CEOInterviews.AIForum BCE a Sintra. Dibattito LAGARDE contro POWELL (Fed) in DIRETTA

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Christine Lagarde18:31

We are facing major structural changes related to aging, digitalization, the greening of the economy, and with all that we have to deliver on our mission of price stability. So if you're interested in those issues, come to the ECB forum in Sintra. We will debate all that and more.

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Host19:20

Welcome back after lunch. I'm delighted to announce one of the highlights of the ECB's central forum, our policy panel. The world economy is undergoing a period of rapid and intense change. The questions for our next panel will cover what these fundamental shifts mean for the future of monetary policy. We are honored to have an exceptional lineup of officials to answer them. We are also honored to have Francine Lacqua, anchor and editor at large at Bloomberg Television, to be guiding the conversation. Francine, the floor is yours.

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Francine Lacqua20:04

Hello everyone, thank you for that introduction. We have one hour and there's a lot to discuss. Welcome to the policy panel Sintra 2025. From tariff-related trade ructions to oil price gyrations caused by Middle East hostilities, there are many questions on how to handle the fallout from some of the political decisions, but much more how the economy behaves now, one year on since the last panel and halfway through 2025. Global policy needs to navigate risks posed both to inflation and growth, a challenge highlighted by the Bank for International Settlements in a report this week. So let's get started. We have Kazuo Ueda, Governor, Bank of Japan; our host Christine Lagarde of the European Central Bank; Jay Powell, Chair, Board of Governors of the Federal Reserve System; Chang Rhee, Governor, Bank of Korea; and Andrew Bailey, Governor of the Bank of England. Madame Lagarde, let's start with you as our host. Thank you so much for having us all here. We had a little bit of data this morning — consumer prices rising some 2% from a year ago, up from May's 1.9%. But then the tariffs still loom large. So how do you see that developing?

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Christine Lagarde21:17

Well, first of all, I would note that we are at 2%, and this is the latest reading. This is also the target that we have had, and this is the projection that our staff is indicating for the medium term, which is exactly what we had anticipated. So I'm not saying mission accomplished, but I say target reached. I think we should start by recognizing that we faced massive amounts of shocks, compounded shocks occasionally, and we are now through that disinflationary process that we have conducted over the last two years. And yes, we are facing a lot of uncertainty. Yes, we are facing the risk of fragmentation increasing. And yes, we are facing geopolitical developments that are worrying generally, but that also are causing two-sided risks to inflation. So we have to continue to be extremely vigilant. We have to continue to be committed to delivering on our target, and I think we are at this point in time in a very good position to do that. So we are well equipped to navigate the tormented waters that we should anticipate.

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Francine Lacqua22:29

Chair Powell, tariffs are not yet showing up in inflation. Is this forcing you or your staff to actually rethink what the models say about how much the tariffs will ultimately feed through to some of the final prices?

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Jay Powell22:42

Thank you, Francine and Christine. Thank you to you and your colleagues for putting on another great conference here today. It's been a pleasure. I would start by saying that the US economy is in a pretty good position. Inflation has come down close to 2%. We're at 2.3% headline, 2.7% core. The unemployment rate is at 4.2%. So we're healthy overall. If you ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hoped that it would. We haven't seen effects much yet from tariffs, and we didn't expect to by now. We've always said that the timing, amount, and persistence of the inflation would be highly uncertain, and it's certainly proved that. So we're watching. We expect to see over the summer some higher readings, but we're prepared to learn that it can be higher or lower, or later or sooner than we'd expected.

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Francine Lacqua23:42

But Chair, would the Fed have cut more by now if it weren't for the tariffs?

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Jay Powell23:46

I think that's right. We're in effect we went on hold when we saw the size of the tariffs, and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs. So we didn't overreact. In fact, we didn't react at all. We're simply taking some time. As long as the US economy is in solid shape, we think the prudent thing to do is to wait and learn more and see what those effects might be. And again, they haven't really shown up. So for now, we're waiting.

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Francine Lacqua24:18

Governor Rhee, South Korea's economy is of course highly reliant on trade. Putting aside the deals that each government could strike with the Trump administration, what can central banks in your position do to shield economies from the impact of trade tariffs?

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Chang Rhee24:34

About the tariffs' impact on inflation, our current inflation is well stabilized around 2%. And we believe tariffs tend to be deflationary rather than inflationary for three reasons. One is Korea is not likely to use retaliatory tariffs. Second, we import 22% of our imports from China, and recently export prices from China have been falling at 5% a year for several years, and we believe that it'll continue to do so. And at this moment our growth rate is 0.8%, which is well below our potential growth rate. So aggregate demand pressure is much lower. So our problem is not inflation itself but the growth impact of tariffs.

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Francine Lacqua25:22

What does that mean you'll do going forward?

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Chang Rhee25:24

We have been in an easing cycle and we cut our interest rate 100 basis points from last October, and we'll continue to be in an easing cycle given our growth rate. But recently financial stability risk has been rising, especially housing prices in metropolitan areas are increasing very fast. So we are keeping an eye on this financial stability risk in deciding the pace and the timing of further cuts.

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Francine Lacqua25:51

Governor Bailey, you've taken the view that the latest rises in inflation in the UK will be transitory. Why are you so confident that inflation will fall back?

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Andrew Bailey26:01

You may have detected I've tried to avoid using the transitory word, because oddly enough it has a bit of a history. But to be serious, obviously any increase in inflation is an increase in inflation. The reasons it's gone up are really entirely due to so-called administered prices. Now, that's an increase in prices, don't get me wrong, but it's not telling us much or anything about the context of the economy. In other words, it's not telling us anything really about the balance of supply and demand in the economy. So the key judgment for us is: are we going to get second-round effects from this pickup? And of course, it's nothing like the pickup of a few years ago, just to be clear. My judgment at the moment is that the context is different. We do see evidence and I see some signs of softening in the economy. I see signs of softening in the labor market. We are going to have to see those come through into prices. But that background context allows me to say: look, I think the direction of interest rates continues to be downwards.

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Francine Lacqua27:11

How, when you look at all the uncertainty, is it a bold call given what happened to oil prices and trade negotiations?

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Andrew Bailey27:20

I would say two things. One, I think as others have said, it's probably a bit too soon to really see the price effects coming through from trade and tariff action. We've made a point of saying also, as Christine was saying, that these are two-sided. They could go either way — could be weaker demand, we could see supply chain disruption. And the second thing of course is that some of these effects, if you take the oil price story, it's gone up, it's come down, all since our last meeting effectively. We've added unpredictability to uncertainty. I was slightly amused at the introductory film this morning with Christine saying all these words, because it's true. Not only are we getting uncertainty in the sense of the range of outcomes, but unpredictable in the sense that if you get things like tariff action, history really isn't a particularly good guide to that — you can't really draw much from the past on that.

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Francine Lacqua28:15

Governor Ueda, you're in a slightly different situation. Japan's CPI has stayed above 2% for three years now. What do you see as fundamental changes in your economy that make inflation more persistent?

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Kazuo Ueda28:32

To put it simply, headline inflation has been above 2% for almost three years, while what we call underlying inflation is still somewhat below 2%. That's the situation we are in. But if I could decompose it further, there are probably about three components. First, there's underlying inflation dictated by wage-price dynamics, whereby increases in prices affect wages which further affect prices, helped by resilient domestic demand. This component has been going up slowly but it's still somewhat below 2%. Then there's the second component, which will be the expected negative effects of possible tariffs on the economy and prices. We are expecting this to take place but we haven't seen that yet. There's a third component, which is a domestic supply shock generated by increases in food prices. This component accounts for about 50% of the headline inflation we've got at the moment. So netting these three, we think the first component and the second component will produce a slow increase in underlying inflation toward 2% by end 2026 or 2027. The third component, food inflation, is going to subside toward the year end. We will be closely monitoring interplays between these three forces.

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Francine Lacqua30:23

Governor, how do you view trade concerns the day after President Trump threatened Japan with more tariffs?

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Kazuo Ueda30:30

It's being negotiated by our minister in charge. So I'm trying to avoid making any specific comments on this.

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Francine Lacqua30:43

What will be the key trigger for Japan for deciding on rate hikes?

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Kazuo Ueda30:51

It will depend on the relative strength of the three inflation dynamics I was describing, and we need some more information to determine that.

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Francine Lacqua31:05

President Lagarde, when you look at rate cuts, where do you see the ECB going? You're in a pretty comfortable position right now out of all the central banks.

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Christine Lagarde31:13

Data will tell. We are determined to continue to be data dependent, to decide meeting by meeting, and to not commit to any particular rate path. That's the doctrine. And we're very lucky because we have just completed our strategy assessment which really gives us a good framework and good strategy lines within which to operate. But those three aspects that I have mentioned — data dependent, meeting by meeting, no commitment to any particular rate path — are constant in that ongoing strategy based on what we have concluded actually yesterday.

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Francine Lacqua31:57

Jay Powell.

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Jay Powell31:59

From our standpoint, as you will have seen, a solid majority of FOMC participants do expect that it will become appropriate later this year to begin to reduce rates again. And that will depend, as Christine just mentioned, on the incoming data. We'll be monitoring particularly what does show up in terms of inflation or what does not show up, and also carefully watching the labor market. We watch very carefully for signs of unexpected weakness. We see a gradual cooling but we don't really see that yet. A majority of us do feel it will be appropriate in the remaining four meetings of the year to begin to reduce rates again.

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Francine Lacqua32:41

Madame Lagarde, the euro has also surged about 12% against the dollar so far this year. Are you concerned that its strength runs counter to your efforts to also loosen financial conditions?

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Christine Lagarde32:54

I'm not going to comment on the exchange rate. We take it into account for purposes of our projections. Obviously, it has an impact, but it's a reflection of market conditions and assessment. It's also a reflection of the strength of our economy. There has been a clear appreciation relative to the dollar. Depending on how you look at it, it's either a depreciation of the dollar or an appreciation of the euro, and there might be a bit of both. We're also looking at the movement, the flow of capitals, and the attractiveness of euro-denominated assets, which is also an interesting phenomenon that we've observed lately.

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Francine Lacqua33:32

Chair, is it fair to say, barring a real surprise, is July just too soon to seriously even consider a rate cut?

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Jay Powell33:43

I really can't say. It's going to depend on the data, and we are going meeting by meeting. I mentioned how I'm thinking about that, but I wouldn't take any meeting off the table or put it directly on the table. It's going to depend on how the data evolve.

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Francine Lacqua33:59

Governor, what's the biggest risk stemming from protectionist trade policy for the global economy and for South Korea?

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Chang Rhee34:06

The biggest risk stemming from trade and protectionist measures — Korea has a quite export-driven economy. So whatever the global fragmentation is, it has serious impact, not only direct impacts through the US tariff but also indirect impacts through China, Mexico, Canada. We are actually waiting for the results of what's going to happen on July 9th. For example, if the tariff goes back to 26% retaliatory tariff announced on April 2nd and also with a lot of sectoral tariffs which affect our economy — aluminum, steel, and cars — we can easily say it has an impact larger than close to 1% in our GDP growth rate. Depending on how long it lasts, the impact will be larger. I hope that scenario won't come.

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Francine Lacqua35:06

What is the most concern for the Bank of Korea? Is it a stalling of South Korea's exports, a slowdown in global trade, or a downturn in the US economy?

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Chang Rhee35:16

It's all linked, right? It's a global economy slowdown. I mentioned some negative sides only. But one positive side — Korean companies have been preparing for supply diversification long before the US tariffs started because we had some issues with China, and then also Chinese industry has become very competitive. So we had to relocate our production sites from China to elsewhere. So relatively speaking we are well prepared. And a second still-good thing is that we have some strong industries such as semiconductors which benefit from AI technology development. So I hope we can manage it, but on the other hand, given the sheer size of the export dependence, we will be significantly affected.

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Francine Lacqua36:10

Governor Bailey, do you think interest rates will be closer to 3% or 4% at the end of the easing cycle, given all of the inflation and trade dynamics?

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Andrew Bailey36:20

That's a subtle way into the style question, actually. I'm fairly cautious about the whole discussion of the level of r-star and therefore where rates are going to reach in the cycle. There is huge uncertainty around it. What I think is important and what we spend our time looking at is how restrictive is policy both now and going forwards. Our staff do a huge amount of work on that front to judge the restrictiveness of policy in the current context and how restrictive it's going to be looking forwards if you project forward with the market curve. The assessment we've got is that policy remains restrictive. It will continue to be restrictive although the level of restrictiveness will come down over time. I would expect that level to come down to a point where it goes more neutral, but you have to judge that in context. In the UK economy, the level of household and corporate debt is actually lower than we would have expected based on past experience. So it's somewhat less restrictive probably than it would have been historically.

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Francine Lacqua37:43

Could I ask all of you your thoughts on the neutral rates? Chair Powell, thoughts on the neutral rate?

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Jay Powell37:49

There are countless empirical and theoretical ways to derive it. At the end of the day, I like to look at the economy and ask whether our policy stance is having the effects we expect and want on the economy. To me, we're somewhere probably modestly restrictive at this level. And by some formulations, we're more restrictive than that. But if you look at the economy, growth has been solid. The labor market is solid and still at historically low levels of unemployment. It's not an economy that feels like it's suffering from very tight monetary policy, but I would say that policy is still restrictive.

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Francine Lacqua38:30

President Lagarde.

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Christine Lagarde38:33

I would say it's a nice concept. It's interesting and many of the terribly talented and brilliant economists in this room are delighted with discussion about the neutral rate. But honestly, as we're getting closer to target and to where we should be, I don't want to pass judgment on that. I think that discussion becomes less relevant. I think what our staff at the ECB measures leads us to believe that it is higher than where it was before the great financial crisis, but it's relatively low compared for instance with what the US neutral rate is at the moment. But in a way, it's a bit of an illusion to discuss that at the moment because the neutral rate is normally defined in a world where there is no shock, where you have perfect equilibrium. Now, are we in a world with no shocks at the moment? I don't think so. So it's nice to have as a concept, nice to elaborate on it, nice to do research on it, but to use it at the moment as a guiding principle to where we should be, I don't think is particularly appropriate.

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Francine Lacqua39:42

Andrew Bailey.

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Andrew Bailey39:45

That sort of continues what I was saying earlier. I don't use it as a sort of guide to where policy should be. But I think this whole concept of restrictiveness is of course critical to our judgment, because that's critical to the transmission mechanism of policy which we have to judge every time we meet. That's a judgment that in a sense we renew every meeting we have. I'd rather agree with what Jay was just saying. In our case, policy is restrictive at the moment. It's going to become less restrictive based on the curve that we've got in the market. That's what I would expect. We will judge it each time.

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Francine Lacqua40:23

Governor Rhee.

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Chang Rhee40:26

I have nothing to add.

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Francine Lacqua40:26

How would you see it, Governor Ueda?

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Kazuo Ueda40:29

We also estimated something like the neutral rate. The range of estimates is very wide. But at least we think we can say that the current rate is below neutral. But other than that, I would refer to what Jay said a year or two ago at the Jackson Hole conference, which was like: we are guided by our stuff, but under cloudy sky.

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Francine Lacqua41:02

President, can you talk to us about scenarios and why this makes more sense as a template of the economy given the shocks and changes that are going very fast?

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Christine Lagarde41:12

This is a topic that we have largely debated as part of the strategy assessment that we conducted in the last year. The baseline, which is the essential projection on which we work and determine our monetary policy stance, holds and is decisive in our consideration. But at the same time, our staff has always conducted scenario analysis, sensitivity analysis in order to arrive at the most solid baseline. It is probably the case that we will do more of it more systematically, that we might publish more often than we have. We have published, I think, in the last few years in four circumstances — the invasion of Ukraine was one, COVID was one, the oil crisis as well, and the tariff threats. I think we might do more scenario analysis that will be looking at the longer-term trends that will affect our economy and that will inform and strengthen our baseline, enhance it probably in its reliability. How this is built, what assumptions we make, what choices are decided in terms of publishing will be determined by the Governing Council in good intelligence with our staff.

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Francine Lacqua42:49

Jay, on scenarios.

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Jay Powell42:52

For many years we have used scenario analysis internally, and I personally find it very useful. I think many of my colleagues do too. We have six or seven at every FOMC meeting. They're often the topic of discussion among governors and at the meeting. We have not taken the step of using them as a public communications device, and that's a big difference. That's one of the things we're going to be talking about this fall. We will wrap up the first part of our framework review, which is the consensus statement, our monetary policy framework, we expect to by the end of the summer, and then we're going to use the fall meetings to look at communications ideas, and that's one of the ones we'll look at. I will say it has a lot of appeal and a lot of questions. My expectation is we, if we're going to do something in that area, it's going to be putting a toe in the water and not just throwing ourselves in over Niagara Falls. I can imagine a situation where we would try that in a particular circumstance. But for us, we're just going to do the work and understand it, as many other central banks are doing now.

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Chang Rhee44:03

In our case we use the scenario analysis in our risk management section as a kind of representing the tail risk. But I have to read the ECB report — if we have to move that section into the more forecasting section for public communication, I wonder whether it's going to be easy to get some consensus on which scenario to do among our members in the monetary policy meeting, because that scenario and those underlying assumptions may be much harder to communicate and to agree among the members, and also it's specific to us. But how I can differentiate the previous approach of risk management section to the forecasting — that I have to think over.

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Andrew Bailey44:48

I think two things, and it's very much in the same spirit as colleagues. One, we introduced two scenarios in the May round and in the May report. For me they were very useful — they were on either side, they weren't symmetric by the way — but for me they were very useful in terms of my decision-making because they helped me to answer the question: given the uncertainty, if we're wrong, if I'm wrong in my judgment, how wrong am I going to be, and what would be the consequences of that, and would it be manageable? And that was helpful. And then the question, coming back to what Jay was saying in terms of public communication — this is the big step, and it is challenging. I tell you why, because we make a lot of conditional statements. You might have detected this in all the interviews you do. But a lot of those conditional comments get immediately translated as unconditional comments. It's sort of life. We're quite careful. But the reason I say this is that if we introduce scenarios, that's a message to us that we're going to have to do this very carefully in that world, because to get the point across about there is always uncertainty, there is always risk, how you calibrate those and how you communicate those publicly is critical, but quite challenging frankly in that environment.

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Kazuo Ueda46:33

We also carry out many simulation exercises about scenarios, but we have not, as far as I know, published them. We do discuss in our quarterly reports qualitatively what risks we have in mind. On top of that, I would say in a very rough way we are carrying out something like a risk management approach to monetary policymaking, which is probably a bit similar to what Christine was talking about yesterday. Risk scenarios, thinking about tail risks, sometimes do affect our monetary policy decisions.

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Francine Lacqua47:27

I ask you all about the dollar, everyone's favorite subject. When you tune out noise of the past few months, what has really changed about the dollar? Governor Rhee, are we really seeing some sort of paradigm shift in the status as a reserve currency that means historians will look back on 2025 as some sort of pivotal year?

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Chang Rhee47:45

I don't think so. Especially in case of Korea, the Korean won has appreciated significantly in the last two months. But I think it's mostly due to the very unique situation that we had — a very unexpected, unnecessary martial law declaration in last December, and after that this political risk together with the slowdown of our economy really made the Korean won depreciate much more than our fundamentals explained. So in some sense the appreciation that we have observed in the last two months is in some sense normalization of our currencies. As for the long-term shift of the dollar sentiment, we have discussions, but looks like people are talking about it, but at this moment they keep the dollar assets while they increase the hedge ratios. So at this moment the lion's share of the impact is mostly moving from unhedged to hedged positions. So we have to see what will happen in the future.

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Francine Lacqua48:47

Governor Bailey.

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Andrew Bailey48:50

I'd say two things. First of all, I think it's important to bear in mind what the definition of a reserve currency is and how it's evolved over many years. Like Chang Rhee, I don't see there being a major shift at the moment. Not least because in this day and age the definition of a reserve currency has as much to do with the supply of safe assets into the market that can be used for all the purposes of collateral and security as it is about a sort of pure exchange rate. So I think we're a long way off that change happening. The second thing is going back to something Christine was saying earlier. When we look at financial conditions — which we do of course — I do think it's even more relevant at the moment to unpack a financial conditions index. The reason I say that is because we've seen a breakdown in the correlations of the components of a financial conditions index. You look at bond yields, exchange rates, equity risk premium — those correlations are not the ones we've tended to see established over time. So you have to look at it much more carefully. There are stories to my mind about each of the components. So when I look at the exchange rate, I look at it very much on that basis. I don't think it's sensible to pack it all up as we normally would and say it's all behaving normally, because the correlations are not actually.

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Francine Lacqua50:17

Governor Ueda, there's also many colleagues at central banks around the world building up gold reserves. Is that the only real alternative to the dollar?

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Kazuo Ueda50:28

I think it's up to a certain extent what areas like Europe or China would do in terms of improving the efficiency or convenience of their currencies. The kinds of things we were discussing this morning — capital markets integration and these things — will change the degree to which the role of the dollar may decline in the future.

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Francine Lacqua51:01

Lagarde.

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Christine Lagarde51:03

I don't know if 2025 will be a pivotal year. I would tend to think that yes, it might very well be. But for a major change to occur will take a lot of time and will require a lot of effort. I completely agree with the points made by Andrew about the dichotomy that we're seeing at the moment. That might be an indication of the fact that investors are looking at options. This is what investors are saying. They ask questions. They seek alternatives. Whether that translates into a general lack of confidence that will be further fueled by more uncertainty, more unpredictability, a bit of a jump in the unknown on several fronts — not just monetary policy, not just even the economics, but beyond that in terms of security at large — I think remains to be seen. It's not going to happen just like that overnight. It never did historically. There's no reason it should now. But there is clearly something that has been broken, and whether it is fixable or whether it is going to continue to be broken, I think the jury is out on that front.

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Francine Lacqua52:15

Powell, how will historians look back on 2025? Is it pivotal?

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Jay Powell52:29

It's clearly an important year. There's a lot going on with trade, and I think I'm hopeful that we'll look back on it as a year where we successfully navigated some significant economic changes. Our job is to make sure that that is the case.

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Francine Lacqua52:49

You get attacked by the president a lot on a personal basis. Does it make your job harder?

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Jay Powell52:57

I'm very focused on just doing my job. There are things — the things that matter are using our tools to achieve the goals that Congress has given us: maximum employment, price stability, financial stability, and that's what we focus on 100%.

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Francine Lacqua53:22

Madame Lagarde, if you were in the same position as Chair Powell, would you do anything differently?

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Christine Lagarde53:30

I think I speak for myself, but I speak for all colleagues on the panel. I think we would do exactly the same thing as our colleague Jay Powell does. The same thing.

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Francine Lacqua53:55

Governor Bailey, is the rest of the world decoupling from America but pulling tighter elsewhere? How do you see fragmentation happening?

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Andrew Bailey54:03

Fragmentation, were it to happen, in my view is bad for activity in the world economy. No question about that. If we reduce the openness of the world economy, that will be bad for activity. I temper that in one respect because obviously we have learned a lot about the robustness of supply chains over the last five years, and it is appropriate that there will be adjustments to that. But if we see a breakdown of the openness of the world economy beyond that resilience that we do see as needed, then that's bad for activity, it's bad for the world economy. I've said a number of times: there are reasons why this is happening. I don't think it's right to just go around saying this is all wrong. There are no reasons why this is happening. What I think is very important is that we get back to a governance of the world economy where we can address these issues in the appropriate multilateral fora and get to the question of what lies behind these issues, what's at the root, what exactly are the issues and what do we do about them. I think it's an obligation for all of us who are very heavily involved in the governance of the world economy. We've all got very big responsibilities to say that it is our duty to get back to the process of saying what's caused this and what do we do about it.

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Francine Lacqua55:43

What kind of fragmentation would it be? Are you fearful that the world is splintering irreversibly or is there a pool that's just moving?

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Andrew Bailey55:54

If it was a breakdown of trade in the world economy, exactly how that would manifest itself would remain to be seen. But it would be running against a long period now where we've been building the resilience of trade in the world economy, we've been building openness. But as I said, I want to temper that by saying there are issues. I don't think we should say there are no issues, this is all made up. There are issues and we need to address what they are and work them out, but we need to do that in the context of a commitment to a robust, open world economy.

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Francine Lacqua56:26

Governor Rhee, as the only governor here representing a non-reserve currency country, how concerned are you about fragmentation of the global financial system and the risk that the US may be less willing to provide dollar liquidity in a future financial shock?

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Chang Rhee56:47

We are quite vulnerable to the fragmentation. But in reality, as a small country, it's a pity that we can raise our voice but in reality we cannot change the course. So we have to probably take it as an environment and adapt. What matters is, we talk about economic fragmentation, but for a country like us the most serious issue is combined with security. As for the dollar liquidity support, as demonstrated during the global financial crisis and pandemic period, the standing dollar facility swap lines with five international financial centers and the nine ad hoc temporary swap lines for the nine non-reserve currencies — that was crucial in restoring stability in the global world. If another global dollar shortage hits, I believe that the US Fed will extend their swap lines again, which is very important. But one other problem for a country like us is: we know that the US provides swap lines as long as there is a global dollar shortage, but the issue is what happens if there is our own problem and there's no global dollar shortage. Our understanding is that the Fed cannot extend the swap lines in that case, and we have to self-defend ourselves. That is why having an adequate, sufficient level of reserves is very important, and recently thanks to the introduction of the FIMA repo facility by the Fed, these reserves have become a much more effective tool to defend ourselves.

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Francine Lacqua58:29

Jay Powell, on fragmentation.

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Jay Powell58:33

I'll just agree with what Chang Rhee said, or point out that nothing has changed relative to our swap lines. We still have the same authorities and we're still prepared to use them in situations where it's within our legal authorities and where we think it makes sense. We're aware that that's a big contribution that we can and do make, and we'll continue to make, to global financial stability.

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Francine Lacqua58:54

Governor Ueda, how much do you think about fragmentation and the impact this could have on Japan?

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Kazuo Ueda59:01

On the trade side, I think a lot about what will happen to Asia, even Asia excluding China. This will depend on the relative tariff rates imposed on the region relative to China or relative to other countries. But there's fairly strong intra-regional trade taking place during the last decade or two. Also there are new countries like India growing at very high speed. So I hope there's resilient, sufficiently resilient domestic demand in the region to keep the energy of the region alive. On the financial side, I don't have much to add to what other people have said, but it would be important to keep trying a multi-layered approach to things like swap lines. We have the Chiang Mai Initiative in Asia. Doing something similar or continuing to do something similar would be important.

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Francine Lacqua1:00:20

Lagarde, you've often spoken about the role that Europe could take in a fragmented world. How do you see that developing, and in what kind of timeframe?

C

Christine Lagarde1:00:32

Europe has witnessed in the last four years in particular — well, since 2022 — major challenges to its way of doing business, to the assumptions that it has made about security, about supply, about destination. Whether you look at what the horrible Russian invasion of Ukraine has precipitated and how that has impaired the sentiment of security that we in Europe had, and the sentiment that we could forever rely on the protection of others — that has been impaired significantly. When you look at the energy supply on which some of the European countries, particularly but most of us have relied upon, namely access to reasonably cheap oil and gas supply from Russia — that has been impaired significantly and we had to find the resources to respond to that. And whether you look at the business model of some countries where the destination was inevitably China in the main — that has already been challenged as a result of the fragmentation that is not just a risk but which has happened. If you combine that with the technology risk that we could all be under, either because of political determination or because of shortage of supply, whether it's on the front of microchips or rare earth, I think we are in a situation where many of the assumptions have been shaken up and where we collectively are on the cusp of — I hope this is my hope — of better taking hold and control of our destiny by making significant structural efforts to be more independent, be more productive, be more autonomous in all these different dimensions. Is it going to happen overnight? Yet again, no. Because on some of those fronts, it takes time, it takes investment, it takes political determination, it takes momentum. And from a pure sort of, as president of the ECB, what we can do on the monetary front is to deliver on our mandate of providing price stability so that the fluidity of factors that is needed, both in terms of capital and labor, can rest assured that price stability will be within our remit under strict commitment to deliver on our target of 2% medium term. But yes, I think historically, I believe that in a few years' time we will look at 2025 and those latest three years as a significant change in the way in which we conduct our life, our business, and develop Europe, and I hope for the better.

F

Francine Lacqua1:03:14

Jay Powell, last year in Sintra you said that the US cannot run these kind of deficits in good economic times for very long, and then you also said we'll have to do something sooner or later and sooner will be better than later. How's it going?

J

Jay Powell1:03:34

I probably preface that by saying we don't comment on fiscal policy. That is the one thing that I have said and my predecessors have also said, and that is the US fiscal path is not a sustainable one. The level of the debt is sustainable, but the path is not, and we need to address that sooner or later. Sooner is better than later. That's what I said last year. There's not a lot more I can say.

F

Francine Lacqua1:04:02

How much of a problem for the world are America's public finances? Governor Rhee.

C

Chang Rhee1:04:10

We have to see what's going to happen. But as I mentioned, we take it as an environment and we just adjust our policies accordingly. I don't comment on our fiscal policy, let alone anybody else's.

F

Francine Lacqua1:04:31

Governor Ueda, actually you spoke two years ago at the ECB conference. It was your first public appearance overseas after taking the current role in April 2023. And you talked about your surprise with the tight schedule of a central bank governor. Are you getting used to the schedule? Is it ramping up? Is it even more than when you started?

K

Kazuo Ueda1:04:52

It's still very tight.

F

Francine Lacqua1:04:56

Is it tighter than before? How are you finding yourself after more than two years in the job?

K

Kazuo Ueda1:05:02

It's as tight as two years ago. So, it hasn't changed. Getting used to it a little bit. Yes.

F

Francine Lacqua1:05:08

Governor, what's your biggest task for the rest of your term until 2028?

K

Kazuo Ueda1:05:13

As I was saying at the outset, headline inflation is above two. Underlying inflation is below two. I want both to converge to 2% by the time I leave my office.

F

Francine Lacqua1:05:30

I think you were also asked what keeps you awake at night in Washington in October, and you talked about the pace of rate hikes as one thing. Is it still the same or do you have other things that you're worrying about?

K

Kazuo Ueda1:05:42

I didn't sleep well last night. There's a reason for this. Governor Powell was sitting next to me during dinner and he told me that espresso contains less caffeine than coffee. So I immediately had a cup of espresso.

J

Jay Powell1:06:05

I meant total amount of caffeine rather than caffeine per ounce.

K

Kazuo Ueda1:06:13

Anyway, that is a joke. But during these international meetings, I get chances to talk to my colleagues, get a lot of useful insights. So when I go to bed, I think about those and say to myself, maybe I should adjust our economic outlook, our policy strategy in response to these nice comments. And this sometimes keeps me awake, but it's a nice thing to do to keep the trust in ourselves, which is a very foundation of what we do among central bankers.

F

Francine Lacqua1:06:59

To all of you, what keeps you awake at night given all of the uncertainties and the changing world?

C

Christine Lagarde1:07:04

First of all, I can confirm what Kazu just said, because it did happen on occasions that the following day after probably a difficult night, you came to see me and said, 'Did you really say that yesterday during the meeting?' And I knew that you had been sort of ruminating and pondering what the consequences were. So it's the truth. It's not a joke.

F

Francine Lacqua1:07:26

What keeps you awake?

C

Christine Lagarde1:07:30

The truth. By that I mean I'm getting more and more concerned about the role that artificial intelligence is going to play, about how distorted things can be presented, how public opinion can be manipulated. And having been a lawyer by background, where searching for the truth is one of the purposes that we hold as auxiliary of justice, I'm very concerned by what's happening at the moment. And what kind of moral compass and the watchdog of the integrity of data — because we keep saying that we are data dependent and we want to see our projections and our assessment and the analysis anchored in empirical data and understanding of what's happening in the reality of the economy — and I do have this fear that things can be distorted and that we can fall prey to that because it's incredibly easy and actually described now in some literature that is of great concern to me. I mean, I sleep at night.

F

Francine Lacqua1:08:48

Chair Powell.

J

Jay Powell1:08:51

I have a little more than 10 months left on my term as chair, and all I want and all anybody at the Fed wants is to deliver an economy that has price stability, maximum employment, financial stability. What keeps me awake at night is how do we get that done? I want to hand over to my successor an economy in good shape, and so do all of my colleagues. That's all we ever want. So that's what keeps me awake at night — are we on a path to do that and how do we get that done.

F

Francine Lacqua1:09:24

Do you plan to stay on as Fed governor after your chair term expires?

J

Jay Powell1:09:28

I have nothing for you on that today.

F

Francine Lacqua1:09:32

Governor Rhee, what keeps you up at night?

C

Chang Rhee1:09:34

My apologies to the sun, but one concern that I have is unique to our problem: a perception gap of the public due to very rapid structural changes. For example, a decade ago our potential growth rate is around 3%, but now it's well below 2%. But people still think that we have to grow above 3% in normal times, and that actually expedite their demand for more stimulus, monetary policy and fiscal policy, while what we need is structural reform. But if I keep on talking about structural reform, I don't know how far I can go on discussing this structural issue because some people say that it's well above my mandate. But I think what is important for our country is not only the cyclical issue but also how to adapt to these structural changes, and that is a very difficult challenge.

F

Francine Lacqua1:10:36

Governor Bailey.

A

Andrew Bailey1:10:40

I want to deliver you inflation sustainably at target. As I keep saying to my colleagues, please stop thinking of all the shocks that we haven't had yet in my term that we might have. But today — maybe I've been sleeping too well because I felt I needed something else to do — today is a significant day because it's my first day as chair of the Financial Stability Board after taking over from Klaus's enormously distinguished leadership. So that gives me a whole load of other vulnerabilities to think about and worry about. But seriously, there obviously are issues in the financial system that we're very focused on, and we'll be very focused on in terms of understanding the vulnerabilities of the situation we're in.

F

Francine Lacqua1:11:22

Governor, I also wanted to ask you about digital currencies, because the Bank of Korea put brakes on testing a central bank digital currency this week. Would you agree that it's more of a priority to find the right regulation for the immediate challenge of stablecoins than to develop a CBDC that no one may use?

C

Chang Rhee1:11:43

That's a hot topic now in Korea. The surging demand for the dollar denomination, especially the recent passage of the Genius Act in the United States, has made many fintech companies and advocates of stablecoins ask the government to allow non-bank institutions to participate in issuing the Korean won-denominated stablecoins. As you mentioned, we have been experimenting the tokenized deposit pilots with commercial banks in our permissioned network, but the surging demand for allowing non-bank financial institutions to issue stablecoins in the public domain makes me — I have to talk with government agencies because it's well beyond the Bank of Korea's mandate. From our perspective, what we are worrying about is that if you allow the unregulated won-denominated stablecoin, it will definitely expedite exchange into dollar-denominated coins and undermine our capital flow management regulation. We don't know whether the new technology in blockchain can identify the irregular transactions, do the know-your-customer rule kind of regulation very well, and then even identify the irregular, strange transactions very easily — but we're not so sure whether this is true. And also there's a narrow banking issue, many other issues. So I think I have to talk to the government authorities how to handle this kind of regulations.

F

Francine Lacqua1:13:21

Andrew Bailey.

A

Andrew Bailey1:13:22

It's an important subject. It's one of the subjects that we will have on the agenda for the FSB. No question about that. The thing that I think about stablecoins — and here I distinguish them from something like Bitcoin — is that they purport to be money. They purport to have the medium of exchange function of money and therefore they do have to meet the test of money. We've talked a lot about trust in money, about the so-called singleness of money, which is really all about them being assured to hold their nominal value. For me, this is going to be the critical test as to what structure and design comes out of all this work that meets that critical test, because if they don't, then I don't think we can be content with them — if they're purporting to be money but don't actually meet the test of money.

F

Francine Lacqua1:14:18

Christine Lagarde.

C

Christine Lagarde1:14:21

I have a relatively strong view on that point, if you don't mind. I think that we are falling prey to some confusion between money, means of payment, and payment infrastructure, and that is accelerated or emphasized as a result of the technology that is being used. And I regard money as a public good and ourselves as the public servants in charge of securing and protecting that public good. My fear is that the blurring of the lines that I mentioned earlier are likely to lead to a privatization of money. And I don't think that this is the purpose for which we've been appointed to do the job that we have, nor is it good for this public good that is money. I think it risks undermining our capacity to conduct monetary policy, and I think it risks weakening the sovereignty of those countries or those regions which inadvertently become subject to the use of that means of payment, payment infrastructure slash alleged money. We should not only just consider it but determine what our policy should be about it, if we mean what we say and we protect what we have to protect.

F

Francine Lacqua1:15:47

Chair, I actually have a question. Do you fully support the recent proposal driven by the vice chair for supervision, Michelle Bowman, on rolling back capital rules? Would that actually meaningfully improve liquidity in the Treasury market?

J

Jay Powell1:16:02

I do fully support what we in fact voted for, what we put out for comment, which is putting the leverage ratio back where it should be, which is a backstop to risk-based capital. So yes to that question. On stablecoins, let me say, I do share the concerns that you hear here, but I also think it's a positive step that we now have a regulatory framework for these in the United States. We tried very hard in the last Congress to work with people on both sides of the aisle to create such a thing. Now it looks like we're well on the way to creating a framework, which I think is something we need. If we're going to have stablecoins — and apparently we are — we need to have a federal and state-level regulatory framework, which I think we're making progress towards having.

F

Francine Lacqua1:16:48

Many of you have plenty of time left in office. Others will leave sooner. Knowing what you know today, Governor Ueda, if you already had to offer some advice to your successor, whoever that may be, what would it be?

K

Kazuo Ueda1:17:08

I don't know. If I finish in two and a half years or so, maybe as I said, inflation would be at 2%. But I will not have finished reducing our balance sheets to appropriate levels. So I would say to my successor: take great care in proceeding with further reduction of the balance sheet.

F

Francine Lacqua1:17:48

Christine Lagarde.

C

Christine Lagarde1:17:49

I don't think I would say anything, because I remember my predecessor telling me that it would be a walk in the park. So I'd say nothing. But I would share the ambition of Jay Powell. I would want to hand over the job as well done as possible and results achieved as much as possible.

J

Jay Powell1:18:10

We're trying to deliver macro stability, financial stability, economic stability for the benefit of all the people. If we're going to do that successfully, we need to do it in a completely non-political way, which means we don't take sides. We don't play one side against the other. We stay out of issues that are really not our bailiwick, and we just focus on those things. We're trying to have it be so that the public lives their best economic lives, and so that elected policy makers can make the really important decisions in a stable environment. That's just how I think about it.

C

Chang Rhee1:18:51

I can say something, but I don't know whether my successor will take it seriously. But given that I mentioned structural issues, I hope that the Bank of Korea continues to raise its voice outside just monetary policy for general economic issues.

A

Andrew Bailey1:19:06

Be humble. We're exercising real power. Many people think we are not humble. Be humble. And I'll say this: if you want an illustration of this, Christine and I were both in Ukraine a week before last. If we think we have it difficult, spend time with the Central Bank of Ukraine.

F

Francine Lacqua1:19:26

Thank you so much to everyone for a wonderful panel.

H

Host1:19:40

Thank you, madame. Thank you to Francine and to all of our panelists for doing such an excellent job of bringing the first day of Sintra to a fitting end. For those of you in the room, just two pieces of housekeeping. We'd like you all to vote on the Young Economist competition. To do so, please go outside into the foyer. There's QR codes on the posters and click on them, and then use the code on your badges to choose your favorite entry. And then please come and join us downstairs for the group photo, too. And for those of you watching online, thanks a lot for joining us, and please join us again tomorrow morning for day two of Sintra.

Forum BCE a Sintra. Dibattito LAGARDE contro POWELL (Fed) in DIRETTA

About Christine Lagarde