2026 Kaserman Memorial Lecture featuring Dr. Christopher J. Waller

Well thank you Joe, and thank you for the opportunity to speak to you today. It's been two years since I taught a class, and clearly nothing has changed. All the students sit in the back. So my subject, as it always is, is the outlook for the US economy and the implications for monetary policy. My last outlook speech was at the end of February, which I have to say now feels like a year ago. Before I get to everything that has happened since, I'm gonna take these off, I can't look in the audience. Before I get to everything that has happened since, let me remind you of how things looked back then when I gave a speech back in February. The economic data indicated that in the absence of the temporary effects of tariffs, inflation was running a bit above the Federal Open Market Committee, or FOMC, their 2% inflation target. The larger question was whether the US labor market was substantially weakening, with the unemployment rate fairly steady, but very little job creation, and other signs of softening labor demand relative to supply. At that point, I was looking for a clearer picture of whether the risk to the FOMC's maximum employment goal called for a cut in our policy rate, or if we should hold that rate steady to support continued progress to our 2% inflation goal. We have these two goals that we have to balance. Now, after that speech in February and before the FOMC's March meeting, two critical things happened. First was the start of the conflict with Iran, which quickly disrupted energy production and transportation in the Middle East, and sent global energy prices soaring. Now, while central bankers rightly tend to discount the effects of temporary oil price shocks, it was apparent that a prolonged disruption in that region could have a lasting effect on inflation and US economic growth. And that was a consideration going into the FOMC's March 17th and 18th meeting, where we discussed monetary policy. The second development is what we have come to more fully recognize about the supply side of the labor market. Over the course of last year, we got the details of how net immigration, which was 2.3 million people in 2024, fell to a minimum level in 2025 and is continuing at a very low level in 2026. This pattern has lowered population growth, and hence the growth of the labor force. This change in immigration, combined with the continued aging of the population, means that very little or zero net job growth is necessary to absorb new workers into employment. This development is unprecedented in recent history. The last time labor force growth was zero or negative was the Korean War, which was obvious why, because men were being drafted back into the army. I believe it's a significant factor in understanding the economic outlook and what that means for monetary policy. Before I say more about these two important considerations for the outlook, I'll start with how the economy looked ahead of the outbreak of the conflict in the Middle East, and then discuss how I think things will evolve if the ceasefire in place today holds, and if there is progress towards opening the Strait of Hormuz. But since that outcome is not assured, I will also discuss another scenario where supply disruptions continue for an extended period of time. Beyond the length of these disruptions, with this economic shock coming on the heels of the boost to prices from import tariffs, I believe there is the possibility that this series of price shocks may lead to a more lasting increase in inflation, as we saw with the series of shocks that we saw during the pandemic. Now, so far there's limited data for the month of March, which is when the conflict began. But what we do have indicates that real gross domestic product, or GDP, was growing modestly in the first quarter of 2026 in the absence of a temporary boost from the rebound in activity after the end of the government shutdown in late 2025. Now, the continued surge of business investment in the first two months of the year seems to have mostly offset the apparent softness in consumer spending in keeping the economy growing. Data center construction from AI and related spending on high-tech equipment are very strong, and these both have spillovers to investment in other capital goods. Meanwhile, the surveys of purchasing managers for both manufacturing and non-manufacturing businesses indicate that their companies expanded sales in March, which is a good thing. And the consensus of respondents to the blue chip survey implies that real GDP grew at a 2.4% rate in the first quarter of this year, and that's annualized. So let me turn to the labor market, which a lot of you are gonna obviously be concerned about in the next couple of years. Any assessment has to take on board the supply-side considerations I mentioned earlier. One has been a factor for some time is the aging of the population. Members of the baby boom generation associated with a surge in births in the 20 years after World War II began to reach retirement age after the year 2008. Since then, retirements have outpaced new entrants to the labor force, pushing down the labor force participation rate. The other big factor has been the decline in net immigration that I mentioned earlier, which was around 400,000 in 2025, much lower than previous years, and is expected by some to be around zero in 2026. Together, these two forces are holding labor force growth at about zero. An important implication of this is that there is a reduction in the number of new jobs needed to reflect a healthy labor market and absorb the workers that are coming in, and keeping the unemployment rate steady. This is called the break-even rate when we look at labor jobs growth. What do you need to create to absorb all the growth in labor force? Well, if the labor force is growing at zero, it means what? You don't need to create any net new jobs. Now, in previous years, we thought this break-even range between 50,000 a month and 150,000 a month, but with no growth in labor force, it's now literally close to zero. In fact, over the second half of last year, employers shed 50,000 jobs net, or about 10,000 per month, and the unemployment rate largely just moved sideways. It didn't go up, it just moved sideways. Now, when you have low payroll growth, that means there's a much greater likelihood of employment shrinking in any month. When your normal should be around zero, you can easily see negative numbers, you can easily see some positive numbers. And that's kind of unusual than what we've ever seen in the past, particularly during an economic expansion. In fact, payroll gains have alternated between positive and then a negative number for the past ten months. This is a little weird. It's positive, the next month it's negative. The next month it's positive, the next month it's negative. Ten times in a row. This is a very strange set of numbers that are coming in. So, just to give you an example, most recently after closing the year with the loss of 17,000 jobs in December, payrolls grew 160,000 in January, the largest increase in more than a year, but then promptly fell 133,000 in February, and then bounced back to grow 178,000 the next month. Now, for a macroeconomist who's studied monetary policy for a long time, this is head-snapping volatility, and it only made it harder to assess the true state of the labor market, and where things stand relative to our maximum employment goal. So, I'm gonna have to get used to seeing payroll numbers that are lower than I've ever seen, and I'm accustomed to seeing in a growing economy, as well as the possibility that even several months of negative payrolls in a row may not be a warning sign of a recession, which in the past was always an indication of a recession. Now, nevertheless, I want to explain why I continue to see weakness in the labor market that leaves it vulnerable to shocks, starting with data showing low numbers of both hires and people losing their jobs. This phenomenon is documented in the Job Openings and Labor Turnover Survey data, what's called the JOLTS data, and is consistent with what business contacts have been telling me for a long time, as well as stories collected in the Federal Reserve's Beige Book Survey of business conditions across the country. On the one hand, employers are a bit hesitant to actually shed their workers in terms of firing or laying them off, even in the face of softening demand, perhaps because of the difficulties they faced in finding workers a few years ago in the tight labor market after the pandemic. On the other hand, employers are very hesitant to hire workers because of the considerable uncertainty over the outlook of the economy. My sense is that employers are kind of walking a tightrope between their earlier challenges of finding qualified workers and where they think the economy is gonna go. And this leaves them vulnerable to some economic shock that could tip them over and lead to a significant amount of job reductions. Now, while the unemployment rate is fairly steady and close to the FOMC participants' views of its longer-term natural rate of unemployment, data on job finding, availability, and openings are continuing to continually edge lower. The low job finding rate means that workers aren't employed for longer, and behind the fairly stable count of unemployed people, a growing share of those who are out of work are out of work for an increasingly longer amount of time. Now, before I turn to how the conflict in the Middle East is affecting inflation, let's consider where inflation was through February. According to the FOMC's preferred inflation measure, which is called the Personal Consumption Expenditures Index, or PCE prices, they were up 2.8% in February from a year earlier. Core prices, which throws out volatile food and energy categories, and we think of as our better guide of where future inflation is going, they were up by 3% from the previous February. Now, neither the headline or the core number is close to our FOMC's 2% goal, and both are just about where they were a year ago. In other words, it's about zero change in the inflation rate over a year. It hasn't come down, it hasn't really gone up. So, you might look at that and say, you're not making any progress on inflation with your policy. You're not bringing it down. But this view doesn't consider the role of import tariffs that were first introduced just about a year ago, which have boosted prices for goods. Now, being here at Auburn University and as a former professor, I got to put my professor hat on here for a minute, I don't wanna miss an opportunity to impart a lesson on price levels and inflation versus inflation. So, when tariffs are passed along in consumer prices, they raise prices by the amount of the tariff. Here's the price, goes up, stays the same. Once that initial tariff effect passes through over some time horizon, so you get inflation as long as you're measuring back here when it's low, and then when it goes up, it's higher from those numbers and it looks like you've got all this inflation. But over time, once you get past the point where the tariffs were imposed, it jumps up and then things go back to growing at zero. So, this is a difference between level effects and growth rate effects. Now, while tariffs boosted inflation considerably in 2025 and into the early part of this year, using research by Federal Reserve staff on their estimated effect and taking that out of the published inflation numbers, underlying inflation, which is the structural stuff that I should be worried about, which is excluding all the tariff effects, is running a lot closer to 2%. So, if the headline was running at 2.8 and we think tariff effects pass through accounts for about half a percent to, you know, nine-tenths of a percent, when you take that off 2.8, you're down around two. And then that should all vanish here in the next quarter or two. So, through the end of February, I viewed that to say that we were making progress on the underlying amount of inflation once you control for the tariff effects, which we all know will disappear. And so, I really wasn't that concerned about inflation when it came to setting monetary policy. I was more concerned about the labor market, which showed signs of weakness and I felt was more vulnerable than it might otherwise be due to the low rates of hiring and layoffs. Now, that was the picture on February 28th when the conflict with Iran began. Then we saw higher energy prices quickly feed through to headline inflation. Prices for gasoline have risen by more than one-third since the conflict started, with a national average of being $4.10 per gallon as of Thursday. Now, using crude oil futures as a proxy for other energy prices, we find that Brent crude oil, the global benchmark for oil prices, was $61 per barrel at the beginning of the year and has bounced around $95 per barrel in recent days. Now, there's been some pullback today based on recent news that came out today. Now, we have seen the effects of the increased energy prices in that March inflation data. The energy component of the consumer price index jumped 10.8% last month. That's just one month. That's not the annualized rate. It went up 10%, almost 11, in one month. Now, 12-month headline inflation jumped to 3.3% as a result, and core inflation in the CPI was up to 2.6%. So, when we combine this information that we got earlier this week with producer price data, estimates suggest that the March PCE, or personal consumption expenditure inflation, which is our target, will come even higher, standing around 3.5% for headline and 3.2% for core. What happens next? Well, let me tell you. Economic forecasting is hard, even in normal circumstances. I am just tempted to say it's a bit like batting averages in baseball, where an excellent result is that you fail two-thirds of the time. But that wouldn't be fair to baseball. We forecasters have even lower batting average. However, add in a military conflict in the Middle East to this task of forecasting, and everything gets a lot more complicated. So, the first thing to do is try to establish some good baseline for where you think things will go, which I hope I have kind of done up till now, and then look where we think things are gonna go in the future. Now, when I'm trying to think about the future right now, there's enough uncertainty that I find it useful to say, well, why don't I think about scenarios? What if this happens? What if that happens? Of course, you could do that for 10 different scenarios, but I'm gonna just pick two. Keep it simple, stupid. That's what economists try to do. So, the first scenario assumes progress to reopen the Strait of Hormuz and the return of energy markets, and broader trade flows happens relatively quickly, and we move towards conditions that existed before the conflict started. So, this is like, this happened, it was disruptive, but it doesn't last long, and it won't be long before you kind of go back to normal. And I think this is still a reasonable scenario to have with a reasonable probability. It's not enough to say, here's a scenario, what's the likelihood you think it's gonna happen? I think there's a reasonable probability this happens, especially after the news we got today, the Iranians have said they are going to keep the Strait open. Now, we'll see. Now, even after the failure of the peace talks last week, future prices for Brent fell to $82 per barrel, but have them falling by $82 per barrel by the end of 2026, and $75 per barrel by the end of 2028. Consistent with the view that financial markets think we're gonna return to something closer to normal, what we saw before the conflict, in a reasonable length of time. If this comes to pass, so if this is the scenario that happens, a fairly short thing, and oil prices come back, Strait opens up, no big spillovers. I expect that the boost to energy prices and headline inflation will fade over the near term, and expectations of future inflation will remain anchored. The pass-through of higher energy prices to other goods and services should be limited, and despite the pain caused by higher energy prices, consumers and businesses will understand that the worst part is past. Energy prices will begin to recede, and this view will tend to support ongoing growth in spending, production, and hiring. This prospect probably represents a best-case scenario for the economy. Unfortunately, I think there's also a worst-case scenario. Maybe not the absolute worst, but something worse. And to me, the oil future prices I just cited in security markets, in general, seem to be undervaluing the risk that the conflict continues, the Strait remains closed, and the disruptions to production and shipping keep energy prices high, which I consider a reasonable scenario as well. Supporting this view is the fact that economic policy uncertainty in this seas have risen to quite elevated levels in recent days. While future prices in general seem a bit too optimistic to me, I note that the tip of the distribution of oil prices at the end of this view is skewed towards high prices. So even though the average as it comes down, there's a big skew towards staying high. Now for inflation, the risk is that the longer the conflict drags on, and energy prices remain high, the more likely it is that these elevated prices will start to bleed into other prices. Airfares, transportation, diesel fuel, transportation costs, any petroleum product that's made, plastics, all that stuff will be affected by tariffs, by the oil price increase. And then this will start affecting firms' input costs, which then get passed along to consumers. Furthermore, if there are physical constraints for the passage of oil through the Strait that last for months, then I also would expect there will be some supply chain constraints, particularly in Asia, Southeast Asia. Commodity inputs, including fertilizer and helium are produced in that region, and these prices in turn could drive up farm prices globally. Meanwhile, if some regions of the world experience a slowdown in production due to energy shortages, they just can't produce the parts, this could produce some additional supply chain constraints. Then there is the issue of how the oil shock, piled on to the lingering effect from import tariffs, affects expectations of future inflation. Now the standard practice for policymakers is to look through these shocks. You know they're gonna cause some short-term inflation, but they're gonna go away, and just don't respond to them. Whenever you hear this phrase, you look through it, that's what they mean. You know you see it today, but you look through that saying you know it's gonna come down tomorrow. And that's what we typically think of for these kind of one-off level price shocks, like tariffs. Tariffs are a one-off thing, that's what I was trying to argue earlier. But what happens if you get a sequence of these shocks? Here's one, then here's another, then here's another. Then inflation never goes back, there's always something that keeps keeping it high. In 21 and 22, the pandemic-induced demand and supply chain constraints were each considered one-off price shocks. Once the fiscal stimulus went away, it was gone. Once the supply chains got fixed, all that was gone. Each one sounded like a one-off price effect, just look through it. But ultimately this continued series of shocks pushed the inflation rate to near 9%. We're sitting here saying three, that's really bad, but nine's bad. But ultimately this, excuse me. And longer run inflation expectations because of that started drifting up. And that's bad news when you're a central banker. Why is that bad news? Again, I'll put my professor hat on for a second. If we say we're gonna keep inflation at 2% and you believe it, your expectations of future inflation is 2%. If people start thinking, no it's not gonna be 2%, you lose your credibility. And for a central banker, that's all you got. So this is one of the most important things when you're a central banker, is your credibility and saying, I will do the following and I will get inflation back down. So back in 22, we started seeing inflation expectations creeping up, meaning people didn't believe us. And as a result, we took action by raising the policy rate very high by large amounts in a very short period of time. Now learning from that experience, I'm just gonna be a little more cautious when faced with a sequence of transitory shocks. Now while intellectually it makes sense to look through each shock, with a sequence of shocks, you just need to be a little more vigilant about saying, I'll look through them. This is because if the shocks just hit one after another, they keep inflation elevated for a long time. And the standard look-through idea can become problematic if businesses and households start to believe inflation is going to be persistently higher and adjust price and wage setting behavior in response. Now one way I watch for this possibility is to look at readings on inflation expectations from particularly market data. While near-term inflation expectations have naturally risen, inflation is gonna be higher because of this shocks. When you look out three, five, 10 years, inflation expectations are right at our 2% target. So markets believe we will do our job and get inflation down to 2%, but not in the near term. Inflation adjusted treasuries, securities in the range of five to 10 years from now are trading at around 2.3%, a bit below their level at the end of 2025. So despite this shock in oil, treasuries have to build in expected inflation in the rate of return you pay people. That rate of return hasn't changed, which simply means inflation expectations are the same. Now while it's early, there is a risk of prolonged high energy prices and secondary effects that raise the price for other goods and services, eventually do change the expectations of firms and consumers, who I note have seen inflation above 2% for five straight years now. This is one of those things that concerns us. We keep saying two, we're five years in, it has never gotten back to two. At what point do people start doubting your promises? Now beyond inflation, there are other implications for the economy from a continuing conflict in high energy prices. Consumers may reduce spending because of higher prices. There might be lower stock market wealth and a drop in confidence. You may have heard recently that the University of Michigan surveys of consumers last reported the lowest ever reading for consumer confidence in the history of that survey. People just don't feel good. Now that survey hasn't tracked closely with actual spending, so just because people feel bad about things doesn't mean they just don't keep right on shopping. Yeah, I feel lousy, but let's go to the mall. Let's go on Amazon and order something. I still find the signal from that data meaningful in terms of where people's heads are, and where they may go in the future. Now like I just said, they seem to have mostly shrugged off the effect of import tariffs on their spending, and they may shrug off this latest shock. But then again, there might be a point you cross a threshold and they no longer shrug things off. Now if households respond with less spending, this shift will mean firms need to produce less and affect labor decisions. It might be that that force pushes employers off that tightrope I was talking about, excuse me. And they no longer are cautious, but they start moving in a bad direction. Now as we've seen often in past recessions, when the labor market weakens substantially and unemployment starts rising, it can drive a cycle of reductions. Think of it as herd behavior by firms that simply look at each other and start copying what everybody else does. I see you're shedding labor, maybe I should be shedding labor, I wanna get ahead of it, and next thing you know, everybody's moving in the same direction. And you end up with a significant decline in aggregate employment. The longer this conflict continues, the more closely I'll be watching payroll numbers and the unemployment rate for signs of such a downward cycle in employment. Alright, what's the big question? What does that mean for me? What am I supposed to do at our next meeting in two weeks? Like I said, it sort of depends on how the conflict evolves and how it affects the economy, both of which are highly uncertain. And these will have a major influence on the path of policy that the FOMC chooses. If the Strait of Hormuz opens, as it looks like it might have today, and trade flows return back to something like normal, then I'm gonna look through the effect of these energy prices on inflation, 'cause I know it will unwind. And my focus will continue to be on the labor market, how it evolves in the current no-hire, no-fire environment. Now here, abstracting from the effects of tariffs and energy, I see a forecast in which underlying inflation continues to move toward 2%, leaving me cautious about rate cuts now, and are more inclined to cuts later in the year to support the labor market when the outlook is more steady. But the longer energy prices remain elevated and the Strait is constrained, the greater the chances that higher inflation gets embedded across a wide variety of goods and services. Various supply chain effects can start to emerge, and real activity and employment start to slow. I will be particularly attentive to indications that this latest price shock, on top of the effects from tariffs from last year, has moved up inflation expectations. Now, a slower economy would restrain demand for goods and services, and perhaps soften the increase in prices. But I expect higher inflation than in the first scenario, and that it would be elevated for some time. In that case, I also believe we would have a weaker labor market. Now, high inflation and a weak labor market is a very complicated problem for us policymakers. Do you raise rates? Do you cut rates? Do you just stay where you're at? That's the problem. Now, if I face this situation, I'll have to balance the risk of those two sides of the Fed's dual mandate to determine the appropriate path of policy. And that may mean maintaining the policy rate at its current level, if the risk to inflation outweigh those to the labor market. I'll stop talking, babbling, and take some questions. Thank you.

Yeah, so this is always, whenever you have an oil shock, everybody likes to go back to, for what most young people, is ancient history, the 1970s. But Joe and I got our driver's licenses in the 70s, so we're very aware of all this. So in the 1970s, what we saw in the US was a sequence of oil shocks. It wasn't one, but some really severe and big oil price shocks that happened in succession over a few years. We also had some other commodity-style shocks that happened during the 1970s. Now what that did is those, that's what I talked about in the speech, this sequence of one-off shocks just kept coming one right after the other. Now what the FOMC in the 1970s would say is, those are supply shocks, we can't do anything about them, they're transitory, so we're not gonna respond. But when households sit there and they see this constantly high inflation, at some point, they're like, I'm just gonna have to ask for a higher wage, firms are gonna have to raise prices to make up for it, and then that starts perpetuating the inflation increase. Now back in the 1970s, economists didn't really talk about inflation expectations much. We never looked at it, we didn't have market measures, it was like, you know, whatever. But now we know that that's one of the most critical things about credibility of the central bank, that they're gonna bring inflation down. So central bankers never looked at it, anything like that. The other thing was in the 1970s, we were a big net importer of oil. Now we're kind of a net exporter of oil. So in terms of the quantities, I don't know about Joe, but I remember sitting in gas lines blocks long, trying to just get gas in my car. I mean, that was a true rationing problem that we are probably not ever gonna face now. So that was even worse when you just can't even physically get the fuel. So that would be the big things, is we got a series of shocks and commodities, the Fed looked at it, so these are all one-off transitory shocks. They ignored it, they didn't pay any attention to inflation expectations, and the US economy was very dependent on oil from external. So I'd say that's the biggest thing. We now know we have to be careful with these sequence of one-off shocks. Expectations matter, and at some point you may have to respond.

Yeah, it's gonna be tough, guys. I'm sorry. No offense. I don't mean to be Mr. Downer up here, but the thing is that when I went around the country, one of the parts of my job I really like the most is I go around the country and I talk to CEOs of companies all over the US, and when I'd say, "Why aren't you hiring?" I would typically get the following set of answers. One, the trade war, the tariffs, the uncertainty about global trade put everybody back on their heels, and they're like, I'm just not gonna do anything. I'm not gonna expand, I'm not gonna do, I'm just gonna sit and wait. So nobody was hiring because they didn't know where the economy was going under the new trade world we were living in. So that was one. The second thing that we often heard was, we overhired in the pandemic because it was so hard to get anybody. Once we hired anybody, we weren't gonna let them go. But now that's gone, it's passed. We're not gonna let them go, but when they leave, we're not gonna replace them. So you're not laying anybody off, it's just you're not gonna make up attrition when people leave. A third thing that we often heard was firms would tell me, look, some of the tariffs, I have to eat. I'm not gonna pass it all 100% through to consumers. How do they eat it? They take lower profits or they reduce their cost. Labor's a big cost. So one thing to do is just not hire. Then you save that income or those wages that you can then use to pay the tariffs that you're eating. And then the last thing is the dreaded two-letter what? What two-letter thing is always out there in the world? AI. The deadly AI was gonna take everybody's jobs. No, seriously, firms all were sitting there saying, I don't know what we're gonna do with AI, but I'm not gonna go hire a bunch of labor if I find out later that I can do that work with AI. So again, that was another thing that put everybody back on their heels about hiring was, we're gonna wait and see what happens with AI. So those are the four things that I heard from private sector firms and CEOs all over the country as to why we were in this really low hire world. Now, if you're in a low hire world and you're a worker, you're like, if I leave my job, how easy is it gonna be able to find a job? Not very easy. So guess what I'm gonna do? I'm gonna stay in my job. So that's why we have very low turnover, people leaving. It's just dropped a lot. No one's leaving their jobs because they think I'm not gonna be able to necessarily find another one. So those are the big reasons we're in this. And any one of those things can unwind at some point in the future, but that's kind of why we're in this now.

Yeah, I mean, scenario analysis is a useful thing for central bankers because you don't know where the world's gonna go, but you have to be thinking about where it's gonna go when you set policy today, which is gonna affect future outcomes. You kind of wanna know where you think the economy's gonna be in the future. Now, if you're staring out at the world and there's very little uncertainty and you're 90% certain this is what's gonna happen, then saying, oh, there's this other 10% thing isn't really very helpful. It's just such a low probability event, it really isn't useful to spend time. But if it's 50-50, now you're even more uncertain, then you say, well, what am I gonna do if that happens? What if I'm gonna do if that happens? So with scenario analysis, one, you gotta have some sense of what you think the probabilities are, even make it a useful exercise to do it. The other thing is how many scenarios do you wanna cover? Well, we could do five, we could do six, but then you kind of start getting lost in what the scenarios are. So keep it simple, do two, maybe three at the most. But it just helps communicate to the public that, look, if this part of the world happens and I think it's with a non-trivial probability, this is what I'm gonna do. And if this happens in another state of the world with a non-trivial probability, then I'm gonna do this. But I can't tell you which one I'm gonna do exactly. I gotta wait and see what happens. So that's how I think of doing scenario analysis.

Yeah, so the issue is central banks have assets on their balance sheet. They've been buying a lot more gold than they have in the past. Why? And then the dollars, what we call the reserve currency in the United States, we're seeing maybe countries moving to other currencies rather than the dollar to conduct trade. I'll just put it that way. In terms of more central banks buying gold, a lot of foreign countries, they wanna hold assets that they're always worried about, say, their exchange rate. We don't worry about it. We just let the market determine. But other countries run more peg or fixed exchange rate or channels on where they want the exchange rate. Now, if that starts going out of whack and there's a big demand for dollars, which would then weaken their currency and force the exchange rate against them, what they wanna do is sell some assets, get dollars, put it back out in the market and take that pressure away. So if the demand for dollars goes up in a country, sell some stuff, get dollars, give it to the people, and then you mitigate the effect on the exchange rate. Now, you just need something to sell in those events. So then you say, well, what should I sell? Well, you want something that's liquid, meaning it's easy to sell. You wanna be in a deep, wide market where there's lots of possible buyers to buy it from you, and you wanna be able to do that transaction very fast. The very fast means you wanna do things digitally. The biggest, deepest market in the world for assets is US treasuries. And US treasuries are easy to store. They're just digits on a spreadsheet. That's all it is in a digital world. You buy gold, you actually have to hold the gold, put it somewhere, you have to transport the gold. Gold is nowhere near as wide and deep as US treasuries. And it's a lot harder to transfer the stuff and get the cash when you need it. So a lot of countries were moving to gold because maybe they don't have as much confidence in the US or maybe they don't want to give as much exposure to US treasuries as they have in the past. But at the end of the day, they're just buying an asset to try to think about how they do future policy. What does that do for the effect on the dollar? Well, if people are buying less dollars, it makes the US dollar a less valuable asset for trade. Now in terms of reserve currency, reserve currency is when you say people around the world wanna use this currency for doing exchange, trading among themselves. There's voluntary trade and then there's involuntary trade in that currency. I like to say the US dollar is the reserve currency because if you have a Japanese firm and a German firm and they're trading with each other, guess what they do that contract in? US dollars. That's a voluntary exchange. No one's forcing anybody from the outside to use our currency to do that trade. But what's happening in a lot of situations is countries are saying, oh, you wanna do trade? You've got to use our currency. That's kind of the Chinese view that people have. We're gonna force people to use the Chinese Yuan if you wanna trade with us. Well, that's fine, but that German and Japanese firm are never gonna use your currency per se. So there's a big difference between reserve currency status when people wanna voluntarily use it versus when you're forcing people to use it. And so that's why I'm not that concerned about the US dollar losing reserve currency status because people just trust the US dollar more than these other forms for doing international trade.

Well, I'm not a tariff expert and how this all works, trust me, I'm not exactly sure. But the administration has said they're probably gonna reimpose the tariffs through different powers. And the idea is they're probably not gonna be much different overall than what they were. So from a macro effect, if you take that as truth, then this really isn't gonna do much. What you're asking is more is the distributional effects of this, like who gets money, who doesn't get money, how long is it gonna take. You know, if Treasury has to give money back, but then they get it back another way, again, it's kind of a wash. So I don't spend a lot of time thinking about that because if anything, it's just kind of distributional, and I really can't do much as a policymaker on that.

No, I mean, the president recently named somebody to take over the BLS who's a respected veteran of the agency. He's been there over many years. The data collection process takes thousands of people. It's very hard for somebody to come in and one person to manipulate all this data. So I don't have any general concerns that there's some big problem. No, you know, there were things done, like the BLS has this birth-death model of new firms entering and exiting to figure out job growth, and they were way off for many, several years, and they started putting in changes at the beginning of this year, and maybe that's some of the volatility we're seeing, but it doesn't mean it's biased one way or the other. It just means we're still trying to figure out what the new model looks like, and they'll probably fine-tune this over time as they do it. But I don't have any general concerns.

Well, I can say, what I just said is just a mechanical, mathematical ratio. It's just, you take all the output that's produced, however it's produced, take all the total measured labor hours that go into it, and that's the level of productivity. I think you're asking, where's that going over, what's that ratio, where's it going over time? So I'm an AI optimist. I think AI is going to be an amazing productivity enhancement going forward. I've seen what it can do in terms of people using it, in terms of what they can do in a very short period of time. I'm gonna say this 'cause... I'm just gonna say it. I watched my wife, who's 62 and retired, build a website, she's never coded in her life, but she built a website in three days using ChatGPT, Gemini, and Claude, and it was up and running in three days. It cost her under $100. The reason I tell that story is because watching her do this tells me entrepreneurship in this country is gonna explode. If those are the barriers, have been the cost and the barriers to starting a new firm or a new business that doesn't require a building, have gone down that much, you're gonna see an explosion, and this is back to the productivity part. You're gonna see, I think, amazing things happen. Now, are there gonna be jobs that are gonna be lost from it? Yes, of course there will be. But there will be new jobs created. We just don't know, right? This always happens with technological change. Jobs get destroyed, new ones come up. It's easy to see which ones get destroyed, it's a lot harder to see which new ones are gonna come up. But I'm an AI optimist. I'm not a doom and gloomer, it's gonna be the end of the human race.

Yeah, I mean, there's a lot of attention on private credit. We do monitor very regularly. Private credit makes up about 6% of total lending that goes on in the economy. So it's not a big, most lending comes out of other sources than private credit. Private credit is designed in a way that it's typically for large, sophisticated investors, wealthy investors, or institutions. This is very illiquid stuff. It's hard to sell this stuff. And that's the bet you're making is, I'm gonna get a higher rate of return off this stuff, but I'm not gonna have any liquidity out of it. I'm not gonna be able to sell it and get my money back, or go ask for my money. That's what you're taking on. You're taking on illiquidity risk for that higher return. So the understanding is, this isn't a checking account. You don't just say, hey, I want my money back. I mean, you can, but they just say, go away. So in a sense, it's not runnable like a bank is. If you had a bank where you say, give me my money back out of my checking account, they're supposed to give it to you right then. These guys can just say, go away. You signed up for a five-year deal. In five years, we'll pay you off, just like we promised. So that makes it less of a contagion thing, because the credit funds can just say, we're not redeeming anything. Now, that may hurt their inflows for new stuff, but that's not causing a financial panic in any way, shape, or form. So I just think it's not. No, the only thing you're worried about are the banks exposed to it, that if somehow this stuff goes down, the banks fail. But whenever I talk to the banks, the typical thing is, look, these things are 50% equity, and of the 50% that's debt, the banks have the top-measuring trance. So you've got to burn through a tremendous amount of value in the underlying assets before they get touched. So that's why I care more about if the banking system gets like back in 2007, 2008 with subprime mortgages. That's what I'm concerned about. I'm just not seeing that.

I just said they did.

Yeah, and Jamie this week also came out and said he wasn't concerned about private credit.

Well, first let's make clear of two things. I did research on central bank independence for 20 years, and why we will value central bank independence. You're trading off accountability to the electorate in the immediate period for stability and policy over time. That's the big game, right? You're not having the president change parties and the president sets policy. Economists love trade-offs. We trade off a little bit of accountability for more stability. But we are still accountable, and that's why all the governors are political appointees. They have to be picked by the president and confirmed by the Senate. The chair goes out in testimony twice a year to tell what we do. We have press conferences after every meeting to tell you what we did and why we did it. You may not like why we did it, but at least we tell you why. I mean, that's transparency. That's the form of accountability. Now, we don't necessarily do what the president wants on every given month or every given meeting, but that's the kind of idea about stability. Our job is to look at the data, try to make the right policy, ensure some degree of stability, and then it's through the appointment process that you get, whatever people get picked, they're leaning more towards with the administration, and that's another form of accountability. But that's really the key thing. There's institutional design of independence and then there's a lot of social norms about how you should behave and deal with it. And I think what we're seeing is a lot of social norms being broken as opposed to the institutional independence being violated.

I wanna thank the students who came for this on a Friday afternoon. On a beautiful day. Thank you.