can't keep up with the demand that they're seeing and so it seems very...
The rational that they're continuing that investment. It could be that the technology is not as valuable as we may have thought it was and there's some overinvestment that's happening. I think more likely it could be that you see some amount, like you saw in the 90s with the internet boom, that you had this huge excitement and markets kind of got ahead of the reality. You had a small correction, but now look at how we use the internet and it's completely transformed everything we do. It just took a little bit longer than maybe the markets were anticipating at that point. So there could be a parallel to that.
Yeah, it can be transformational but also you can have overinvestment at the same time. Both can be true. From a perspective today, what do you think is the more significant issue? The lift to the economy it's providing from the investment side, or more the potential weakness to the labor market? Which of those two would you put more weight on?
Again, if it's going to create weakness in the labor market, you could have a jobless boom. That's something that's a little tricky for us to think about. Monetary policy is really good at managing cyclical changes. It's not so good at managing structural changes. If AI is a real structural change in terms of the labor force population, that's something that fiscal policy and the governments are going to really have to think about. How do you retrain workers? How do you find new opportunities for them? Monetary policy is a pretty blunt instrument and can't really handle that. So we'll need to see exactly how it plays out to understand what the right course of action is.
Early days. I want to talk about the monetary policy framework review that the Fed unveiled in August, Chair Powell at Jackson Hole. Sort of a return to what we had prior to 2020 where we're basically going to try to hit 2% inflation all the time. Most people thought that was quite sensible and expected. What else should we be thinking about in terms of changing how the Fed conducts monetary policy? Lori Logan, for example, recently came up with this idea that maybe the federal funds rate is no longer the right target variable for monetary policy because the federal funds market has become very idiosyncratic. Most of the trading in the last few years has been GSE selling their reserves, which they can't earn interest on, to foreign banks. So she's proposed the triparty repo general collateral rate. Where do you come out on Lori's proposal specifically, and more broadly, are there other things that you think the Fed should be thinking about doing differently based on the lessons of the last few years?
I think Lori raised a really good point, which is that our target rate is the Fed funds rate. We have done an excellent job of keeping it within its bands, but it's increasingly a very narrow market. It's a hundred billion dollar market relative to the repo market that's four trillion, or the bills market that's six or seven trillion. You're looking at a very, very small slice of the market. It's great if we can control policy over here, but it's a little bit like saying your kid is doing a great job coloring in the lines when there's a food fight going on around them. So if we can't keep control of the broader constellation of money market rates, that could become problematic. The Fed funds rate is our current target, it's absolutely important that we continue to maintain control over that. But I look at that broader constellation whether it's bills or repo rates, and I think it's important that we're exhibiting some influence over those as well. So I think it's a great conversation for us to begin having around what the target should be. Markets evolve over time and we should similarly evolve. There was a big change coming out of the GFC in terms of the incentives for banks to finance themselves longer, which has been a great service to financial stability and to the health of the banking system. But it's meant that the Fed funds market has shrunk very significantly, so we should continue to think about what the right fit-for-purpose tools are.
So let's say we do make a shift to a different target rate. Do you think that's going to have much consequence for how the Fed actually conducts monetary policy, or just more about how it communicates its conduct of monetary policy?
I don't think it'll change much in terms of how we actually conduct policy. I think it'll be some amount of communication. I think it will make our control over front-end rates greater if we are really watching more broadly that constellation of money market rates and repo rates broadly. But I don't know that it'll change things. We're operating in this ample reserves framework, which I think is the right way for us to be operating. Figuring out exactly where ample is, is an art not a science. Trying to keep our finger on that and see what levels of volatility are acceptable. I actually think it's good to have some amount of volatility in those front-end rates as long as they're staying within our band. So maybe that's 25 basis points of volatility. I think that's healthy and helps some of the levered investors recognize that this is not completely risk-free. But you don't want to see hundreds of basis points of volatility; that wouldn't be constructive. We know that on days when there are big bill settlements or month ends or quarter ends, behavior changes, and I think we can look through those types of one-off dates when we see more elevation in rates as long as we come back to the target where we expect to be over time.
We're certainly seeing more volatility in rates recently. In the last few weeks, the standing repo facility has been used on a regular basis; we've seen upper pressure in repo rates. Do you think that means we've gone a little bit too far from the abundant reserves into the ample reserves regime? At the last FOMC meeting, as everyone here probably knows, the Fed basically announced the end of QT effective December 1st and after that the Fed will actually start buying things to grow its balance sheet again. Do you think that's going to need to happen a bit sooner given all the pressure you've seen in money market rates recently?
It may. On the positive side, I was pleased to see the take-up in the standing repo facility. We had as much as 50 billion. I'm surprised there wasn't more take-up given where rates were trading. I think the banks are getting used to it and starting to recognize that we do want them to take advantage of this tool. Their role as primary dealers, I think, would say they should be taking advantage of this to help redistribute reserves and help us maintain effective monetary policy, which the facility does. Having a tool like that allows us to maintain a smaller balance sheet over the longer term and reduce our footprint in the market, which is a good place to be. The one piece that we don't control is the Treasury's general account. Part of the reason we've been seeing some pressure in money markets is that it ramped up pretty fast and has been running closer to a trillion rather than the 850 billion they had intended. So it could mean that the difference between ample and abundant is 150 billion. We'll have to watch that and figure out where we want to be positioned. Remember, the pace of runoff we had up till this point was around 20 billion per month. So that 150 is like six months worth of runoff. That's a pretty big difference in the context of where we are.
Let me ask you a different question about the stable coin legislation we got from Congress. We got the GENIUS Act, and I think a lot of people thought it was about time we had something putting guardrails in place for stable coins. So two questions: Number one, what do you think about what's happening in terms of movement towards stable coins? And what do you think the Fed's role should be in all of this? Chris Waller, for example, recently had a proposal to offer skinny accounts to limited charter companies that could actually settle at the Fed, which seemed like a potentially good idea. How are you assessing this very rapidly changing industry, and what do you think good looks like five or ten years out?
Most people don't really think about the other functions we have besides monetary policy, but we have four other key functions: financial stability, supervising and regulating the banks, ensuring consumer protection, and supporting community development and running the payment system. Whether you're thinking about financial stability or the payment system, stable coins can have a big impact on how things transform. I think it's an exciting new technology, and there's a lot we'll learn over time as we see some of these use cases. The most compelling use case I've heard is around cross-border payments; there's a lot of friction still. I haven't yet seen a real use case in practice; most usage of stable coins I've seen has been more on-ramp to crypto — what they call the crypto sandwich. So I think it'll evolve. It's helpful that we have rules and regulations because now there's more clarity that will help those businesses form and identify possibilities. Some changes in the payment system show real demand for instant payments. We've created FedNow, our real-time payment system. I struggle to think about, at least domestically, what the difference is between a payment stable coin and using something like FedNow, which is an instant payment. But I'm sure we'll see new things come up. Both from a financial stability and a development of the payment system, it'll be important for us to watch. From our supervision function as well, to understand if there is the growth that I've heard people talk about within stable coins. I've heard numbers like $2 trillion, but that's small relative to deposits in the US, which are around $17 or $18 trillion, and money market funds at $7 or $8 trillion.
