Hello, welcome to Is Business Broken. So, business broken is the podcast of the Marotra Institute. You're sitting here at a live recording and you can listen to this podcast and you should listen to the podcast. There are many good episodes and some of the people who have been featured on the podcast are in the audience. So welcome. So this podcast is basically where we ask whether markets, institutions, and leadership are still fit for the world we've built. Today's conversation sits right at the center of that question because few institutions shape the modern economy as profoundly and often as quietly or rarely as loudly as the Federal Reserve. Let me start with a story that captures why we're here tonight. In March 2023, Silicon Valley Bank unraveled with stunning speed, more like a viral event than a traditional bank failure. It wasn't brought down by fraud or a cyber attack. It was brought down by a rapid shift in the economic climate. After years of near-zero interest rates, rates rose sharply. That matters because banks hold lots of long-term bonds. When rates rise, the market value of those bonds falls. Losses that look like paper and manageable in a calm world suddenly became alarming in a nervous one. And then modern technology and the appetite for regulatory arbitrage did the rest. In the old days, a bank run meant lines outside the branch and days, sometimes weeks, before the full panic spread. In 2023, depositors didn't need to drive anywhere. A few messages in group chats, a couple of well-placed posts online, and billions of dollars moved with a few taps on the phone. So fast that the bank couldn't keep up. Silicon Valley Bank's choice not to use federal deposit insurance to be able to offer more attractive rates exacerbated the run. In the days that followed, the Fed faced a familiar but uncomfortable decision. Do you risk letting fear spread to other banks or do you provide emergency support to keep the financial system from freezing? Working alongside other regulators, the Fed stepped in with a new lending backstop designed to prevent the wider run and the immediate panic. The Silicon Valley Bank bailout was not the Fed's first. During the great financial crisis, the Fed essentially helped keep the global economy from going over a cliff. It did so in part through quantitative easing, large purchases of treasuries and mortgage bonds from 2008 into the mid-2010s which calmed markets and pushed borrowing costs down. But it also left a legacy we're still debating. How dependent have we become on central bank backstops? Did money encourage more risk-taking in new parts of finance? And what happens to market discipline and public trust when the central bank's balance sheet grows to historic size? How can or should the Fed effectively reduce the size of the balance sheet without triggering selloffs in stock and bond markets? The Federal Reserve was created in 1913 to do something deceptively simple: supply money to the economy such that inflation is predictable at say 2% and unemployment be close to the natural rate for the foreseeable future. If done successfully it provides monetary stability in a system prone to panic, booms, and busts. Over time that mandate evolved. Today the Fed manages a delicate balancing act: maintain price stability, support maximum employment, safeguard financial stability, and act as lender of last resort when markets seize up. When the Fed works well, it fades in the background. The economy hums along. Inflation stays low. Jobs are plentiful and credit flows. When it doesn't, or when the world changes faster than its tools can adapt, the consequences show up everywhere: in your mortgage rate, in whether your local bank survives, in whether companies can afford to hire or expand, in the price you pay for groceries. For decades after Volcker's fight against double-digit inflation in the 80s, the Fed's main job to print money such that inflation and unemployment are roughly stable felt almost predictable. Recession seemed manageable from a monetary policy perspective. The toolkit focusing on inflation and unemployment seemed to work despite the Fed's growth of the balance sheet. We survived the great financial crisis. Then the pandemic happened. Suddenly inflation came roaring back. Not at 2%, not at 3%, but hitting 9% by mid-2022, the highest in 40 years. It started with supply chains breaking during COVID. Chips are stuck in ports. Factories shut down. Then came massive fiscal stimulus and trillions of dollars pumped into the economy where there wasn't much to buy. Demand surged. Supply couldn't keep up. Prices exploded and the Fed faced the oldest question in central banking. How hard do you hit the brakes? Raise interest rates too slowly and inflation becomes embedded in expectations. Workers demand higher raises. Companies pass on costs. The spiral feeds itself. Raise rates too aggressively and you choke off growth. Companies stop investing. Layoffs begin. Unemployment rises. You trade one crisis for another. For the first time in a generation, people who never thought about the Federal Reserve suddenly had opinions about it because everyone felt it in their mortgage payments, their credit card bills, and even in the price of eggs. Inflation spikes became a hot topic before and after the election. The Fed raised rates faster than it had in decades. Inflation decreased significantly, but the debate isn't settled. How much pain is acceptable to bring prices fully back to target? When do you declare victory? And what if the next shock hits before you finish dealing with this one? Is a so-called monetary policy soft landing possible in such circumstances? Underneath those tactical questions lies something deeper. Do we have the right framework anymore? Some economists argue for alternative approaches like targeting the overall price level or nominal GDP or building in more flexibility for different economic conditions. These aren't just academic debates. They are about whether your tools still match the economy we have. Which brings us back to Silicon Valley Bank and the broader question of financial stability. Modern finance is faster, more leveraged, more interconnected than ever before. Stress doesn't stay contained. It migrates from banks to non-banks, from one market to another, from balance sheets into the real economy. Regulations such as Dodd-Frank have contributed to the emergence of shadow banking systems which are large private debt markets. The Fed's expanded toolkit was used to provide liquidity during COVID. With interest rates always close to zero, the Fed could just cut interest rates further. It again bought trillions of dollars in treasury bonds and mortgage-backed securities through quantitative easing. The goal during both the great financial crisis and the COVID recession was to keep credit flowing, stabilize markets, and prevent a complete economic collapse. Should the Fed do that if private debt markets collapse too? Unconventional monetary policy tools worked in the sense that both in 2008 and 2021 we avoided another great depression. But it also changed the game. Those actions compressed risk premiums, meaning investors got comfortable taking more risk because they expected the Fed to step in if things went wrong. More activity shifted from traditional banking into market-based finance. Shadow banking, private credit, complex derivatives, and the Fed's balance sheet ballooned from under 900 billion before the crisis to nearly 9 trillion at its peak. We are still living with consequences. Markets now operate with an implicit assumption. If things get bad enough, the Fed will intervene. That's called moral hazard and it creates a trap. The term too big to fail entered public vocabulary after Lehman Brothers collapsed in 2008. The government let Lehman go under and the resulting panic nearly took down the entire financial system. The lesson learned: some institutions are so interconnected that their failure would be catastrophic. So we bail them out. But if banks and financial institutions know they'll be rescued, what incentive do they have to manage risk carefully? This isn't a new problem we saw in the savings and loan crisis of the 80s, but it's become systemic and it raises uncomfortable questions the Fed is still grappling with. When do you intervene? How do you intervene without making the problem worse next time? And is this toolkit built for 20th-century banking adequate for the 21st century's banking? Then there's a question of Fed independence and what that word even means anymore. Central bank independence has long been viewed as essential to economic stability. Inflation spikes of 80% in countries like Turkey or Argentina illustrate what can happen if the central bank is not independent. The idea is simple. If politicians control monetary policy, they'll be tempted to goose the economy before elections, keep interest rates artificially low and let inflation rip. So insulate the Fed from short-term political pressure. In the United States, that independence was hard-won. It emerged in steps, strengthened by reforms during the Great Depression and made operationally real with the 1951 Treasury-Fed Accord, which freed the Fed from having to keep interest rates low just to finance government debt after World War II. But independence doesn't mean the Fed operates in a vacuum. And it certainly doesn't mean immunity from scrutiny. Today, monetary policy actions such as quantitative easing affect inequality. It affects who can afford to buy a home. It affects asset prices, which means it affects who builds wealth and who doesn't. It asymmetrically favors capital income over labor income. It affects how much fiscal space the government has to spend on other priorities. When the Fed raises interest rates, some regions and industries feel it more than others. When it intervenes to save financial institutions, it makes decisions about winners and losers. So independence can't mean insulation from consequences or accountability. It means something harder. The Fed must continually justify where its authority begins and ends. It must explain its decisions not just to economists but to the public whose lives are shaped by those decisions. That's a much more precarious position than it used to be. Finally, there's the broader structural reality the Fed has to navigate. The economy itself has fundamentally changed. Technology is reshaping productivity and employment in ways we're still figuring out. Novel payment systems and cryptocurrency relying on blockchain technology affect transmission mechanisms of monetary policy. Demographics are shifting. An aging population changes everything from labor supply to inflation dynamics. Global supply chains that seemed stable for decades are being rethought. And trade policy matters in new ways. Tariffs, export controls, friend-shoring. These aren't just moving goods around. They raise costs. They redirect investment. They change which countries we depend on. And when supply chains break, then layer on the unique role of the US dollar. Because the dollar is the world's reserve currency, America enjoys extraordinary privileges like cheaper borrowing costs, deeper capital markets, and global demand for US assets. But that privilege comes with responsibility. When global markets seize up, whether it's a crisis in Europe, turmoil in emerging markets, or a pandemic, the world looks to the Fed to keep the financial plumbing working, to provide dollar liquidity, to be the backstop and the world's global banker. That gives the Fed enormous power, but it exposes it to risks and pressures that go well beyond domestic interest rate policy. In this environment, the old playbooks don't always apply. Uncertainty isn't the exception anymore. It's the baseline. Which brings us to the question underlying all of these debates and the one that sits squarely in the spirit of this podcast. Are we asking monetary policy to do too much because other institutions are doing too little? Think about it. When markets fail, when politics stalls, when shocks arrive faster than legislation can respond, who steps in? The Fed. Not because it's the best tool for every problem, but because it's a tool that can move. Monetary policy is almost frictionless. Fiscal policy requires Congress to agree on something. Good luck with that. The way that the Fed loosens monetary policy and changes short-term interest rates is the Federal Open Market Committee to get together, have a meeting in Washington for two days and take actions. If there's a crisis, it can act within hours. That makes the Federal Reserve extraordinarily powerful, but also puts the institution in an impossible position. It becomes not just the supplier of money and the lender of last resort financially but institution of last resort politically and economically. And every time it steps in the expectations grow, the mandate expands, the scrutiny intensifies. So tonight we are fortunate to be joined by Governor Stephen Miran to unpack these questions. Governor brings a unique perspective to this conversation. A Boston University alumnus who went on to earn his PhD in economics from Harvard, he's followed an unusual path from Wall Street to the White House to the Federal Reserve. What makes his voice particularly interesting right now is his voting record. Miran has dissented at every single Federal Open Market Committee meeting he's attended, four in total, consistently arguing for more aggressive rate cuts than his colleagues supported. When the majority voted for a quarter-point reduction, he pushed for a half-point cut. When they voted to hold rates steady in January, he wanted another cut. He's also been vocal about structural reforms of the Fed, arguing for shorter terms for governors and greater presidential authority over the institution. Before entering public service, he spent years in the private industry hedge funds where he had to bet real money on his economic forecast. He's helped to develop some of the administration's most significant trade policies, including the position that tariffs don't cause inflation, a claim many mainstream economists dispute. In short, he's not your typical Fed governor. He's someone who's bridged academia, market politics, and now central banking. And he's willing to break ranks when he disagrees. That makes tonight's conversation even more valuable. Tonight, we'll explore how the Fed thinks about its role in this changing economy, where the hardest internal debates are happening right now, what tradeoffs keep policymakers up at night, what tools they wish they had, and critically what problems may ultimately lie outside the Fed's mandate, no matter how much pressure there is to solve them. We'll ask not just what the Fed is doing, but what it can do, what it should do, and where the boundaries of monetary policy are. Because if markets feel broken, if institutions feel stretched, if the old rules don't seem to apply anymore, understanding the limits and responsibilities of the Federal Reserve has never mattered more. Governor Miran, welcome to Is Business Broken?
Thank you, Marcel, for that introduction. It's a great setup for this conversation. Thank you, Governor Miran, for being here. And thank you to all of you for being in attendance here. You're part of this conversation, too, because you're going to be able to ask questions. And after I get through some that I've got for Governor Miran, we'll go and try to involve as many questions of yours as we can in this conversation. Scan the QR code and I'll be able to see the questions here and we'll have a really nice time. So, first of all, thank you for your time here on campus today. You've done several events and now you're having this conversation. So, I'm in the communications business. I love it when we talk and we learn more that way. The world gets better. But just thanks so much for taking the time to speak to us.
It's my pleasure. Thank you so much for having me. You know, as you know, I went to BU for college and so it's a real honor and a privilege to be back here. Some things are exactly as they were when I left and some things are bigger and newer. And if we could all be freshmen again, wouldn't that be nice?
I had more hair when I was here.
Well, let's... I'm going to start with a couple of questions to kind of set us up and then we'll go into more detail. But I think just hearing what we just heard from Marcel, let's talk about... well, let me start with tariffs because that's one way that you've distinguished yourself a little bit too. Governor Miran, you've expressed skepticism that recent tariff actions are a primary driver of rising goods inflation. And I think a lot of people have been surprised, right, that the impact of tariffs and all these pending trade deals hasn't had more of a strong effect than it has. Can you tell us more about your thinking on tariffs and what distinguishes it, I guess, from your peers?
Sure. Thank you. So yeah, I mean I have had an out-of-consensus view on tariffs all along. And I think people have been very gradually moving towards my view. I mean I think a year ago there were people who were predicting that tariffs would cause some horrible recession or they'd cause a... there was even one famous economist saying it would cause an inflation spike worse than we saw after COVID. And you know, I always thought it would be largely speaking not that huge a deal and I think that thus far people have been very slowly moving in my direction. My view is that we haven't seen significant tariff-induced inflation thus far and this is still an out-of-consensus view but I base my analysis based on two comparisons that I make. One is to compare imported core goods in the United States, that's goods other than food and energy, because you know at the Federal Reserve we tend to look past food and energy price fluctuations because they're volatile and they don't really tell you much about underlying supply-demand balances. They're just more indicative of transient shocks that hit commodity markets. So if you look at overall core goods and you compare them to imported core goods, if you thought tariffs were a very material driver of inflation, you'd expect imported core goods to be experiencing significantly higher inflation than overall core goods. And you don't see that. You see them experiencing relatively similar rates of inflation. Similarly, if you look internationally, if you looked at US core goods on a chart with core goods inflation in a bunch of other countries, if tariffs were a big driver of inflation in core goods, you'd expect to see US core goods stick out. You'd expect to be able to pick it out of a lineup without labels and you can't do that. It's right in the middle of the pack. There's not really a significant way in my view about how US core goods inflation deviates from international core goods inflation. So doing those two comparisons, I can't conclude that there's a lot of tariff-induced inflation. That could change. We could get a data release this week, next week, next month that I run those analyses again and it tells me, hey, you know, there is something there. But thus far, I haven't seen it.
Yep. When you say thus far, are you mainly saying because we're just talking about data points up until today or do you actually expect it to change?
Well, thus far I'm talking about the data that we have at hand which is through I guess through November. And as I said, there could be an instance, you know, we could get a data release in which it changes at some point in the future. I have no idea if and when that'll happen but I've laid out pretty clearly my guidelines for how I evaluate this thing. And I've done the comparisons that I've done and I haven't really seen a comparison that I find more persuasive. And so if I get new data I'll change my mind. But at the moment the data have come in that direction. The truth is that there's been a lot of international trends which have affected core goods inflation in recent years and they all could be playing a role in this. If you go back to the pandemic we had difficulty sourcing medical equipment and that led to a lot of firms saying we want to improve the resilience of our supply chains. We want to build in some redundancies. We want to make this more structurally secure. We've also had proliferating export controls, some implemented in the US, some implemented in China, some implemented in Europe. The existence of export controls on various technologies and inputs to production wasn't really a widespread phenomenon a number of years ago and it's accelerated. So there's a lot going on that could be causing core goods inflation not just in the US but globally to remain a bit elevated. And I think it's just a little bit too easy to blame that on tariffs in the last year when in fact I think those trends have been going on for longer.
Yeah. Briefly, I don't want to stay on this too long but you know you saw the reaction or what people expected to happen with tariffs didn't happen per se. I'm just curious like why do you think that happened or why was that perception there? Because you felt pretty confidently that it wasn't going to have such a strong of an effect as people expected.
Well, I think one reason why the perception was there is because this is the big... we've had the biggest changes to international trade policy in half a century. So I think it's quite natural for that to elevate uncertainty when you have that type of change. Nevertheless, I think there was a bit of an overreaction for a couple reasons. One is that if you look at the international trade literature, trade economists tend to estimate that the overall gains from trade versus say no trade at all is probably on the order of let's say 5% of GDP and maybe it's a little bit higher than that maybe it's a little bit lower than that but that tends to be where the trade literature settles out on what are the overall gains from trade versus having no trade whatsoever.
That's interesting. I would have expected it to be a lot bigger.
Yeah, it's not huge. And so the idea that you were going to eliminate such a significant portion of 5% with what was a move in tariffs that left you really far from zero trade whatsoever just seemed to me to be an overreaction. The other thing is at the end of the day imports are, forgive me if this number is off by a percent but I think it's about 12% of the economy right and so you'd have to have some extraordinarily large change in import behavior for what is 12% of the economy to really flow through into something that was going to be a very enormous disruption. And so I think people maybe just got a little bit out of proportion relative to what the stakes were.
Interesting. That's why we have you here for this, the global view, sweeping views on things. So now picking up on what Marcel kind of really helped set up too. You forecasted much more aggressive rate cuts than many of your peers. You've dissented on committee votes for this reason arguing that the current stance is too restrictive and that it poses risks to jobs and growth. What data are you seeing? You just gave some examples of how you approached another problem, but what data are you seeing regarding the labor market, regarding productivity that puts you in a different view than some of your peers on the committee?
Sure. So, one small correction, it's not that I predicted or forecast, it's that I called for as appropriate policy.
Yeah. Right. You called for those.
But yes, I do think it's appropriate to have significantly lower policy rates than we do now. Let's tackle a couple of those items. Inflation. So when I look at inflation, I see an outsized contribution from a couple of categories that are the result of measurement error. And so for example, if you look at portfolio management fees, these have contributed 36 basis points, 0.36% to annual core inflation in November, which is the latest data that we have versus a historic norm of about six basis... sorry, 32 basis points versus a historic norm of about six basis points. So these have contributed over a quarter of a point of excess inflation over historic norms. But what this series does is basically just track the stock market, that's how they measure portfolio management fees. And so my view is that is ultimately conflating a quantity with a price. If you look at actual fees in the asset management industry, they've been in outright deflation for 20 years, fees every year they get slashed and there's news articles about how ETF investors or mutual fund investors or whatever are benefiting from new lower fees on their investment products and so actual investment management fees have been slashed for 20 years in deflation and yet we're recording abnormally large inflation from this series. That's a bias, there's always a bias but the bias is anomalously large now. There's another bias which is basically in the way that we calculate shelter inflation. And because of the very complex lag structure with which shelter inflation is calculated, it records... it basically is recording the real estate market of 2021 to 2023, which is a historically anomalous real estate market. It's not the real estate market of 2026, let alone 2027. If you look at market rents, they've been running around 1% for a couple years now. And if you look at measures of all tenant rents versus new tenant rents, they've converged, which basically means that renewal leases are now at about the same level where fresh new leases are. Which all together to me indicates that the housing market, that housing inflation is going to normalize I think pretty quickly this year. And I think we're going to end up with housing inflation running below what we had before the pandemic as a result.
Interesting. Yeah. Well, I mean these are... we have a technocrat here, right? So we're getting some technocratic answers with a lot of numbers that sometimes work well on a podcast, sometimes don't. Sorry. But essentially what you're saying is that you've got a lot of ways that inflation is measured that you think are not really as modern and contemporary as they could be. And that's affecting how inflation is being viewed.
I think that's completely right. Look, the Congress tasked the Federal Reserve with maintaining full employment and price stability. Prices now are higher than they were before the pandemic because of a confluence of fiscal, monetary, supply chain, and regulatory factors that drove a large increase in the price level. However, prices are now once again reasonably stable. We weren't tasked with undoing all price changes ever. We weren't tasked with returning the price level to what it was in 1900. We're tasked with maintaining it relatively stable. And so it is true that prices are higher than they were before the pandemic. It is true that people still are unhappy with the prices of certain goods. But those goods are no longer really changing prices very much. The change in prices, which is the inflation rate, which is what we target, in my view, is now once again stable. And once you strip out these anomalous factors like portfolio management fees and quirks of the way that we measure housing inflation, underlying inflation is growing within noise of our target. It's, you know, underlying inflation is growing within measurement error of where it should be. And so to me, that tells me that yes, we did have a big inflation problem in prior years, but we don't have a big inflation problem now. Are we still dealing with the scars of that? Yes, we are still dealing with the scars of that, but that is not a good excuse for asking people to lose their jobs.
That's really helpful. Thank you. Another thing that you've highlighted is deregulation. Something that we're in a climate of deregulation now and that is something that obviously impacts the economy and that is something that you feel isn't sort of being fully incorporated into these forecasts. You've described regulations as kind of infinite taxes that prohibit industries from existing. Can you talk a little bit more about some of the specific taxes in like the energy or housing sectors that you see as kind of the biggest drags on GDP in the US right now?
Yeah, sure. So, I think that regulations are really key to determining the supply side of the economy and look, we just lived through a period in which supply chain
Constraints played a really big role in the evolution of inflation. And I think you probably would find most people would absolutely agree they played a role. And so if we acknowledge that supply chain constraints can cause inflation on the way up, I think we have to be fair and acknowledge that the relaxation of supply chain constraints through regulation or through deregulation or through other means would naturally drive inflation lower. So that is a channel that I see. Regulations strike me as an area that economists underappreciate when constructing their forecasts because they can be difficult to quantify. It can be very easy to quantify a tax rate or an interest rate. You've got a 4% interest rate, someone else has got a 1% interest rate. Let's compare outcomes. Quantifying regulation is much more difficult because you can have thousands of pages of text that affects companies differently based on where they operate, what line of business is, how old they are, how old the business is, how cozy they are with the regulatory agency that does supervision or enforcement. And that just makes it very difficult to quantify. Nevertheless, there have been some advances in quantification of these regulations in recent years through AI, through LLMs, through machine learning and natural language processing and you know we can make do better jobs now and if you consult those it looks like the deregulatory agenda has actually been pretty powerful thus far and also that the increase in regulations in the last few years before last year was actually quite aggressive to the upside as well. So my view is that that's very very important determining the supply side of the economy and therefore inflation and price levels and things that follow from it.
Okay. Can we talk a little bit about the policy of deregulation a bit because you know there's always that worry that as you deregulate you know you raise the risks of the next financial crisis, you raise the risk of the next environmental disaster. And there's also this idea that the economy is regulated and if the government deregulates more that the big companies, corporations kind of step in and end up acting as regulators and sort of you know end up managing the economy or those markets to their benefit. How do you cut red tape but also make sure that you're not just helping the giants you know get stronger and crush innovators which you also want in the economy.
Yeah, absolutely. That's a great question but let me sort of separate it into two halves. There's real economy regulations and then there's financial regulations including bank regulations which are what the Federal Reserve deals with. With respect to real economy regulations, those are not regulations that the Fed sets, but I think we need to study them because they matter for monetary policy. I view real economy regulations, not always, but usually as being barriers to entry. They're barriers to entry because in order to comply with a regulation, you need a compliance department. You might need to measure stuff. You might need someone to fill out paperwork. You might need to hire accountants or lawyers. You need to establish relationships with a regulatory agency. And all of that is an expense that a large business is probably better situated to pay than a small business. And so just imagine trying to start a, you know, trying to build a home, right? If you've got your land and you want to build an extra house in the land, you can't just throw together some wood and stone and build a home yourself. You've got to get permits. You might have to measure carbon emissions. You have to sort of deal with zoning. You have to deal with labor laws. You have to deal with restrictions in the materials you use. Was the stuff properly inspected? Right? All of this stuff adds to the cost of building it. And if you're a big builder, you've got a huge compliance department that sort of deals with the stuff in scale. And if you just wanted to sort of start up yourself and do it, it'd be very expensive. So these are barriers to entry. As an economist, I'd call them markup regulations. And by being barriers to entry, they actually restrict competition. And so that's why very often you end up with incumbents favoring regulations because they can keep startups out. So my view is that we absolutely want more competition. It's disinflationary. It improves productivity and it improves economic growth and that regulations are often barriers to entry that inhibit that. Now I can also talk about banking regulations which are totally different.
We can get maybe we can get to those but sounds like you want to finish your thought there or that's just your view towards them. How do I guess to finish answering that question? How do you ensure that when you do that that I mean you made the argument that this doesn't help bigger players or established incumbents but how do you keep them from working the system to their advantage because they can set up trade groups that you know set new standards that everybody has to follow anyway if you want to build a new house.
Yeah. So the best in my view, those standards, those regulations, especially when they have the force of law behind them as regulations, can prevent small startups from entering a market. They serve as barriers to entry and in doing so they protect incumbents from competition. They reduce the competition and thereby they increase prices and they decrease productivity and economic growth and employment. So this is not true for all regulations. There are some regulations that do the opposite, right? You know, for example, antitrust regulations. But I think that for the majority of regulations, that's the effect that they have. And there's a lot of literature on that in the economics literature. I gave a speech on regulations and monetary policy in January, and I cited a lot of this literature in developing this argument and encourage anyone interested to go take a look.
Okay. Well, let's move to banking then. You stated that the Fed's balance sheet is now driven more by banking regulations than by monetary policy. Does this mean that the Fed has kind of lost its grip on the steering wheel of the economy to you know steer it solely through interest rates to an extent?
First of all, interest rates are the primary tool of monetary policy. Monetary policy works through financial conditions and through manipulating financial conditions can affect economic growth, inflation, unemployment, GDP growth. If for some reason you can't change the short interest rate, like you may be at the zero lower bound and you need to cut, but you can't cut any further because you can't push interest rates below zero, then there's a role for balance sheet operations potentially to play a role in monetary policy. Outside of that, the short rate is typically how we would set monetary policy. With respect to the balance sheet, we expanded it enormously during the global financial crisis, but then continuously for long periods of time thereafter as well all the way until 2022.
And when you say expand the balance sheet, you're talking about quantitative easing, all this kind of infusion of cash into the market essentially.
Quantitative easing, large scale asset purchases, emergency liquidity facilities for different asset classes. We expanded the balance sheet for a long time and that increased the footprint of the Fed in terms of the effects of the Federal Reserve in financial markets. During times that are relatively calm, we try and shrink the balance sheet.
Now, did you say trick the balance sheet?
