Transcripts For CSPAN Discussion On Banking And Financial Markets 20151017

Goldman sachs in 2007 interesting timing to run the markets desk and became president of the new york fed in 2009. In that role he served as vice , chair of the open market committee, the policymaking committee of the event. John taylor is the Marion Robert professor of economic at stanford and many other things at stanford. Among other things he was a , member of the Council Economic advisers in the First Bush Administration and under secretary of treasury for International Affairs under the second Bush Administration. John taylor is known as being the creator of the taylor rule. Although i am told he did not put at the name on it, somebody else did. It is a simple rule of thumb that talks about how far inflation is how far the economy is from full employment. John developed the taylor rule in 1993 when Alan Greenspan was chairman of the fed. Alan greenspan was either incapable or unwilling to describe his approach to the rest of the world. What made john so amazing was he seemed to capture the greenspan fed with an equation in ways much more clearer than greenspan was able to explain anyone else. If you read the transcript, greenspan talked the same way inside the fed as he did outside. The taylor rule has since evolved and some people uses as a yardstick to decide if Interest Rates are too high or too low. Theres legislation pending that would require the fed to explain to congress when they deviate from the taylor rule and why. Bill dudley takes a different approach. He said its not a good substitute for indepth analysis and judgment. And he has called the taylor will incomplete because it does , not incorporate Financial Conditions. After all, he said the fed influences the economy not directly but through Financial Conditions. And way back when he was an economist, he talked a lot about a Financial Condition index as a guide for Monetary Policy. Now, i am not a phd economist, im a student of economics. And most i know, i learned as reporter for the wall street journal from wise and patient teachers like bill dudley and john taylor. I look forward to the todays lesson. What we are going to do is bill will start and speak for about 12 minutes. Then john taylor will respond. They will join me on stage for a conversation. Then we will turn to question from those of you in the room or for people watching online, you can send us a question on twitter by using hashtag fed. Please join me in welcoming our first presentation, bill dudley. [applause] bill thank you, david. It is a great pleasure to be here to participate with the john taylor. Todays topic which is where to go next, to address the issue of how should Monetary Policy be conducted. This is an issue getting considerable attention in washington, d. C. To put its exactly the question , i want to tackle is it better for policy makers to start with default role as a more position or for policymakers to have a more flexible approach . As always, what i have to say reflects my own views. And not necessarily those of the federal market committee. To get right to the punch line, i favor a more flexible approach that incorporates a broader set of factors into the Monetary Policy decisionmaking process. The world is complex and everchanging. There are many factors that can impact of the Economic Outlook. And the attainment of the feds objectives and therefore the stance of Monetary Policy. At the same time, i do not favor total discretion, in which Monetary Policy is revealed in an ad hoc fashion as we go along. As david said looking outside and deciding we be seen on umbrella today. For this to be most effective, participants and businesses need to anticipate how the Federal Reserve responds to evolving conditions. The transmission policy to the real economy depends not only on what policymakers decide to do today but also what the public the fmoc will do as the Economic Outlook changes and evolves. Our experience in recent years underscores how important expectations are influencing the effectiveness of Monetary Policy. Policy makers need to act in a systematic and consistent manner so that anticipations are formed accurately and behavior can respond consistent with those expectations bring in my view, it was a total discretionary policy. I like to make it clear that at the start, the taylor rule, which is the formulation based on johns papers, have a number of positive attributes for useful reference for policymakers. First, it has 2 parameters. Second, the role has a desirable feature that when economic shocks push away from the Central Banks objectives the , teller will prescribes the policy and can push the economy what the Central Banks rules are. Third, studies have shown the acrossrule performs well a range of different assumptions of how the economy is structures and operates. Despite these attractive features, i do not believe any prescriptive rule, including the taylor rule, can take the place of a Monetary Policy framework that incorporates the fomcs collective assessment of a larger number of factors that impact the Economic Outlook. As i say, the taylor rule has several significant shortcomings that could be detrimental to attainment of the Federal Reserves mandated objectives. ,hese are not just a radical they have been relevant to Monetary Policy in recent years. First, the taylor rule is not forwardlooking. Its policy prescription is based on the current size of the output gap and the deviation from the feds objective, not how these variables are likely to evolve in the future. In a rapidly changing environment, the taylor rule and similar prescriptive rules will be behind the curve. For example in the fall of 2008, taylor rule prescriptions were well above the level of the rates at the time given the sharp tightening Financial Conditions that occurred during that period. Many economists recognized such prescriptions wouldve been inappropriate, and they suggested various ad hoc modifications to those prescriptions. Modificationsaid were appropriate at that time. But there was no consensus about what were the right modifications for the time, in part because the circumstances were unprecedented in the outlook was so uncertain about time. If the fomc was wired to Show Congress deviations from the rule at that time i believe that , wouldve slowed down how we would responded to the crisis and would resulted in a policy that was not sufficiently accommodative. The consequence would been a longer financial crisis and a deeper recession. Second, the taylor rule is typically used assume it to percent rate is consistent with a neutral Monetary Policy. But in equally Short Interest rate is unlikely to be constant, with the value affected by many factors including the pace of technological change, fiscal policy, and the evolution of conditions. Sometimes it can be much higher than 2 . Presumably, this was the case during the late 1990s as rapid technological change lifted productivity growth. Sometimes it can be below 2 . When Credit Availability dried up during the financial crisis in 2008, this drove the equilibrium rate far below 2 . Slow growthy, the rate of the economy and the low Interest Rate we have seen is evidence the equilibrium today is well below the 2 rate assumed by the taylor rule. If 2 were consistent with a neutral Monetary Policy, the n the very low rates of recent years, buttressed by our asset purchases, should of been extraordinary accommodative. As a result, we should have seen much higher than the 2 growth rate than we have seen and should have seen inflation rate much higher than what we actually experienced. This conclusion is supported by a number of more formal models. For example, the williams model currently estimates the equilibrium shortterm rate is around 0 , not 2 . Third, the taylor rule, and more broadly, any prescriptive rule for the systematic quantitative adjustment for the policy rate to change intermediate variables such as real gdp or inflation is , incomplete because it does not count for the factors crucial to how Monetary Policy are transmitted to the real economy. Monetary policy affects Economic Activity for its effect on Financial Conditions, included the level of the equity market, bond yields, Foreign Exchange of a dollar, and credit conditions. If the relationship between the federal funds rate and other indicators of Financial Conditions were stable, one could focus on the level of shortterm rates. But because Financial Conditions withconsiderably shortterm rates, as we saw in the financial crisis one needs , to consider development of conditions more broadly. In fact, at times when shortterm rates were at the zero lower bound, the Federal Reserve took actions that eased conditions without changing shortterm Interest Rates. Such actions have included for guidance Forward Guidance that the fmoc was likely to keep rates low for a time and asset purchases that resulted in lower bond term premiums. As i said at the start, because i do not want to favor a rule mechanically does not mean i favor the polar opposite, the discretionary Monetary Policy in which market participants, households, and businesses cannot anticipate how Monetary Policy is likely to evolve as economic and Financial Conditions and the Economic Outlook change. Houses and businesses do not have a good notion of how the Federal Reserve will change. This will loosen the linkage between shortterm and Financial Conditions. Lead to greater uncertainty about the outlook and higher risk premiums and i think it would make it more difficult for policymakers to attain their objectives. Astead, what i favor is careful elucidation of those factors that influence the Economic Outlook and how Monetary Policy is likely to respond to changes in the outlook. This includes fiscal policy, productivity growth, the international outlook, and Financial Conditions, as well as how much inflation and unemployment deviate from the feds objectives. By conducting policy and it by conducting policy and a transparent way and communicating what is important in determining the Central Banks reaction function, i think policymakers construct the best balance between a Monetary Policy that fully incorporates the complexity of the world as it is, while at the same time retaining considerable clarity , about how the fmoc is like to respond to changing circumstances. A formal policy role such as the taylor rule misses this balance by going too far in one direction. What is important for attaining the feds mandated objective is not a formal, prescriptive role but rather the fmocs , strategies are well understood by the public. This argues for Clear Communication for the fomcs meeting statements and meetings. Longerterm goals are Monetary Policy. Testimonies before congress. And speeches by the chair and other fmoc participants. It is also important that the strategy be the right reaction of function. This means the policy approach that responds appropriately two important factors beyond the two parameters of the taylor rule the output gap estimate and the rate of inflation. Thank you for your time and attention. [applause] john thank you for coming and thanks for inviting me to be here. Last time i was speaking in this room, not the last time, maybe the first time, i should say. The first time in 1982. I gave a paper about something called the swedish Investment Fund was like a policy rule. Stan fischer was a discussant. , givend up what he said that stan is now at the event. He said ,john reaches a surprising conclusion. Somewhere, sometime, a government policy worked in a way it was intended. [laughter] john maybe that same day or another meeting that same year, paul bogor was here. We went over and had a you drinks. Paul volcker was here. We went over and had a you drinks. And jim tobin was here. It was 1982, a difficult period and i remember very well jim asking paul, why dont you lower Interest Rates, paul . And paul volcker said i do not set Interest Rates, i set the money supply and the market reacts to the Interest Rates. And that was the end of the conversation. This was also crossroads period, if you like. A period where the fed was turning, i think. Paul volcker had a lot to do with that. It is somewhat related to where we are down. I think what paul volcker was able to do with his colleagues was turned the fed from a very discretionary stop, go, go, stop policy, which was disruptive. Inflation rose. And it was tough. Crossroads are always tough. Experience, plus all of the Research People have done, has led me to the conclusion that we really need to strive to some kind of focused rules based policy, because that is what paul volcker day. He was very ad hoc in the 1970s when i started penning the subject. And the economy actually performed remarkably well, the great moderation. I always liked the word long boom. But there is no question the two are related. Unfortunately, it did not stay that way. As i interpret the history, the Federal Reserve began to get off of that rulelike policy and i think originally showed up in 2003, 2004, 2005 before the crisis. So there is a causality, in my view. That deviation, along with other things and regulatory lapses , at least made the Great Recession worse and led to a lot of the problems we have had in the last 10 years. I think the fence reaction to the panic i will come back to that as i discussed some of bills points were admirable. A last resort action in the panic of 2008. It seems to me as i continue to get off track a coverage and theolicies discretionary was unruly. One way to think about the crossroads is where the road should be in. Where you should be going. To me, it should be to get back. Is important the way bill has articulated, it is really not and all are lucky an all or nothing thing. I think that is what we need to be focusing. To me, aside from the transition, aside from the crossroads, which is what we are focused on so much now, is it is good to have a sense of where we are going. I inc. Bills remarks were very constructive. To me, we should be going in a sense back, but not completely, because the world is different. You can see how emerging markets are so integrated with the rest of the world. Go back to the situation. You can fairly well understand the reasons for the ups and downs in the Federal Reserves rates. And its target. Be rocketr going to science, but you can understand this. In a sense, that is what was going on and that rule like period. The taylor rule is one way to describe that. Actually, the taylor rule was not originally a descriptive device. It was a recommendation device. We were always surprised about how it described much of the greenspans fed. I think this is more general and it was never meant to be mechanical. People always quote my original papers, saying it should never be mechanical. And it is certainly never meant to be mechanical. So we are at this crossroads now paired i actually stated this wonderful dupont plaza, dupont actually, i stayed at this wonderful dupont plaza, Dupont Circle hotel and i was looking at another crossroads. This one only has 10 routes to take. Massachusetts avenue, New Hampshire avenue, connecticut avenue, peachtree, 19th avenue. You can go either way. 10 options. I think that that has to decide which option. It now seems to me it is driving around that circle. Driving around that circle. And we want it to go somewhere. I do not know if it will go on a rulesbased direction and not going to be easy and never was. Not for paul volcker. And we learned something from the transition off of qe. Former chairman bernanke talked about it in a way that was not clear. But when things got clear, it was quite smooth and strategic and i think it worked well. So clarifying where youre going and how youre going is important. I would say one of the things you mentioned, normalization, dating back to rulesbased policy, also requires getting the Balance Sheet back to normal levels. It is a complicated issue under a lot of debate. Rates,e fed does raise it will have to do it by paying interest on reserves or by reverse repose. Ultimately, i would like to see the situation where the Interest Rate is determined by the supply and demand for reserves. Hink that present i i think that puts an important sense of rules into the fed and makes it more difficult to do qe. I do not like qe, qe infinity especially. It seems to me that is another part of getting back to a rulesbased policy. Which of those streets is it . Maybe p for prosperit. Which maybe down p is west. I always like the western direction. The only downhill place you can go, maybe a little easier, easier trip in that direction. So, bill, i appreciate the care with which he has addressed the issues. He also gave an important speech in 2012 to the council of foreign relations, which talks about his views and how they relate to policy rules. In a sense, it seems to me that by listening to this and listening and reading these things, it is a way of how, if legislation was passed it might , be used. It was really an attempt to describe how what the ad would be doing is different from a simple rule and nobody was to follow a simple, mechanical rule and was useful to compare. People do it all time. Thats kind of discussion might very well be how the fed would constructively respond to the requirement that it reported strategy. I like how bill use the word strategy all the time. Strategy is not reported mechanical rule. Indeed, it may at sometimes require some modifications. I think the example bill gave up 2008. I think he suggested i said modifying the role, and that is true. That is actually the period where we had this enormous movement between the libor spread. It seemed to be real credit issues in the market. Some of the simple idea was just adjusted by that libor is not the best thing to use anymore. In other words, the modifications are still within the context of the really rulelike discretionary thing. Bill mentioned the taylor rule is not forwardlooking. Thats because it responds to the current state of the economy. As best as we can measure it. Always hard to measure where you are. By the way, we are Getting Better in our forecasting. Where we are now is really i take that is, in a sense, not the way i think about it. If you want to examine whether a policy rule works well, it is always going to be evaluated in the context of a model or view of the world which is forwardlooking. So the better any other central bank reacting to todays inflation rate is implicitly describing how it will react to tomorrows Interest Rate tomorrow. Any model or view of the world which involves expectations is going to take that into account. Even though you cannot really see a forecast on it nation in the rule, you see the actual inflation rate, it really is forwardlooking. And attempts to replace the current inflation rate by forecast of inflation, thereby making it look exquisitely forwardlooking. It usually does not work that well. You also have to figure out how you want to if forecast of inflation. It is hard. What thehe question of equilibrium real Interest Rate is very important. Originally, the taylor rule had a 2 target rate or the in patient. It also had a 4 equilibrium nominal ones rate. 2 rate real. The docs indicate the fed has slipped that down a little from three point 5 , the media now. I do not think that is inconsistent with using a policy rule. , cannot beorously willynilly. About you change your strategy or rule too often, and rules discretion clothing. It have to be careful about that. In the last minute, bill recommends having a careful list of something your respond to. And how you respond. The taylor rule is too simple. But is that really so different . Isnt that what we are striving for . The reason the taylor was simple is because we made it simple. A struggle then was to find a goal for the Central Banks to use it inherently would these so complicated. Everything went matter. Could you somehow boil it down to some key things . It was amazing we could pave the idea is you cant boil it down to this couple of things, have trouble measuring them, but that does not mean your strategy does not sometimes have other factors. As long as i can predict systematically. I think it is a we are striving to do. [applause] david thank you, both of you, for clear and 16th presentations six think presentations. Who mayo remind people be watching online that if you have a question, you can put it fed. Tter, hashtsag i want to start with you on something. I think there is a woody allen movie where he goes on a first date and says to the girl, can we just kiss now the beginning and get it over with . We get into the deeper issues, tell us, are you going to raise rates in december or not . [laughter] answer wish i knew the to that. We said it depends on the day that depends on data between now and the end of the year. It is crazy to presume what the data will be. David so is the economy performs as you forecast, then if the economy performs in line with my forecast, i would recommend listing off. But it is a forecast. People in the forecast business now sometimes forecast that are wrong. Rather than relying on my forecast, i would look at the data in evaluate how the economy unfolds. David thank you. You said it was important be public well understand the intentions and strategy of the central bank. How well do you think the fed has been doing that . What grade would you give yourself . Bill in terms of what were going to do this year at the next couple of meetings, i think you probably have not been doing that well because there are different views on whether the economy will perform in a consistent way or not. Disagreement about will the economy be Strong Enough is a realistic one, given the economy is growing only slightly above trend. The Unemployment Rate coming down slowly. Recent economic move suggests the economy is slowing. And developments in china and emergingmarket economies that could be developed in a way that come back to hurt our economy and hold down the u. S. Inflation. It is reasonable that differences in the forecast will lead to different views about the appropriate timing of lift off. I think where we are clear, in terms of what is driving our decision. We have been clear that what we want to see is further improvement in the labor market. So that we can become reasonably confident that inflation will term. To 2 in the near we have also provided information on how we and the economy will you fall. Revolve. Will compared to the 1970s, the fed has more information on what we are thinking, what our forecast is. Summary of economic projections, if you go back 10 or 15 years ago, it does not even provided Interest Rate. You can see the different fomc participants, what they think about the timing of lift off. Last fomck at the meeting, there were 17 participants, and 13 expected the lift off to take place sometime this year. Think how well do you they are communicating their intentions and strategies . Think it is confusing. Unfortunately now, leading up to the last meeting, it seemed to the more difference of opinion and confusion than i have seen before. I think half of the people were surprised by the decision and half were about right in terms of what they expected. David a meeting done right. It would be nice if you got a sense of 80 or 90 got it right. John it is difficult now. I think the reaction to that decision was, to me, and shock to. One of the concerns we do not know all of the reasons you and your colleagues making the decisions. But one of the receives that sort of the reasons to postpone was the german market. And the postponement itself seem to cause more turbulence. That in itself was a learning experience. Bill wouldow if agree, but that is important, because it is hard to change after so many years at zero. I can understand that. Bill i do not think our decision was based on the fact there was turbulence and Financial Markets. I think the issue is are we making significant progress in our targets of employment . And to the extent there was concern about the chinese growth outlook. How what was happening in china was feeding through prices are putting pressure on emerging markets. Some of that also showed up in terms of Financial Market turbulence. To me, the issue was not the wasncial turbulence, what happening in china was. And the risk that it could come to the u. S. And slow us down. David john, do you think that the problem is they are not following a clear rule or do you think policy is too easy or both . John i think they go together. If you look at a lot of roles bill is trying to give counterexamples but many rules say the rate should already be above zero. It would still be lower than fomc thinks it should be going back to. It will be easy and that sense. Now, there is the sense out there that any as long cannot be done as inflation is less than 2 . The economy is not roaring ahead. Experience shows a rule should have a higher rate at this point, given the state of the economy. It would still be quite easy, compared to normal. Using when we talk about a rule in normal times, when things are stable like they were in the 1990s, and you think one reason things were so good is because the fed was using the role but it is also true we had an unusual period in the last 10 years. What with the taylor rule have had the fed do . And is the only thing you can tell us is, well, lets deviate from it, happy really accomplished your aim of having a systematic rule to which people can have confidence in . John first of all, the rate would not have been so slow. So low. That is my calculations. That was written down before the crisis. That is probably the biggest thing. The cut in rates in 2008 was exactly what the rules said. You basically have the rate coming on. I do not think it would have gotten as high if it had been in 2004arlier bactroban 2005. If inflation picked up and the fed raise the rate, that would not have happened. 2009, there was a real issue about the zero bound. Iowas thought when you hit the zero bound, it means you look at money growth to make sure it is steady. Ashink after as late 2010, there could have been movement in the fund rates. To me, it is before and after the panic that are the problems. David once you hit zero, the rule tells you the Interest Rate should negative, right . I have never thought of having a negative rate. Increase theyou money supply when you are at zero . Presumably, you add more reserved to the Banking System. To do that, you do qe. Qe was not motivated to keep banking rates from falling. Bill we were trying to make Financial Systems more accommodative. I never heard any discussion about what we need to do now that the rates are zero. Just make sure money growth is not fall. That was the lesson from the great depression. Bill how do you prevent money growth from falling . John what did you do when you did qe . David is it let is it that you do not like the rational for qe or they should have done Something Else . John i think they should have made sure money growth would not fall. We would have been buying security to plan the Banking System. That is what we did. John certainly would not have purchased massive amounts of mortgage securities. Bill what causes the money supply growth . There has to be some policy that increased the Monetary Base by some amount to increase money growth. David they would have had to buy assets . Do not necessarily think by. Money growth was doing ok. Bill it was ok because we were providing stimulus to the economy. I think there was a conflict between qe and money supply growth. John that was not a justification. That was low Mortgage Rates and eventually to stimulate the on market. I never heard the description we have to get them to moving again. Onl the reason we focus money supply growth is the we have seen the link between that and has grown. Paul was systematic in the pursuits of his goals, but he was not a creature of habit in terms of what insurance he used jayz used my supply growth for in terms of what tools he used. He used money supply growth for a period of time and then changed it. You want to be flexible. If you are applying a rule and it is not working, you need to modify the rule. That is what happened in 2008 and 2009. We were at the zero lower bound. The economy needs more stimulus because we are far away from our goals in terms of employment and price stability. So we provides the ability by Forward Guidance. Largescale asset purchases. That is superior than following a rule. And just saying we have to follow the rule. We had better results not great, but better. If you want to say what a ificy role work have said we did simulations with models, if the rate hit zero we usually cut it off at 50 basis points or under basis points then we would go back to a freedom rule. Then you would do that. That was basically the strategy. I do not think you would need more than a year to do it. Money supply growth grows at a certain rate. Add reserved to the Banking System, which is a we did. I do not the conflict . John because you added so much in ways that was not dedicated to money increased growth. The second question is that do you think that a rule with which you would have been comfortable with implies less tv than they got less qe than they got. John they may have applied no qe. It remains to be seen. I actually did work on evaluating the first qe and found it did not impact Mortgage Backed securities. If you do a study of what else was going on to affect risks, it did not have an impact itself on reducing rates and mortgage markets. In that sense, it did not work. Made it worse,we because you now have a policy you cannot describe systematically, you do not know how you will unravel it, and i do not think that is cut short days. We have never been to the zero lower bound before. Moment, it makes sense to figure out what you can do to innovate, providing more monetary support to the economy. That is what we did. That is preferable to saying we are stuck here with his old set of rules we have to follow. I think we did better by pursuing the course of action we did. David and you disagree on the efficacy of qe. You do not think it works. Bill i think it was helpful. David right. I want to tease out one thing. You both mentioned that i am not sure everybody understands. The taylor rule has an equilibrium real Interest Rate. That is an Interest Rate that we think is the inflationadjusted rates when the economy is at all employment. Bill mutual Monetary Policy. We keep you there. David when you did the team the role, there seems to be consensus you knew what that was. Now there is disagreement about what it is and there is an argument that has come down. If you are the fact, and if you are the fed and you point he always point out that it is hard to figure what is happening now, how big the shortfall for full employment is does that not get more complicated when you cannot be sure you know what the equilibrium rate is . I do not think it was correct. I think everyone agreed in the 1980s and 1990s that it was an approximation that seemed sensible at the time and that it worked. It was not like it was everybody even thinking of it in those terms. They were focused on what the equal real federal funds rate should be. That rule had a lot of 2s in it. 2 realtion target, equilibrium fund rate. One over two for the coefficients. It was based on lots of studies. I do not know why it was simple. Bill i do not think it has changed that much on uncertainty. What happened is we are in a world craving maybe it will reverse but prefers discretion. That is the best way to put discretion into a policy rule. You change the level and can do whatever you want if you just change that rate. Isid you do not think there more uncertainty today on the equilibrium rate than 10 years ago . John i think what happened because of the unusual Monetary Policy, i think it will cause more uncertainty of where inflation rates will go. In a way, inflation is more stability. What were you going to assume about the inflation rate in the 1980s . There is much more certainty about that. Bill you talk about the rule rule came first and then the Monetary Policy came after. Monetaryt that the policy came out in the 1980s and then the taylor rule was a description of that policy . John Alan Greenspan describes it as a the fed deserves an assist. I think that is right. I would put it this way. Vat was going on with focus was an attempt to policy on a smaller number of things. Maybe inflation. To be clear about that strategy, he did not even have to go and talk about it much. He jackson hall meetings, basically did not say much. Everyone knew what the policy was. It was clear. That is very rules taste and forecast. Regression,did a you add the 1970s, and you add much different estimates. If they had to choose a particular period, and use that to drive the coefficient. Myself, it was not based on a regression. It was raised on what our research told us would be good to do. Bill i think no one wants to go back to the Monetary Policy of the 1970s, so we agree on that. David let me tell the story about what is happening. I had this caricature that the only thing that matters in the economy is Monetary Policy. We had stability in the 1980s and 1990s. Paul volcker brings a miracle. Everything is good for a while. The roleeviates from and everything falls apart. Are there not a whole lot of other things going on . John absolutely. Monetary policy cannot do everything. The fed says that and i agree. It can cause instability. I think you look at the timing of those movements. If you look at different periods of history, different countries, Monetary Policy is powerful, for good and for bad. David and your views was that if it was tighter in the 2003 to 2005 period, we would have had no crisis, no housing bubble, or a smaller one . What . Comparison,y way of in 2003, the fund rate was 1 . Inflation was about 2 . In 1997, the inflation was 2 and the fun read about. 5 . Two different inflations, two different periods. It is a big difference. A searchhat is part of for yield. Part of the excesses. I always say it was not the only thing. I think there was Regulatory Oversight missing. But those together we never know for sure, but that is just the kind of thing people were talking about and that was the kind of thing that happened. David do you agree . Bill i think Monetary Policy a second or third order. I would point to lack of standards. I would point to leverage that existed in the financial sector. Complex mortgage products that people thought war safe but were toxic. I think we would have gone a housing bubble even if the fed followed a tighter Monetary Policy. I would have slightly different views. Which is even though the Federal Reserve raises Interest Rates systematically after, Financial Conditions never tightened. Bond yields came down. Stock market went up. Got deep inntil we the financial crisis that it became more available. The fact that Monetary Policy was not significantly tight to generate Financial Conditions, not because the fed started deviating from the taylor rule. But i think Monetary Policy was second. Chairman bernanke was good about this in his blog. In his newest book. At the economics policy in new york, which i chair, next month. David when you look at what the fed has done in the last several months, as bill pointed out, they have quarterly forecast, rates were the rates will be in the next couple of years, what couple of the next years, they have a press conference, they have written a mission statement, they have moved to wait 2 inflation target. Is a move inthis the right direction or a move into too much information . John i think you cannot have too much information. You definitely can. Your be out there talking all thinking your transparent but youre just confusing things. Agree there are different examples of how to communicate. Sometimes you do not have to communicate for people to know what you are doing. That is the ideal. I do think that the examples youre giving are missing an important thing. What is strategy . There is an important statement of goals in strategy that you guys worked out. It is all goals. There is no strategy. If you read it. A couple pages. There is no strategy. It does not say what you will do to the insurance, how you will react if the goal is off track. To me, it is misnamed. It is goals and you need another thing on strategy. A clearlyink we have defined strategy. Look at the fomc statements. We are going to have a Monetary Policy designed to push the inflation rate up and unemployment down. Interestift off, the rate, after we made further progress in the labor market. Pretty clear to people. What is not clear is how the economy will actually perform. I think the issue is not how the that is going to react to incoming information. Going to be economy Strong Enough to generate further improvement in the labor market to make us reasonably confident inflation will return to 2 . There is always going to be some residual uncertainty. John you, in your remarks, a list of the factors and some sense of how you would react to those. I do not see that in this strategy statements. I heard you say it here. In the think it is there fomc statement, the press conference, the summary of economic projection. We have said what is important. Growth rate economy. Pressure on labor market. Pushing unemployment down. And a sense this will be sustained. It is not just what is happening today but how it will affect of the Economic Outlook. I do not understand what is unclear right now. What is unclear now is the economy. John are you kidding . No one knows what you are doing [laughter] john i am sorry, this is a public event. Should say this. I have Great Respect for your position and what you are doing. Things,he great institutions like brookings, we as a Civil Society can criticize them. Bill debate is good. David the question you think the fed has not answered are what . What information do you want . John how much will it react with the Interest Rate when certain events happen . David like an if then sense . John right. David you think that is a wide thing to do, given all the other john for example, you asked me what should the Interest Rate be now. Maybewere back to normal, 1. 5 . I do not hear anything like that coming out of the fed. What are thes, but docs in 2017 that mr. X reffering to . I think if you connected the dots to those peoples forecast for outlook, then you would begin to talk about a strategy. Medias forecast for gdp. A median forecast of how that will translate in terms of unemployment and if nation. Then the dots how people think Interest Rate will evolve. John what would be helpful this relates to this legislation if that legislation passed and he had to report some kind of strategy, the whole system would have to get together to think about and articulate its. It would be hard. It is like when money growth was put into the Federal Reserve in 1977. Originally, the fed reacted in a way that it did not want it. But it was coming. So everybody got together and thought what is the best way for us to improve . There were different opinions. They had to come together. I think that is what happened. Life what are the facts of is that almost all the people who like that legislation and criticized with red are republicans. Been verymocrats have defensive of the fact. I am curious why you think that is and does that make you uncomfortable to think it becomes so partisan . John it is a problem. I thought about it for a long time. Testified, iten i was so visible. One side, that side. And it is an arcane subjects. Reflects thek it polarization people refer to all the time. There are lots of possibilities. Some say that the parties have somewhat different philosophies about government and intervention and power. So one party is generally less interventionist. I am not saying everyone is. I think the fed is less interventionist recently. I am sure there is more political reasons. If i were a political scientist, i would be able to figure that out. I do not think it is good this way. Mean well. People they are trying to be constructive. But for some reason, it has gotten a very partisan. David why do you not think it is not good why do you think it is not good . John the issues do not fall on party lines that much. We all want to have a stable economy. Keep inflation low. There is nothing that needs to be partisan about it. To thed go way back William Jennings bryan type of partisanship. I do not think it is that. Bill i think the fact that it polarized understates why it is a bad idea, in part because it would politicize the Monetary Policy process. I think you want have i think you want to have independence of Monetary Policy. It is Congress Sets the goals of Monetary Policy and the fed has to carry them out. You dont want the fed could be second guessed over every single Monetary Policy discussion. That would ultimately undermined the process, and make it harder for the fed to achieve its goals. I has been a lot of Academic Research that the outcomes are better in Monetary Policy is separate from the political process. That would risk having a less effective Monetary Policy, in my opinion. John i disagree with that. I think in some sense, if you is nott where and gone really congress, the administration think of the accord on and off and the period of the 1970s it is clearly the administration. In my existing government, which but inat a central bank, administrations, i think it would improve independence. This is our strategy, so, get off our back, we are not going to do what you are asking. I agree with you that the original concern is from the administration. Beyond, the and administration both parties have been consistent. If there is a threat to said independence now, im not sure you can get a vote of majority in congress who think the independence of the central bank is a good idea. You cannot get a vote from congress to pick the day of the week. We are trying a particular legislation, not all of congress. There is legislation that goes the way you are talking about. This particular legislation, i dont see it that way. I think it is constructed in a way to give it more independence. Theres always resistance in congress. Congress has the responsibly for oversight. This legislation enables congress to have oversight in a dontat things at the fed. About the one joke is fed using a ouija board. What are they going to do about it . You report your statute as you see fit, the best you can. It is a way to have some accountability. David you have said that the fed looks at taylor rules. , the membersses me of congress, even those in favor of the bill explain to me, what with the taylor rule tell you now, and how you deviate from it. It is not clear now, their opposition to it. Are lots of tables, charts, why not but a chart in with the bill and say, we did it, and talk about the bill . Bill that is an option. You startm is, when to focus on any particular role, you are creating questions. That may in turn limit your ability to pursue a different approach. It is not the point that you want to wander all over the place, depending on what date is. You want to be systematic. David what john is saying is, i will impose some discipline on you. Bill you have to be able to change it systematically, or you will achieve inferior outcomes. It would have led to a Monetary Policy that is significantly tighter than the one we pursue. We would not be making as much progress on unemployment. Think of it this way, what people would be out of work today. That is the real consequence. I dont feel comfortable having more people out of work today on the basis of, i had to follow this rule. John i really dont agree with that. You have no evidence whatsoever. My evidence looks at history, when the economy is worked below working well, when unemployment is low. At dont have to look only the United States, you can look at any other country. It is counter to what you are saying. I understand you have a different view. I think we would be better off now, even in the Current Situation if interest was at 1 . There would be less concerned about the downturn. What are you going to do with the downturn . The economy is working well. I think the economy is in much better shape. Just repeat what david said, it is not the only issue, there are lots of policy issues to address. Bill lets compare to europe or japan. We are much more aggressive about getting the Banking System recapitalized. In an absolute sense, we have performed much better than the major economies. We are slower out of the blocks to follow a similar type of policy. John comparing with europe theres so many other things in europe lets just compare with ourselves. Follow. Hey basically, they drove up the yen , and decided to appoint a e, but where is the economy . People have written a lot about the currency exchanges. Of course, in 2014, there was a euro went down. Emergent market communities are not doing well. Bill i think what is going on in emergent market world is a lot more complex. It has lot more to do with the chinese strong economic growth, now they are slowing, and the change in commodity prices. I would argue that the fed Monetary Policy regime has been very unimportant in terms of what is going on. David do you think fiscal policy has helped the fed achieve its goals, or been something that the fed had to fight against . John that is a big question. Package, i do not think it worked out too well with the obama administration. I dont think that is surprising. We have learned that these temporary stimulus things do not have much affect. That is what i think about the fiscal policy. I do think that the unraveling of those has required some contraction. The andthink that is of these inevitability things. I do think the issue of the debt is a problem. It is a little stable now, but it will explode. The fed is affecting that to some extent. I think that is a problem. T seems to me that the fed sometimes there is the idea out there that we are the only game in town. Fiscal policy is not working, so we have to do it. We can do it, and everybody wants you to do it, sea doing so you endi think up doing too much, i think. There is this kind of pressure all over the place to do something. Just say, no, that is not our job, we are not a multipurpose institution, we are a focussed institution. Contractionary, as you said it, the fed should offset that, or say, americans, you voted for these clouds . Clowns . John they should look at the overall economy. Bill Congress Gave us a very clear mandate full employment pursue is what we should. We have to take the world as it is, right . Of course, we need to put all the tools that we have available to achieve the objectives. I would like fiscal policy to unfold a little differently, and maybe a little less austerity. We have to take the world as it is and use the tools that we have as best as we can to achieve our objectives. John a lot of the austerity of the state and local is the economy itself erie basically, with the economy not going so well, revenues are not so well, so state and local spending has not expanded so fast. David i kind of wish we had one of these rooms where there was a clicker, but unfortunate did not think about before. E will take questions now there are a lot of people here so i will ask you to identify yourself and keep your question short. Micre is a my coming comic. A question for bill. Im formally of the new york fed with bill. Since mid last year, the biggest change in financial position has been the dollar. When you look forward, how do you think about the dollar in your forecast and policy strategy . Is it reasonable to assume the you will get more drag from the dollar than you would normally get a few were following a rate pass that was more like the s p than the rate currently in the market stucco bill certainly we consider the dollar and how it will affect the trade sector. We have seen over the last year, the dollar has appreciated about 50 . Of course, that is dampening inflation. We are not targeting the dollar in any sense. Dollar in terms of its valuation to the Treasury Department to think of worry about. The dollar is an environmental factor, along with a lot of other environmental factors like the stock market. All of those things together serve what you describe as Financial Market conditions. If conditions are more accommodative, you would expect the economy to grow faster. If conditions are more tighter, then you would expect the economy to grow more slowly. David when Financial Conditions are tighter bill theres another element as well. To the extent that policy is consistent with other countries and market expectation, you would not expect the dollar to move much. If other countries were following easier policies, the dollar would likely appreciate. Current evaluation is exceeding expectations. Brookings. Im a micro con us. Let me say, i think i hear all of this, and this is a deja vu agency. Bout regulatory the way i think about this, in the 1970s and 1980s, we had regulatory agencies. Employed forms of taylor rules. Prices were regulated. They were bad ones, but they have them. People then took your perspective and said, this is too rigid, lets start experimenting, get some flexibility. You say, these guys can make decisions on their own, looking for you, this more nuanced approach. Then, they said, lets go one step further and d deregulate all of these industries. From your perspective, if people are so good and better than taylor rules, at guiding what the fed ought to be doing, why dont we go that one step further and completely isolate the fed from any kind of political influences whatsoever and say, we have these bright people, they look at data, they will be nuanced, and let them make policy. They are not appointed by the government, they dont have to before congress. Doesnt it bring you back to take the rules k the rules. Aybe the rule is not so bad what you think . Bill the federal government has to have legitimacy. Is appointed by its board. Eddie legitimacy is very important. I think the problem with having this completely walled off have ah is people would legitimate question in a democratic society, who are these guys and women, and where did they get the ability to do this in a democratic regime . I think the balance we have right now actually works white. Ell quite well a clear sense of legitimacy of the people doing Monetary Policy in terms of who gets a positions, and lots of reports to congress and the public about what we are doing, so we can be evaluated on the basis of our successes and failures. I think it is a good balance. People lead decisionmaking about how to do it to us, but the goals are set by congress. John from wall street journal, i will try to as two questions. Mr. Taylor, when you wrote your rule, one of the benefits is it has embedded a 2 inflation role. The fed has said it has a 2 inflation goal, why do we need a rule . By example, when i asked my plumber to fix the leak, i do not ask him to explain how he will fix it, i just asked him to fix it. Expressedrs skepticism with the phillips curve, the expectation from the fed that inflation will rise. They expressed some desire to see actual evidence that inflation is rising before they act on rates. I would like to hear what you think of the argument, and if you have doubts about the expectations on the phillips curve, and if you want to see actual evidence before you start moving . David john, do you want to start . Idea just say what it is, do whatever you need to get to that i do not think it is enough. Qes, intervention into the market does not describe your policy at all. What if it was just one plumber in town that you had a choice to go to. What you want an evaluation of their techniques . I think this is a little more than your analogy. One plumber and talent and the plumber was completely incompetent, someone who do something to make sure there is a new plumber in town. I will blame john. I think theres a lot of uncertainty about how inclusion clauses work. There is a real question about Inflation Expectations versus resources. We dont really know exactly what the shape of the tradeoff is in terms of how much inflation we get as a consequence. We dont know how the phillips curve changes in shape as we drive the Unemployment Rate down even further. I believe that if you push the Unemployment Rate down far enough, the phillips curve will get steeper. People will ask the question, why are they letting it get that low . Theres concern around pressure on labor resources and how that feeds through. Inflation expectations have been so well anchored, that has been the most powerful determinant of what actual inflation is. You asked the question, joining to see actual inflation . I need to be reasonably confident that inflation will return to the 2 objective. For some people, they might decide that they need to see actual inflation head up. I dont feel like that is a necessary conclusion of inflation getting back to 2 . If i see more pressure on resources, and believe that the Unemployment Rate will continue to decline, i will expect that i will become reasonably more confident about inflation going back to 2 over the long term. I dont think the linkage between resources and my tofidence im not willing show that relationship. I have a question for both of you. Can you comment on the usefulness in the United States of targeting a negative Interest Rate, as now be experimented with in europe . John i think it is worthwhile to think about this a little bit. I think going in that direction opens so many cans of worms, if you like. I think it is a great thing to do research on. That there are new ways to gain the system. Right now, the Interest Rate should not be negative in the u. S. I would stay away from that. I think we only had this period in 2009, when you could think about it, and since then it has not been an issue. It was certainly not an issue in 20032005, which was a mistake. Bill i dont think it is a question that is on the table now. The economy is moving above trend, and the question is when will we raise Interest Rates, not lower Interest Rates below zero. The one thing we have seen is other countries have moved to negative Interest Rates. On balance, the unintended consequence of moving the Interest Rate it has been probably less than what people feared. It is not obvious that just because it is working ok there, you would necessarily want to import it here. We havent different system in terms of how our money markets work. Question is does the benefit outweighs the potential costs in terms of potential consequences. As we went through the financial crisis, that was an option, and we decided to not pursue that option out of fear that the benefits were not sufficient to outweigh the potential cost. David the gentleman in the back. With one brown capital. Our and Interest Rates already extremely high . And world markets, our tenure bond to pay 3 is the same as spain, versus germany at half of 1 . Our rates are very high, and we are seeing the effect in terms of trade. Also, in terms of our Monetary Policy, we are experiencing limitation of what can be done just by buying paper. Money ends up with the bank, but it does not leave the bank in terms of creating money. We are working with fiscal policies that are negative. Sayt there a limitation to we will buy mortgages or bonds, likead of buying stuff Port Authority bonds, highway bonds, etc. Bill first of all, the fed is very circumscribed and what we can buy. We can buy very shortterm obligation bonds. We are very limited in what we buy. I think that longterm rates in the u. S. Are quite a bit higher , they areny and japan around 2 . I think that is a very good thing. It shows that people think that shortterm Interest Rates in u. S. Are going to rise, a sign that we are making some progress. The fact that Interest Rates are so low in germany and japan reflects a greater concern about prospects of success and greater concern about how quickly shortterm Interest Rates will be normalized in those countries. Im very happy that we have higher shortterm yields. David you think they reflect a stronger economy . Bill a stronger economy and execution that the fed will raise Interest Rates in the future. Times,the financial can i ask you to flesh out your responses that you think we are seeing a slowdown in the economy. And, one of the points that was outweighingthe risk the risk of going too late. Im wondering if you could give us your view on that. Bill i think there is some news that suggests the economy is slowing down a little bit. The last Payroll Employment report, retail sales were a little on the south side. I would not want to make too much out of that. There is a lot of information between now and the end of the year. The economy has a lot of variability in it in the normal course. The data is not often measured very well, very precisely. Is aally what i see domestic economy that is performing pretty well. Is housing sector recovering. Business investment is right. What is holding the economy back is two things. We had a lot of contribution to inventory. We will probably give some of t that back in the second half f the year. It will probably be weaker, not because the gdp is weaker, but because of inventory. The second aspect is that the dollar has appreciated so much. We are seeing persistent deterioration in trade performance. That is nothing new. When i put it all together, i still think the economy is growing at the above trend. If that is the case, we should seek greater pressure over time and resources. If that is the case, we should be able to normalize Monetary Policy. As i said in the beginning, that is a forecast. David the question is when you are at zero and dont have much inflation, you have to make the judgment of what is the outcome. Is it a worse outcome if you wait too long, or is it a worse outcome if you move too soon and take the economy just at the wrong moment . Raising to think that Interest Rates is good for the economy. John i think we are extra low now, so increasing them is moving them to where we should be. If inflation rate is 2 , why not be zero . That is what we hear. You have to have the rate higher. When i say higher, i dont to get should go to 24 , but it should be higher than zero. I think that zero causes its own problems. There are distortions. It can be lowered without raising questions of negative Interest Rates or qe4, which i hear unfortunately around sometimes. Its like your card needs to have a sense in which it can go put on the slower accelerator, take it back, put on the brakes. We are not in that situation now. David bill, your view of Risk Management . You risk going back, and that raises questions about what you do at that point. If you feel too long, and you might have to tighten Monetary Policy. S. U are balancing the two risk bouncing those at time when the economy is going a little above trend means that people can i think there are risks on both sides. Wasne comment, if there only one plumber in town, i i would use as many techniques to fix my problem. As a thought experiment, do you assume that we are measuring productivity incorrectly and it is much higher today . To questions, doesnt that mean that inflation is lower, growth is higher, real rates are higher , and labor markets are higher than what the data is measuring . If you are in a situation that the economy is behaving different than it was in the past, and if your data quits being wrong, what is the implication of implying a rule than being flexible in your approach to make Monetary Policy. John the questions are quite related. I think it is always hard to stimate the economy potential and inflation. I think you need to do that, have a sense of if it is a discretionary policy or a rule. You need to have a sense of where the economy is. It is a fact of life. This idea of feet world changing, the economy changing, and how could you possibly have one goal to deal with that, i think what we have learned it is a good question what we have learned is you can have lots of different views of the world, and if your policy is robust, lets have something that is robust to that. Always, say the things were talking about a few minutes ago, you will start reacting this, you will probably overreact. Way, the more robust means it works with a lot of different ofws of the world, a lot different models. You dont require a particular approach to productivity. That is where i think we found out a lot about these rules. If they were not robust, they would be a waste. Every day, someone proposes a ule to the model. There is a guy with a database of 50 different models. A lot of them are from Central Banks. He basically says, you have a new rule, tried out on these 50 models. I think that is something that they think about. David if we are understanding productivity, isnt potential growth higher and output path bigger than what we think . That would be a problem for applying the taylor rule. It is harder and developing countries where growth is even higher and more volatile. It is not really a problem david right. John it is not an argument in favor or against. David i agree. You think we are overstating productivity . If we are, either consequences . Is if we arestion overstating productivity, are we overstating it by more now than a few years ago. As new products get innovated and produced i guess the question i would have is are we making bigger errors now than in the past. If we are making bigger errors, it would not imply that inflation is more. I dont know how to answer this question. If we knew how to measure productivity better, we would be doing it. I think this is more of a theological issue. Some people are more pessimistic, some are more optimistic. I agree with john that gdp is hard to get your arms around. We dont know what it does today, and much less so about the future. Thee can you push unemployment safely without putting so much pressure on resources. Aroundhere is a debate what kind of policy rules to use. Some put more weight on the some putp, will less. The application of the 1990 version of the taylor rule in 2009 would have called for a 5 . Proposed inou have as preferring to the prescriptions of monetary watch that the fed proposed . Hall, youore jackson were skeptical in so far as the official expectations in Monetary Policy. A statistician disagree. September 17, the committee reaches a statement, one week gives an entirely different version. I suppose the question is what will change between the end of august and september tway fourth . Thank you. Bill the rule that i proposed ages ago, it seems like ages ago, it is not perfect. It has held up over time. Attempts to modify it are great. David i think the question was the ideal Interest Rate would be below zero, what is it that the fed should do that they did not do . They would not have to qe. The big it was not justified by that particular situation. Is that the question . David no, back to Interest Rates, if you need to do more to increase the money supply john i think a lot of the discussion is about particular evidence an episode that you want to react to. What we do know is if you have a rule, and part of that rule is when it hits zero or one, you dont focus on the Interest Rate, you focus on money growth. That is a welldefined policy. It is a rule, that is what i would recommend. David i think you heard the question, where you sending mixed signals in september . Bill i think the message was pretty consistent, it depends on the data. ,nd everything we have said Global Economic development and developing Financial Markets are important in terms of the Monetary Policy decisions. I thinknd of the day, were pretty much on the same page. David with that, please join me in thanking john and bill. [applause] we would appreciate it if you could pick up the papers and coffee cups at your feet. There is recycling outside. Thank you very much. Tonight on cspan, editorial cartoonists discuss how they covered the george w. Bush and administration. It is part of a conference on the Bush Administration hosted by Hofstra University in new york. Here, steve reed draws one of his favorite cartoons from the bush presidency. So imew disorganized that figh