Lisa Cook

Governor, Federal Reserve Board of Governors

Yale Program on Financial Stability presents Federal Reserve Board of Governors, Governor Lisa Cook

🎥 Mar 26, 2026 📺 Yale School of Management ⏱ 67m 👁 711 views

Lisa Cook is an American economist who was sworn in as a member of the Federal Reserve Board of Governors in 2022. She is the first black woman to sit on the board. Before her appointment to the Federal Reserve Board, she was elected in January 2022 to the board of directors of the Federal Reserve Bank of Chicago. She was also a research associate at the National Bureau of Economic Research. Moderator: Andrew Metrick, is the Janet L. Yellen Professor of Finance and Management at the Yale School of Management (SOM) and the Director of the Yale Program on Financial Stability will moderate this...

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About Lisa Cook

Federal Reserve Governor Lisa Cook has focused recent public appearances on the intersection of artificial intelligence, financial inclusion, and small business economics. At a July 2026 panel on "Emerging Innovation, AI and Financial Inclusion," Cook stated that financial inclusion "connects directly to our dual mandate" and described AI as "central to my work at the Fed." She noted that the speed of AI adoption is "remarkable," citing a small business credit survey finding that nearly half of small employer firms reported using AI and 71% saw increased productivity. Cook also said she began holding roundtables with stakeholders in 2022, before ChatGPT appeared, because stakeholders "weren't talking to one another." In May 2026 remarks at the SIEPR Spring Policy Forum, Cook said inflation was "clearly moving in the wrong direction," estimating the PCE price index rose 3.8% over the 12 months ending in April, "well above our 2% target." She stated that she saw "elevated risks to both sides of our mandate" and believed "the right course of action is to hold rates steady," while adding she was "prepared to raise rates if the expected disinflation does not appear in a timely manner." Cook also warned that "AI-related job loss could precede job gains" and that the economy "could be approaching the most significant reorganization of work in generations." At the June 2026 State of Small Business Symposium, Cook highlighted that 99.9% of U.S. businesses have fewer than 500 employees and have accounted for 61% of net new job creation since 1995, emphasizing that achieving the dual mandate "will create the conditions where small businesses and all Americans can thrive."

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Transcript (71 segments)

Andrew Metrick7:53

Andrew Metrick. I'm a finance professor here at the School of Management and the director of the Yale Program on Financial Stability. And I am delighted on behalf of our program and on behalf of the school to welcome Governor Lisa Cook here to speak with us today. Yeah, we can applaud.

So I always feel a little silly in this age of Google and Wikipedia giving introductions for famous people. So I won't do the main biographical stuff; all that is very available. I will say I want to talk a little bit about why it's so exciting for us at the Yale Program on Financial Stability to have Governor Cook here today. Most people know, or almost everyone, even my crazy uncle, knows that the Federal Reserve has a primary role in setting interest rates through the Federal Open Market Committee. That's a very famous committee and that's why they're in the newspaper all the time. But the Fed does a lot of things and has several committees. The Fed is run effectively by the Board of Governors who form little subgroups to make a committee, and that committee oversees some really important functions at the Federal Reserve. And the most important function, in my view, of course, is financial stability. So the Fed has a Committee on Financial Stability who think about things like how can we not have another global financial crisis, and if we do have such a crisis, what do we do? Pretty important questions. And it has three governors. There's three governors on that committee, and that committee is chaired by Governor Cook. Okay. So for the Yale Program on Financial Stability, there is nobody more important at the Fed, and you can tell Chair Powell that there is nobody more important at the Fed than the person who runs that committee. And so, I'm really looking forward to hearing this speech today, which I know is going to touch on financial stability issues a whole lot. So, Governor Cook will give a speech and then we have some questions that we have gathered and I will lead a Q&A for our remaining time. I think we are scheduled to go until 5:30. Do I have that right, Stacy? 5:30. Okay. So, we're scheduled to go until 5:30. I promise I won't keep people after that, but I will probably keep you until that. Okay. Hey, so without further ado, Governor Cook.

Lisa Cook10:46

Thank you, Andrew, for the kind introduction and the opportunity to return to Yale to speak to the Yale Program on Financial Stability. I have long admired and voraciously consumed all the insightful work you have done here since the program's inception in 2013. I know that a number of staff of the Board of Governors have been contributors to and are also avid consumers of your work. I place a high priority on using novel sources of information to address data gaps. Given that, let me commend the effort to turn the information gathering and analysis the program conducted into a standardized, research-friendly platform. That impressive work includes a data set covering over 850 years of banking crises, which must have been a true labor of love for Andrew and Paul Schmelzing. These data collection efforts provide a valuable public service to the finance and financial stability communities as well as to the broader research community.

This is my third trip to New Haven and my first since becoming a Governor of the Federal Reserve Board in 2022. One of the parts of my job I find most intriguing is my work on the Board's Committee on Financial Stability. Indeed, financial stability is a long-standing research and policy interest of mine. Early in my career, I studied how the underdevelopment of the Russian banking system hampered post-Soviet growth and how poor regulation fuels instability. Later, as an economist at the Council of Economic Advisers, I saw how financial system weaknesses contributed to instability in the Euro area. Shortly after arriving at the Fed, I became a member of the committee and since 2023 have had the honor of serving as chair. After four years of careful attention to this topic, it seems like an appropriate moment to reflect on and share lessons learned in this role.

I will start by discussing the Financial Stability Committee itself and then move to reflections on the Fed's Financial Stability Report, or FSR, and scenario analysis, the analytical workhorse of financial stability analysis. I will then conclude with a few thoughts on the real-world complexity of making financial stability policy.

Following the global financial crisis, or GFC, the Board adopted a revised approach to financial stability. This approach emphasized bringing together insights and analysis from all parts of the Federal Reserve system: economists, market experts, bank supervisors, and payment system experts. This work, coordinated by the then-new Office of Financial Stability Policy and Research, focused on the connections across sectors and their implications for the economy. The Board and the FOMC began receiving periodic briefings on this work. As a part of this evolution, the Board created the Committee on Financial Stability in 2014. The committee provides a venue to discuss financial stability issues.

Let me take a moment to acknowledge the contributions of the committee's first chair, Stan Fischer. He made seminal contributions to the literature on financial stability as well as open economy macro. He was also a dedicated public servant who took on several roles as a central banker. Specifically, he played key roles in managing financial crises, first as a senior official at the IMF through the turbulence of the Asian financial crisis of the late 1990s, and then as Governor of the Bank of Israel through the GFC. As Vice Chair of the Board from 2014 to 2017, he recognized the value of having a dedicated forum where policymakers could learn the lessons of the GFC and other crises and discuss, debate, and evaluate financial stability issues. It is my great honor to continue in the tradition that Stan established.

Many of the topics Stan focused on and spoke about during his time at the Board remain highly relevant to policymakers a decade later. For instance, Stan pointed out in several speeches that while post-crisis regulatory measures had significantly bolstered bank resilience, certain activities were going to migrate to non-bank intermediaries that were not subject to the same regulatory safeguards. He noted in his aptly named speech, 'Financial Stability and Shadow Banks: What We Know, What We Don't Know Could Hurt Us,' that the data gaps and limited visibility into some of these activities were their own source of systemic risk. We are working to better understand these issues with an eye toward improving our financial stability monitoring, and I will continue to work with my Board colleagues to find concrete ways to do so.

Stan also appreciated the value of giving policymakers a venue in which to discuss tail risks and longer-horizon questions related to the evolution of the financial system. These considerations do not always have immediate bearing on the near-term macroeconomic forecast, but you do not want to lose sight of them. That is why staff briefings to the Financial Stability Committee explore the plausible range of severe shocks that could hit the economy and the ways in which these shocks could ripple through financial markets and institutions, with a view to understanding the ultimate effects on the economy. However, in response to a negative shock, financial conditions tighten. How much would financial conditions tighten and how rapidly? One way to view the work of financial stability is the quest to understand the responses to these questions. Answering these questions requires thinking about the likely range of shocks that could hit the economy as well as the resilience of key financial markets and institutions.

While macroeconomics has made great strides in the past 15 years to incorporate the lessons of the financial crisis, it is fair to say that models cannot yet reflect the full institutional richness of the modern financial system. And the public's attention to these issues can fade because financial crises are thankfully rare. However, policymakers at the Fed remain vigilant. For families negatively affected by the financial crisis, we know the scars linger. And in the spirit of an ounce of prevention is worth a pound of cure, the Financial Stability Committee is a place of consistent, continuous focus on this vital issue.

This is the impetus for the Board staff's examining and Board members receiving periodic briefings and updates on a broad range of topics related to the financial system's behavior under stress. These updates occur even during the extended periods of relative calm we have seen over the past few years. Recently, among the issues we have discussed are hedge fund trading strategies, the rise of private credit arrangements, and the connections between banks and different types of non-bank financial entities. Some of this work appears in the Fed's twice-yearly assessment of vulnerabilities in the financial system.

When we reintroduced the first FSR in November 2018, Chair Powell noted that he hoped it would provide transparency into the set of indicators the Fed monitors for financial stability and that it would prompt feedback and engagement from the public. Thus, since its inception, the FSR was designed to act as a platform that policymakers could build upon to develop their own views about the system's overall resilience, rather than expressing a centralized view. The FSR carefully works through a long list of data series relevant for the four key vulnerabilities or amplification channels we track: asset valuations, borrowing by businesses and households, leverage in the financial system, and funding risks. A comment on whether these vulnerabilities are high or low relative to history. This disciplined approach is helpful in coming to a view on the system's resilience, but by itself, the approach is insufficient. Policymakers concerned with the system's ability to withstand shocks also need to take a view on the interactions among vulnerabilities and the shocks with the greatest likelihood to hit the system.

Some policymakers might be more concerned about the consequences of a rapid decline in asset prices or view contractionary shocks as more likely than inflationary shocks. These perspectives would lead them to place different weights on the four vulnerabilities informing their overall view of the system's resilience. The value in the FSR lies in the consistent attention to and updating of the underlying indicators of both the resilience and evolution of the financial system.

Let me give you one example. Since its inception, the FSR has contained a chart based on the Board's data showing bank lending commitments to non-bank financial institutions, or NBFIs. We affectionately refer to this graph as a 'rainbow chart' because it comprises 10 separate colors, each reflecting a different type of non-bank borrower. For you students aspiring to join us at the Board, don't forget your crayons or your Claude Code-edited files that can produce these colors on your behalf. This category of loans has been growing quite rapidly, much faster than overall lending to non-financial businesses, a category known as commercial and industrial lending, or CNI lending. During the past decade, large bank commitments to NBFIs have grown at an annualized rate of about 9%, roughly three times the pace of CNI lending. This growth is tracked in successive additions of the FSR. Observers would also see changes in the composition of the rainbow in the report. For example, the category that includes special purpose entities, collateralized loan obligations, and asset-backed securities has expanded in recent years. This work gives us deeper insights into the developments in private credit and other important sectors, helping us to better understand how stress in one area might affect other parts of the financial system. And even without real-world stress, getting refined and more precise estimates of the linkages among sectors provides useful input for scenario analysis.

My next topic: scenario analysis. Scenario analysis is the process of analyzing the implications of a sequence of shocks or exogenous events. It has proven to be a powerful mechanism for assessing financial stability. Such inspection involves three forms of analysis: the vulnerabilities described in the FSR, an assessment of how sectors interact with each other, and a set of plausible shocks.

Let me start by contrasting financial stability scenario analysis with the well-known stress test exercise that those tasked with supervision at the Fed have undertaken since the passage of the Dodd-Frank Act in 2010. These stress tests feature a severe but plausible scenario based on the Great Recession and highly quantitative assessments of the first-round effects of such a shock on individual banks. The emphasis is on precision, with the published loss estimates having material consequences for the participating banks. I would characterize these exercises as excellent at addressing the known unknowns we face.

In contrast, in the realm of financial stability, we start with scenarios that may never have happened. One could credibly ask, for example, what if AI disappoints? Although tech booms and periods of technological progress have occurred throughout history, it is difficult to know if any compares to the current situation. Therefore, such a scenario would be without historical precedent. Nonetheless, the scenario must both feature a coherent narrative and be qualitatively and quantitatively specific. A good scenario is not path-dependent and aids us in thinking about tail, not just modal, risks. That is, it helps us break free of the well-known human tendency to believe that tomorrow will be like today.

The next stage is to assess the effect of the scenario on all the key markets and institutions in the system. This step is where our disciplined approach matters. The FSR starts each section with a table summarizing the most important markets and institutions for a given vulnerability. Fed analysts focus on those at the top of the tables. Further, estimating losses and liquidity drains from the scenario is inherently imprecise. For instance, we often lack micro-data on key exposures and must make informed guesses in some cases. This is another difference from the supervisory stress test exercises. We also analyze the interactions across markets and institutions, or second-round effects. Institutions and investors will take losses or watch liquidity being drained in the scenario. They will respond in a given way, deleveraging, for example. Those responses in turn have spillover effects. Will the second-round effects meaningfully amplify the original shock? This is a question we ask in this analysis. This is obviously a difficult question to answer precisely. Indeed, these effects are not modeled at all in supervisory bank stress tests.

We maintain as much specificity and quantitative rigor as possible. For example, when leveraged intermediaries take losses, their leverage increases and they might choose to or be forced to sell assets to delever. We aim to be as precise as possible about the likely range of sales as outcomes. Then we use several different approaches to measure the effects of these sales, such as direct measurement or comparing sales volumes to purchasing capacity at dealers. Another approach is using historical analogy: has the system handled similar volumes in the past? Finally, we recognize that our assessments are inherently uncertain. This posture prompts us to look at markets that, should the scenario actually come to pass, would confirm or falsify our assessment. Indeed, scenario analysis is a guide to the financial system's behavior under stress. We need signposts to understand whether the guide is proving its validity or whether we missed a key amplification channel. If we have a valid guide, that work warns us which markets and institutions would come under pressure and whether their distress in turn would have severe repercussions. Sometimes the most valuable part of these exercises is to identify the entities that would be most affected.

Before I conclude, let me offer some thoughts on policy to support financial stability. I am not going to comment on any specific proposals or past actions. My purpose is to describe some of the lessons I have drawn from my years on the Board. If I could send a message to myself four years ago, here is what I would say. First, I cannot underscore enough how important it is to remain vigilant about obtaining high-quality data to guide financial stability analysis. The stability data challenge is distinct from what we face in our macroeconomic work, where we also sometimes have to grapple with measurement issues. In our financial stability work, we confront the ever-changing nature of the system where new markets and institutions can arise suddenly. Data permit us to answer key questions: How large is the sector? What share of loans is associated with it? Do borrowers have alternative sources of credit? I have observed a synergy between scenario analysis and data collection. Occasionally, when we run a scenario, the most important lesson we take away is the data we need to identify to truly understand how the system might evolve. You can see some of the fruits of that work in our FSR as we add new series or refine our estimates of existing series in response to findings from our scenario analysis.

Second, the policy landscape reflects a long history of decisions that multiple state and federal agencies made in response to a complex mix of mandates and considerations. Yet financial stability requires viewing the web of markets and institutions as an ecosystem ultimately designed to support the needs of businesses and households. This perspective is different from that taken by authorities who are accountable for a particular part of the financial system. If the system is hit with a bad shock, will it continue to function? Would the collapse of one part of the system present an opportunity for a different part to grow? Furthermore, the tools available to policymakers are typically able to build resilience or constrain activity in one segment of the ecosystem. This practice might make one corner safer, but would such an action lead to a trophic cascade or the unwanted growth of a different part of the ecosystem?

Consider this example. In the late 1990s, the Australian government undertook conservation efforts to eradicate the feral, invasive cats plaguing native rare birds on Macquarie Island. The effort helped to preserve a critical breeding ground for several native rare bird species, but it also led to an unforeseen consequence: the explosion of the rabbit population. Maybe it should have been foreseen if you know anything about rabbits. Ultimately, the Australian government was able to complete the herculean task of controlling the rabbit population and that of other invasive rodent species. As a result, critical vegetation has regrown and rare albatross are seen nesting on the island again. But even with the happy ending, the experience is a cautionary tale. An action itself can have dire consequences, but interventions will also have their effects, anticipated or otherwise. Indeed, it may have been desirable to remove the metaphorical feral cats, but policymakers should be prepared to manage the ensuing bunny boom, too.

If you permit me to strain the ecological metaphor further, the globally systemically important banks, or G-SIBs, are truly a unique genus in our financial ecosystem. The diversity of the U.S. banking system, with banks of many sizes and business models serving a variety of customers and communities, can help promote resilience of the overall system. But for better or worse, G-SIBs are unique and highly interconnected, and the system depends on them for many services. These largest banks can be a source of stability that buffers the entire system in times of trouble. But their resilience is fundamental because they are connected throughout the ecosystem by extensive networks shuttling resources among them as stress emerges. While I take comfort in the very high levels of resilience at the G-SIBs, vigilance in ensuring their continued resilience is critical.

Third, we should embrace responsible changes that strengthen our financial system, not hinder them. The Committee on Financial Stability and the Board staff monitor financial and technological innovations that are in early stages of development, including digital assets and the use of AI. The fact that the U.S. financial system is the largest and deepest in the world is a result of decades of successive and transformative financial and technological innovation. As a corollary, we need to understand innovations at early stages to see the system's trajectory. We have also observed innovations that have brought unintended consequences, and we need to stay abreast of potential risks in order to better understand where guardrails and industry engagement might be helpful.

As a final note, the trade-offs between acting to prevent the worst near-term effects at the cost of a larger Fed footprint and moral hazard are real. We know that making policy during a stress event presents the highest degree of difficulty. The stakes are high, with significant real-world losses looming. Time and information are often in short supply. The available options are almost always suboptimal. That is why properly undertaking scenario analysis in advance is a high priority. This allows policymakers to have some knowledge of the key players and dynamics at play. It is much easier to follow Michel Camdessus's 1994 dictum that in a crisis you do not panic if you have thought through all the options well in advance. As we have seen time and again, credible announcements by central banks can have dramatic calming effects. Indeed, a strong initial announcement can result in a smaller intervention than a series of ambiguous or insufficient announcements. But as with all forms of central bank credibility, this effect is a result of a long history of thorough analysis and a consistent track record of following through on previous announcements. The credibility that supports effective financial stability policy interventions is a product of careful, deliberate work, such as the work the FSR covers.

Thank you for allowing me to reflect upon my first four years on the Financial Stability Committee. I hope I've made clear that while I and the Fed have learned much in recent years, financial stability is an exercise in continual study and improvement. Similarly, it is important to keep you and the public more generally informed of this work, which is why we publish the FSR at regular intervals. I trust you are eager to review the next version, which we release later this spring. Consistent with the goal of keeping the public informed, I hope my discussion of scenario analysis and the complexities policymakers face when making financial stability policies added to your understanding. Thinking back to the financial crisis, we know the damaging effects of economic downturns on employment and household wealth. Americans depend on a stable financial system to start and support families, buy homes and vehicles, start businesses, and pay for their education. Ultimately, our efforts to maintain financial stability are service to the American people. Thank you again to the Yale Program on Financial Stability for the opportunity to speak to you today. I look forward to your questions.

Andrew Metrick38:01

Governor Cook, that was a great speech on exactly the topics that we love to talk about here. And I think the questions that I have will be good follow-ups. One thing I should say to everyone is I misspoke earlier when I said I'm going to keep you prisoner till 5:30. I've been told I'm only allowed to keep you prisoner until 5:15. So, we will adjourn at 5:15. Okay. So, let's start. You mentioned Russia and the research that you had done on that and on both Russia's banking system and European financial fragility. That's clearly informed your current work. What lessons from studying financial instability in other contexts have proven most applicable or inapplicable to U.S. financial stability analysis?

Lisa Cook39:10

Certainly, from my time in Russia, I learned two main things that are relevant for financial stability. First, Russia's banking system adopted many of the best practices from the U.S. during the time I was there, the early 1990s. But there was lack of faith in the system, lack of trust in the system, and then the rule of law disappeared. And you can't have financial stability in that situation, and we just saw instability emerge and it's remained the case. So that was a big lesson. Financial stability has many different factors that affect it. The second thing is data, which you all are committed to and that we're committed to as well. No one wanted to report accurate data. No one. So, businesses, banks, bureaucrats, no one wanted to report accurate data because of the criminal forces that existed at the time. Or let me be clear about that. It's not necessarily criminal forces for the government bureaucrats. It may have been that they had the oldest computers on earth and they just couldn't compute, say, GDP or a certain data series. So it wasn't all nefarious. So what I know about financial stability is that you need really good data to be able to understand how the financial system works, how it's changing, how the institutions interact, and certainly what the risks are. So I think I learned a lot from that particular time, and that's where I lived the longest and where I wrote my dissertation. So I probably had better insight than I had in many other places.

Andrew Metrick41:09

Thank you. That was an exciting time to be in Russia. Thank you.

Lisa Cook41:13

Exciting. That's one word.

Andrew Metrick41:13

So, we have—it's been a long time for us to be implementing Basel III, the most recent agreement. And we've gone through several different phases of getting some parts of it passed, but not all of it passed. And most recently, we're seeing some finalizing and some other regulatory changes surrounding that. Do you think that the system is being materially weakened by these recent changes?

Lisa Cook41:51

So I won't speak on any particular proposal, but there are bank capital proposals that have been put before us. And the first thing I want to say to respond to your question is that we have some of the best, most talented minds thinking about these issues in this room, and we would urge you, for the proposals that are out now, the comment period ends on June 18th at 5:00. So we really would appreciate your commentary on that, and we seek commentary from a broad range of stakeholders, but especially those who have deep knowledge of these issues. So that's the first thing I'd like to say about those proposals. The second thing I'd like to say is that I am concerned about financial stability, which means that I'm also concerned about the cumulative effects of all of these proposals that are being put forward and the interactions among them. So I want to make sure that I understand that and again would look forward to commentary on that as well. But certainly, the resilience of the system is critical for us, not only for financial stability but as a foundation for achieving the dual mandate.

Andrew Metrick43:15

Thank you. You mentioned AI, so you've opened the door to what is, I think, a topic on all of our minds: financial stability and more broadly. So specifically, as AI models become embedded in risk management and trading across multiple institutions, do you worry about emergent forms of interconnectedness or model monoculture that wouldn't show up in traditional exposures data?

Lisa Cook43:48

So first, I'd like to say that there is electronic execution already in many of these markets, say in the Treasury cash market. So that's not new there. There's some things about AI and algorithms that would not be new. So that's not new. We did a special section on AI in the November 2025 FSR, and what we found was sort of two things. One, the trading strategies that were being implemented were just based on existing strategies. So no new strategies, just existing strategies. But certainly there are concerns related to correlation risk, related to manipulation. So we've dug further, and Lee and Hansen, for example, have looked at agentic AI and its trade outcomes relative to humans. And what they found, and I think it's an important benchmark that they're doing it relative to humans and not just to each other, what they found was that this could actually be stabilizing because the agents displayed less herd behavior. So in some ways, this is just one of the findings, in some ways this could be better for financial stability. So I think you have to be very discerning about the kinds of tests, kinds of experiments that are run and what is actually entering the system. But we're keeping our eye on it because it's changing very fast.

Andrew Metrick45:40

I'll take any good news that I can find. I'm sorry. I got a list of questions here. I'm sorry.

Lisa Cook45:47

We curated them from everything we received.

Andrew Metrick45:52

Okay, follow-up to that with regards to AI. More broadly, how do you think it will affect the economy and jobs for our students, our graduates? You had years as a university professor before, so I know you've thought about that. So, taking off the financial stability hat and asking more broadly, what are your views?

Lisa Cook46:16

So, as you probably know, for 25 years before I got to the Fed, I studied the economics of innovation. So I've been waiting for this, just a little bit enthusiastic. But I think of it as a general-purpose technology that will help to create more ideas. I think about it the way Paul Romer thinks about endogenous growth, and you can have boundless growth with all of these ideas, with the arrival rate of ideas being sped up. So that's what I'm excited about. Now, I know that for the labor market, this can certainly be transformative. It could be the biggest labor market transition that we've seen in generations. So I am very cautious about how this might play out. And certainly with respect to the youngest population, with new graduates, the labor market is in a low-hire, low-fire regime, and it's tough for the youngest people in the labor force. So I'm watching it very closely, but there's not much—we're watching adoption, for example. There's less evidence about the direct effect of the adoption of AI, but we're looking at the data very closely.

Andrew Metrick47:45

Do you have concerns? I guess there's sort of two different ways of thinking about this in economics. Some people who say, 'Oh, this is all going to be labor-augmenting type of growth,' good for labor. And then there's labor replacing, right? The pessimists and the optimists. Where would you say you stand on that divide?

Lisa Cook48:09

Right in the middle. Right in the middle. Because what we've seen so far, especially from CEO and CFO studies, is that it is labor augmenting. And frankly, I think that some firms have these dreams about the labor they can shed. I think they're being overly optimistic about the people they can replace, and certainly using some of their customer service chatbots that they haven't beta-tested enough. I think they're too optimistic in the short run and in the medium run. So I use that as an example because I think that certainly many tasks are going to go away. But if I even look within the Fed, within our sandbox, our experimentation, careful experimentation, we have guardrails, we observe safeguards. There is more work to do. There is a lot more work to do. And maybe we're going to meet actual timelines related to that work because the Fed moves kind of slowly on things. So there's just a lot more work that can be done, I think, for firms and businesses. This is what I hear as well from them, that they're able to generate a lot more activity, get more business in the door. So I am certainly waiting for this transition to understand its contours. And I'm looking forward to seeing the tasks that may arise, and there may be tasks that go away.

Andrew Metrick49:53

I agree with you completely on the chatbots. The customer service chatbots. I am always just saying, 'Human, human, please, representative.' They never help me. They can never—

Lisa Cook50:03

Okay, let me tell you what helps you. Can I say? Okay, so if you're typing it, you should write in all caps, right? Because Gen Z, the folks here, think of all caps as like cussing, right? So that's partly what you have to do. And then the other thing you have to do, if it is audible, you use a curse word, and you get straight—yes, that person is angry. That's what the agent will tell, and that's when it goes straight to a human. So I think where they've underinvested in technology is where that breakpoint is. So these are crude. That is a great—these are crude, but they're working. I don't know how long it's going to work now that I've said it publicly, but that's what's worked so far. But you have to show anger of some sort to be able to get where you need to go.

Andrew Metrick51:04

Also, tell me that punctuation in a text shows anger. Is that true, Gen Z? Like if you put a period—

Lisa Cook51:11

They're being kind. They're being kind. That says that you're old.

Andrew Metrick51:15

I am old. That says because I use punctuation.

Lisa Cook51:19

They don't use punctuation. Everything is a run-on sentence.

Andrew Metrick51:22

It actually really—it shows that you're angry, a period at the end of the sentence. It does. That's insane.

All right. Scenario analysis. Let's follow up on scenario analysis. You outlined how financial stability scenario analysis differs from supervisory stress tests, emphasizing unknown unknowns, right? And second-round amplification effects rather than precision. Could you walk through how you think about constructing a good scenario? So, how do you do that? What makes a scenario useful versus just speculative?

Lisa Cook51:57

That's a good question. So first, I'd like to say that the objective of scenario analysis is to discover how the system works, where the interactions are, and where the vulnerabilities are. So we start with a question, for example, and the question can be something like, like I said in my speech, 'Will AI disappoint?' So that's a broad question. You have to refine it. So what does disappointment actually mean? Does it mean that shareholders will be disappointed? That firms may be disappointed because they won't be able to shed labor in the way they thought they might be able to? So the question is refined, and then there's a two-stage process. The first is the first-round effects, the ones that affect markets and institutions immediately in the short run. That's what we look at, and then we look at the second round, and the second round is longer time horizon, other parts of the system. And after the first and second round, we give the fully implemented scenario analysis to experts. So we bring in the experts to tell us where we might have missed a channel or an amplification channel, or if something may have been missed in the analysis. So these are the experts that I mentioned, the economists, the banking experts. And then after they've looked at it, you have to be careful because every sector expert is going to be able to offer analysis. So you have to balance sort of depth with covering all sectors, and we go back and add those and then try to quantify those effects. So I would say that it's tantamount to equal art and science, or more art than science. I think it's debated within the building about which it is, but I think it's equally both. So you have to have a question that will reveal the resilience and the vulnerabilities. So I think that's where the art part comes in, and the science is the rest.

Andrew Metrick54:24

Are you reusing some of the—so you say like when you have the AI one, that seems like it's a ton of work to put that together. Would the idea be two, three years later, revisit that, go back to that shell and use the work that you have? So you have a whole library of these, or are they all one-offs?

Lisa Cook54:43

So that's a good question. You know, I'm not sure I know the answer to that question, but I would guess with respect to AI, there's so many dimensions and so many places where things could pop up. I think that would be revisited because it's so big and the possibilities are so great with respect to it. Yeah. But I'd say the same about private credit, too, actually. So I think there is possibly constant refinement. I really think there is a catalog, and I think that these get refined if there's some large development. But minor adjustments that inform the scenario analysis, I think that happens all the time.

Andrew Metrick55:30

Do the banks all want to see your scenario analysis so they can know what you're thinking?

Lisa Cook55:34

Yes. Yes, they would like the questions to the test before the final exam, please.

Andrew Metrick55:44

I was really pleased to hear you talk about Stan Fischer's prescient warnings about activity migrating to the non-bank intermediaries a decade later. What has surprised you most about how that migration has played out?

Lisa Cook56:02

Surprised me the most? So I would say that the NBFIs have constituted a part of this ecosystem, and you want to be aware of the interactions between the financial system and the parts that aren't as regulated, because you want to manage financial stability no matter what the source. And I think this is one of the things that we have to realize and that we have to react to. So, you know, I think it's a bit of an unfair question in a sense because I wasn't here 10 years ago, but I would still say in terms of the development, we're really looking at the ecosystem. We're not isolating ourselves as was done during the GFC, only paying attention to the part of the financial system that we regulate. No, that's not what we're doing.

Andrew Metrick57:00

How do you—you mentioned data gaps. How do you think we're doing on data for non-bank financial institutions now? What's your sense over the last four years that you've been there about how that has gone?

Lisa Cook57:12

We are doing more. We're investing in measurement and better measurement, and we look for others who are doing the same, which is why we appreciate the work generally that you all are doing. But this is a bit of a blind spot, but we keep digging and we keep looking, and we keep using the researchers at the Fed, keep using novel techniques for existing data to discover some of these interlinkages. And that's what we're really concerned about: interlinkages, especially with the banking system. Even though I said NBFIs are part of the ecosystem, we can measure some things, so we're trying to measure as much as we can in the different versions of the FSR. So I think we've talked about private credit for the past three years consistently. So we're refining what we know, and we publish it in the FSR. So that's a place where we're continually looking for data gaps and continuing to address them.

Andrew Metrick58:17

Great. Thank you. All right, let's talk about the FSR. So the financial stability reports—the United States has a variety of them. The Fed does one, but there's other places as well. And it's now the case that almost every country in the world does financial stability reports. Here in our systemic risk program, our master's degree program, in the fall semester, our students all present an FSR from somewhere in the world. We've seen a lot of them in the program and see how different countries react. It was designed here as a platform for policymakers to develop their own views rather than just expressing a centralized assessment. How has that design choice specifically shaped how the report has evolved over the years?

Lisa Cook59:08

So I would say that what I have observed evolve the most over time is addressing the data gaps. I know we just talked about that, but for the vulnerabilities that we're concerned about, we're always looking for better ways to measure those vulnerabilities and the resilience to those vulnerabilities. So I think the data quest is one that we're constantly on and that we're investing in, and you see the fruit of that in the FSR. So I think that's what's changed most since I've been there, but I think probably in the 10 years of the report or so, that's probably one of the biggest changes, too.

Andrew Metrick59:53

Okay. Yeah. All right. Let me give you the question that you probably get every time you leave the house, which is: you just finished an FOMC meeting. How do you see the balance of risks now, and how does the war in Iran affect those risks in your view?

Lisa Cook1:00:14

So first of all, uncertainty is elevated, and we used to report how many times we counted in the Beige Book the term 'uncertainty' because all of a sudden we were seeing it, but then it became almost normal that it was at this elevated and historic level. You know, we've been publishing the Beige Book for a very long time. So, this is highly unusual. I see the balance of risk as being largely in balance, but I would argue that the inflation risk is greater right now as a result of the Iran war. Certainly, we haven't seen in five years our inflation target being met, right? So, if that's the case, and this could have potentially a substantial effect on inflation, and before we were on this disinflationary trajectory, even with—okay, well, excluding tariffs, we were close to the vicinity of the target, but certainly tariffs have taken us away from that, and now this is added on. So we could be at this for much longer than we anticipated. So I think right now the balance of risk has shifted more to inflation. With respect to the labor market, I see it as being in balance but precariously so. I mean, we talked about the situation of there being this low-fire environment with immigration being stopped. This is a lower equilibrium than we've had before in recent years. So, this is especially tough on young people who are looking for jobs, looking for their first job, entry-level participants in the labor force. So this is something that we're watching really, really carefully. But I think the Iran war has put the balance of my concern about risk to the dual mandate more towards inflation.

Andrew Metrick1:02:38

The OECD came out today predicting 4.2% inflation for the United States this year.

Lisa Cook1:02:45

Really? By the end of the year. Oh, interesting.

Andrew Metrick1:02:47

That was just a—today, right? Okay. That's a scary number.

Lisa Cook1:02:52

It is. It is a scary number and very far from our target. Yeah. Right. But uncertainty is really high. We don't know. We don't know.

Andrew Metrick1:03:04

That's a point estimate.

Lisa Cook1:03:05

Yeah. That is a point estimate. And there are going to be confidence intervals that are wide around the OECD's, I'm sure.

Andrew Metrick1:03:12

Maybe that's the biggest change is how wide the confidence intervals are. Right. Yeah. Mhm. You—I have a couple more minutes and I wanted to follow up on private credit because you have done a lot of work on that in the FSRs. And I'm personally of two minds about it. I'm very worried because there's so much I don't know about the interconnections. I hope you guys know more than I do. It's really hard to know who actually is funding it. Some of the structures are very opaque. But on the other hand, when I hear, oh, a lot of people wanted to redeem, and the private credit funds said, okay, 5% can redeem because that's all they're allowed, I worry less because I think there's not really—it doesn't look like a bank in that you can't—Silicon Valley Bank is going to run in one day, right? This would take 20 quarters at that rate. So what can you share with us about how the Fed is thinking about this relative to risk in the banking system? Private credit, it's kind of maybe a separate animal versus the banking system.

Lisa Cook1:04:26

So I would say that we're very, very focused on the interlinkages. So yes, I think we're comforted by the fact that this is supposed to be patient capital, right? Certainly the requests for redemptions have been going up, but they haven't all been met, right? So that is—this is what the contract says. It would be a slow-motion activity, slow investment, filling a gap that banks no longer engage in, but now they're engaging more. So we're quite—not quite concerned, but certainly we're concerned about the interlinkages with the bank system, and we are trying to figure out where those are and trying to see how all of this plays out. But certainly, you know, I think banks are looking more closely at those contracts, right? Looking more at the specifications. So that is a good thing—to know what you're investing in is always a good thing.

Andrew Metrick1:05:38

Well, thank you very much, and on behalf of myself and the Yale Program on Financial Stability, thank you so much for coming and speaking to us, and thank you for everything that you have done to protect the Federal Reserve. Thank you.

Lisa Cook1:05:52

Thank you.