Reuters Insider - Evans: Fed should not "degrade" tools with an eye on stocks
06/12/2013 23:42
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Description: Chicago Federal Reserve President Charles Evans
tells a Chicago symposium he is not willing to
used monetary policy to lean against the rise in
stock prices that some see as a potential bubble.
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Transcript (May be auto-generated)
-- -- George thanks so much for that wonderful introduction and it's really an honor
to be here at this very nice conference. The Fed is beginning arson tendered to its
Centennial year our celebration. A hundred years this is a really excellent conference
good way to. She can offer us here in Chicago. George thanks a lot you've been a
strong partner with but reserve bank of Chicago for quite a long. Long time you've
helped us organizer bank structure conference and also our international banking
conference and they have been stellar. Conferences I would judge. We've been able
to accomplish what others this is another excellent. Q. It is enormous privilege
to serve. In the Federal Reserve. I would say -- bandwidth. That reserve bank Chicago
for 22 years. Work with some people in this room and -- those last six years. Higher
-- -- the president. Of the -- The Fed has. The Fed has been given. You know great
amount of responsibility but also the ability to undertake. Those responsibilities.
Quite well preemptive measure of independence. From the federal government because
we don't have for our funding from. The commerce and appropriations. System what
comes with that courses accountability. With that independence we have we have the
responsibility to take. Important actions that other politicians might not like to
do with the popular. And we're supposed to do that in order to fulfill our objectives
and then be held accountable so. -- actions are very important. And how we come out
of this.
We'll probably set the stage for the next ten years. Perhaps even longer depend on
how well it turns self so today what I like to do is talk ever so slightly about
the implications of history David touched on this quite well already. And help theory
is blurred. Strong these historical episodes. Then I'd like to talk about how that
interacts with our current monetary policy strategy things. Broker jury chairman
Bernanke's time. What that means for today's situation take you a little bit through
that and -- implications for the future. Well.
I think I agree with the previous speaker that there have been a number of big offense
in the Federal Reserve System I've got two of them. Like he did the Great Depression.
The Great Depression the great inflation. And I'll also mention the treasury court
it's selective I prioritizing these events. But I think they're very important. You
know as we all know from important -- treatment -- looking. The great depression
and the way David just took us through that time injury free minutes Schwartz at
the end of their chapter on the Great Depression.
Indicated that he was really -- monetary policy that was to blame for so much. What
happened. Net monetary policy field adequately combat the credit contraction that
took place that deflation. That took place and that led to do quite depression. I
think in fairness. We ought to acknowledge that the state of our economic understanding
that time is not merely switched courses now and the events shocks occur at that
time probably extraordinarily difficult for even -- -- central bankers understand
no response. Yet. Better policy would have changed things. So it is important we
learn from them of course.
-- great inflation. -- -- During that time period -- I would say that. Monetary policy
failed to recognize that there were structural changes. Taking place the earlier
question about. Chairman burns and whether or not -- appointment from the president.
Is intended to perhaps get him reelected or to deliver particularly. Generous monetary
policy for political reasons you've got an entire committee that held responsible
there -- Wednesday. In today's environment there was determined it was going off
Israel's terms there understand what was. You know taking place in the prescriptions
are a lot of people feel all eyes. Direction that's what it.
Process is supposed to help insure again so job. It's not to say that your birds
-- -- Every time. Should have been accountable. -- monetary policy during that time
period they'll recognize structural changes and also. The changing expectations of
dynamics with regard to inflation that -- build it here again that's another gap.
In our understanding and -- theory at the time and that they're going to treasury
court it's not the episode. So much that I I personally think it's so important because.
Statements in the fifties were pretty good time. The monitor possible -- after the
court but I think it's an example the highlights. The critical importance that central
banks the afforded some local autonomy we call it independence. So that they can
take the difficult unpopular. Actions in the name of achieving our goals that politicians
would want to do because they're too painful so. -- And it's this this was an episode
where I think we benefited from. Recognizing that -- separation between us in the
fiscal authorities. So what are the economic foundations that sort come out these
experience what's the learning. You know and here you know I think 1 of the central
messages. The Great Depression is that central banks have to address nominal.
Crises the fact that the place sprawling. Fact that they were meeting there. Price
mandate. -- that -- all kinds of difficulties treatment -- document that extraordinarily
well. I would put professor Ben Bernanke very importantly. On this list because he
pointed out that non monetary propagation problem. Those monetary impulses through
the banks the bank panic. The banks going under and then realizing that the entire
credit origination process was lost. Largely during that period everybody knew how
to make alone.
They weren't in the same place they were somewhere else that was much more costly
difficult to implement so now it's important also has another important observation.
Others made it to but affected countries went off the gold standard the sooners --
once recovered the quickest. Time. It is really indicative of -- so I think that
means we need to address now crises with monitor wells. -- -- That's great for the
great inflation reminds us. That central banks have to distinguish between real.
And nominal cycles that there are real limitations in the ability. Of businesses
and households does generate higher output. Through changes -- technology regulatory
behavior. Cost of energy and things like that and it monetary policy mr. Bernanke.
Uses today is -- panacea for every problem that -- -- that we need to recognize.
Distinguish real. Phenomena from. Now owns and Friedman's presidential address was
extremely impressive before it happened was indicating forces that could lead under
inflation. Lucas prize -- south of here. Wrote down the details in theory -- elegantly
that is inflation expectations and supply relationship there's critical. And kept
it press got an 82 is just wanting among many examples. A theory that shows no real
economic drive. Economic cycles and monetary policy would be ineffective and generate
higher levels about what with well. Delivery unacceptably. High wage. And then the
third 1 Central Bank independence. Independence is important. -- you know as I said
before it's granted so that we can take the necessary. Actions even though there
on popular so central banks have to be able to act is necessary that sort of wanted
to messages that I take. From this to the press gets -- seven Ginn no well. Laureates
for their work here indicate that some systematic response. From monetary policies
to be for discretionary. Responses especially when there's too much temptation. To
to take other actions. Argument about the that your bird's back that barrel Gordon
also emphasized the importance of credibility and reputation in general of office
just one example of how you might solve that problem. Through the appointment. A
more conservative central banker. Who despises inflation more than the public but
they're able to solve this conflict and deliver. In the average level. The appropriate.
--
-- of that sort of background. Hell. In this takes me to the current long run strategy
for monetary policy at the -- he agreed to. Back in January 2012. I would say when
I think about the contributions that chairman Bernanke's main. Two US monetary policy.
To lead to mauling one of them. He is just his stewardship over the economy the financial
system during the financial crisis. I think you have to. Remember that the shops.
Arguably the financial shocks that we work. Subjected to certainly after Lehman Brothers
were perhaps bigger than what the 1930s. US economy experience. And yet we didn't
under we didn't have to go through the same level of contraction. Or deflation we
had a very short recession but it wasn't depression.
And although prices did fall it was temporary and we a wrong turn that around very
quickly from -- experiences to sells non. So I think that the innovative lending
programs the alphabet soup that will -- David. You know was was reminded us of the
many innovative things in the lessons that. Professor Bernanke took from his scholarship
of the Great Depression very important. Wrong that by itself it's just a tremendous
accomplishment the other accomplishment though is getting the committee to firm up
our long run strategy. -- -- Strategy of course but here we clarified that we have
an explicit numerical price objective. And inflation rate that's our target not.
Quarter by quarter. But over the long run. And we agreed that we would we would focus
on personal consumption expenditure inflation index the total level and 2%. Was the
rate that we would be wrong. Attempting to steer you come to.
We also. Home took note of the fact that we have a dual mandate. And the Federal
Reserve act in you know instructs us to maintain financial monetary conditions too.
Promote maximum employment as well price stability so. Maximum employment as economists
anybody. With a little bit of training here in the room this thing about it. You
know maximum level of employment is not 330 million people because that everybody.
Wants to work among the people who want to work they ought to. Be able to find employment
opportunities and a maximum one -- personal level this translates into unemployment
rate. Which is as low as feasible and not zero. Looking at the structural composition
of the economy and labor markets and things like that. We took note of the fact that
this sustainable rate of unemployment. Might move around overtime that's why I've
got to time's up script up there that 2% inflation there's no -- -- we're working
for 2% over the long term enough moving them around before the unemployment rate.
You know where we're willing to acknowledge that sometimes it might be a -- 6%. Or
were lower than that so. We point to power. Quarterly communications on the you know.
Summary of economic projections and that the committee indicates. Individually. What
we think the sustainable employment -- it is over the longer term. And that range
is currently in the fight and a quarter to 6% right so I think it's it's my view.
Of the range that would be deemed more acceptable. Than something that's -- percent
today. And the last real important element that is this is when we see deviations.
A law. The economy and inflation from our long run goals were to take a balance of
approach to reduce deviations in place an appointment from these long -- objectives
of we're going to be paid attention to vote. Of those. OK so this is an important
emphasis on our community responsibility but for a moment. Let me just stop and ask
a question what -- like other foreign central banks we had a single. Objective and
that was for price stability. Will it does today's dilemma different if we were focusing
only on a single mandates are the most recent efforts so. You know here's the total
PCE. Index and you can see that from 2000 -- 1007 we averaged 2.3 percent we -- read
-- troopers -- objective or so it's better but during that time period it somewhat
higher in averaged 2.3 percent and it's a pretty good trend line if you look at that
there's not many big deviation. From that then. I've got 2%. Law Priceline from December
2007 that's the business -- This cycle peak and it's the if we have been able to
maintain 2%. Every quarter we would have been on that. And you can see that we've
fallen below that on average we've been running less than that 2% -- there was a
period to go to school public. Offer it has been opening up again that dots or the
-- employed by the SEC inflation forecast that the media so. We've been under on
this. So if we only got a single mandate for. Price stability -- price stability
2% on inflation I would say we needed that and that objective from below we ought
to be symmetric. Around that and so that argues also for. Accommodative policy the
lower panel also displaced a couple of different versions of that. Court BCE is not.
Our mandate but it's a slightly better indicator of what inflation tendencies are
going to be. As you strip out the transitory movements of food and energy or if you
just sort of smooth piece the over 36 month period that's the other -- and you can
see that. There was a period well. You know 20042008. -- it was a little bit above
that we've been under running for quite some time. Arm. And young man. While inflation
is a global phenomena. These days I mean. It around the world we're all cheering
and an experience which is providing challenges for our economies but also for our
inflation -- so. If you look at. You know our Brothers and sisters and north of us
and Canada they're finding that inflation. Is slower and slower than 1% believe their
target 2% rate. If you look at the eurozone. They -- most recently with there economic
troubles found themselves with. Less than 1%. Inflation year over year Japan as we
know well is going through a long period of time. With this type of behavior. And
most recently it's a little -- in -- user they're trying to even harder than they
have before you get inflation up to. 2%. And the UK is an interesting example because.
They have been using very aggressive accommodation in an environment where inflation
is well above their 2% objective. The argument from the Bank of England is that they're
projecting downward drift in inflation as they continued asset purchases leave --
-- an apology. And maintain approximately zero. Interest rates there and most recently
inflation has come down. Last inflation report quite abruptly. So everyone is really
participating in this low inflation environment. That that's suggestive of the need
for continued -- Now back to the dual mandate. It's do you think about. Max mainstream
macroeconomics. And an attempt to capture this dual mandate which leads you to think
about lost function. For the central banker which is in terms of deviations of inflation
from our objective. And also unemployment from our natural right or output from its
potential Trent. Line. So you know this is this is a methodology which John Taylor
back in 1979. Wrote a seminal. Paper says to estimate. Mainstream economic models
and to sort of take out. Which combinations. Of monetary policies were most appropriate
with the best monetary policies can be achieved. With that model if you knew exactly
how to minimize that loss function. He estimated. That the US experience up to 79.
Was not it was reasonably characterized by a loss function. That put four times more
weight on inflation. Then it did the output gap that's why I've got that coefficient
of point 25. In front of these. I'll put -- its trend well so four times weight on
inflation relative -- output yet. But if you then translate that unemployment. Using
-- standard Elkins law relationship today in the practice democratic you end up with
equal weights on inflation and unemployment. So that's really very conservative characterization.
Of your preferences or this case for inflation. Relative to variability in output
but for unemployment translates 11. The circles indicate. You know there that are
wrong iso cost functions matters of indifference between inflation and unemployment.
And this is a way to sort of situation go back against the Green Line up point up
there that -- September 2011. And that was a period where inflation was below 2%
but unemployment was 9%. And as you. You know if you think about that is -- what
happened right quick that in terms of inflation only. What would be an equivalent
inflation laws it would be over 5%. But around the circle to the top where help where
unemployment is -- its natural rate and you know then. Inflation would be 5%. If
inflation was five and a half percent. And we were targeting 2%. We will be outrage.
And back and I said it would be acting as a partner was on fire that we needed to
take care of that because inflation three and a half percentage points above where
you're supposed to be is entirely the wrong. Place to me that's the lesson of the
seventies. But instead we -- not quite as aggressively because inflation was actually.
-- also financial matters making it that much more difficult we have zero back. Here
we can see the current projections from the US EPO and we have the updated value
where -- stand on that with today's. Unemployment rate. Falling to 7%. But inflation
falling to seven tenths of 1% total PCD. Year over year. So it's been slow progress
there but this is one way to to sort of capture how you should -- these things off.
Think. Which policies together. But why is achieving the dual mandate and so are
why we spend so much time away from the bulls -- Here. I think people it's fairly
well known. You know deleveraging in the aftermath of financial crisis. Makes recessions
last longer it's more difficult the fight against wrong. And -- the environment a
lot of global risk with a global economy. Is weaker. One thing that I don't know
this is it's. You know equally well understood is that fiscal policies -- quite restrictive.
And it's more than just since 2011 with the debts Heatley and congress and president.
Fighting over budget. Reconciliation and tax increases and increasing payroll taxes
off of the holiday. But but talk about that a little bit more but it's also the case
monetary policies and -- Excellent -- -- -- the -- news. Government. So that it's
your lower balance so. You know as you undoubtedly know -- event. In in a state where
the funds rate was reduced to zero back in December of 2008. By the committee in
response to the state of the economy and we bent -- -- for that time we now indicated
that it's going to be that -- for. For quite some time. One way to measure. What
is normal reaction policy would be to the state economies look yet another important
contribution from John Taylor the Taylor rule that's the Red Line. And the Blue Line
is the actual history of the funds rate. Com. If you just sort of look at the Taylor
rule prescriptions it. If inflation goes to you would say those concerts ago and
the output gap. If -- -- growing strongly that the country should. Go well so in
the aftermath of the Great Recession the -- 99 rule says that in -- country wanted
to go to minus 4% that was a prescription. You can't do that you can't drop below
zero so we've been stuck at zero we'd like to provide more accommodation we have
been able to. And so the response has been to provide additional. Accommodation through
unconditional. Unconditional. Unconventional. Tools. I'm wrong you know I'd like
to say that all three of the lessons that I mentioned earlier from the academic literature
or -- work. With these tools large scale asset purchases were currently buying 85
billion dollars. Long duration assets every month in an attempt to jump start on
the economy. You know this is this is policy advice that Milton Friedman offered
the Bank of Japan. Back in the early two thousands. You know very -- You know late
time in his life with a lot of experience and results in its mistakes -- In Japan
deflation in the couldn't get out of it and he was saying you should continues to
you know. By assets print money what are your analogy to the economy begins to turn
around -- that in -- chart that David showing eventually. Turns around so that that's.
Addressing -- crises with monetary policy.
It the other one is we're using independents. Here to take an unpopular action. Questions
about probably some questions later about how unpopular these actions are but if
it's the right thing to do. With the best analysis that we -- but that's what we
have to do wrong in those circumstances. We've also provided or -- so were indicating
that the funds rate it's gonna be held zero. Until certain economic conditions are
met we can't go below zero so we have to hold it is hero and knows that. Financial
markets -- price assets and long term interest rates with that in mind that's the
corporate leniency. Relationships that was mentioned earlier. -- relationships. So
we're saying the interest rate would be up at zero at least until the unemployment
rate is below 6%. And and at that point we'll stop looking do we need to tighten.
Unless something goes wrong. Plus my analysis wrong and I should you know something
I'm not taking into account -- senate which starts to take off inflation starts to
take at all. If it goes below about two and a half percent. Terms of -- wanted to
your forecast that would be an indicator that something transpired differently and
we need to. Make an adjustment. Perhaps raise rates at least it's got places if --
That's making sure that. Regressing nominal cycles with monetary policy -- recognized
and you can get to a point where the real. Aspects of the cycle can and can kick
in and takeovers so that that's also use those -- And you know trying to lower long
term interest rates -- these tools and it's discipline by economic -- now that's
an attempt to impose. Discipline. On our decision making process. Nobody would agree
it is well it is the rule of sorts but and it's it's discipline by economic conditions
and I think that's work. Or that.
Your decides partner and chief trees scene is it's very large. It's headed for four
trillion dollars before. -- -- that'll. An airport outside I talked about in the
interest of let me just remind you there for guidance is that. We'll keep occupancy
zero at least until it's below six and a half percent but its threshold. So let me
just get you an example what unemployment rate keeps going down and you know it it
gets down -- six point 2% and we -- raise funds rate why would we do that well what
if what if inflation were only 1%. Let's places. Only 1% then there's a problem that
there's something else not little that's going on and we need to continue to make
sure that inflation gets a -- 2% heart targets not want. Quarter it's 2%. So in that
situation I think everybody ought to expect we would continue to wait and try to
get the inflation rate. What if that's what it. Sure -- on our report things like
so it's a threshold it provides that some wiggle room.
Think it's the right amount of conditionally. Okay fiscal policy. Try to go quickly
over this some people often say -- she -- her period we've been struggling. With
outlook that fell -- and we haven't grown fast enough the Red Line is where the trend
line for potential output would have brought. After 2007 on the right Campbell if
this hadn't happened look at the resource slack we haven't gotten back up to that.
Why -- why can't we have eight. -- like the early 1980s or 1980s. Had a very sharp
downturn in 8182. But did it very quickly got back up to the trend line. After that.
Why can't we do that -- monetary policy that's wrong. So one of the challenges here
is. On the right inside fiscal policy because there's been tremendous amount of fiscal
restraint has been huge -- in her face. On the left hand side in the eighties fiscal
policy was stimulating the economy it was a tale but it was helping dramatic. So
just just think back to the early eighties the Reagan administration and he came
and there was a lot of authorization pentagon budget -- -- a lot. And here this scraps.
The contribution. Of government purchases. To real GDP. And you'll notice it is extremely
positive. In the early eighties and in -- bit. Eighty's this is a lot of spending
there's really no authorization. There's the normal about a government purchases
the congress and the president were doing during that time period and then not on
this but also. A -- when is the taxes had been reduced stimulating aggregate demand
but look at where we are right now. You know we've we've had this big. Head when
it's been negative so instead of having one -- recorder. You know additive. For the
economy where no one half percent poll right now 2013 Cory -- congressional budget.
Looking ahead. We're gonna get to a point I'm optimistic that 2014. And be a year
that's better than 2013. Maybe it'll be escape velocity over 3% maybe it'll just
be a good year of two and three quarters I think two and -- of the 3%. But I think
were at the point we're gonna start taking off today's employment report was extremely.
A positive emits less positive reports that unemployment went down 7%. Still the
case from September to November. Good chunk of that is because labor force participation.
Felt. More than we expected news demographic trends but still looks like the economy
ought to do better next year when you start. Thinking about wandering -- when we
we normalize we're gonna wanna adjust our balance sheet in June of 2011 and our minutes
we stated principles. By which we would -- our balance sheet. We're actually gonna
go back to the plan is go back to a balance sheet more in line with the size of the
economy.
It was 800 billion dollars. In the summer of 2007. -- -- Since then so 800 is too
small but something. North of one trillion is probably about the right now something
is but dramatically sell them where you are so -- be smaller. The balance sheet composition
ultimately just go back treasuries. Instead of including India us. And the sequencing
for doing this would be. At some point. You know we'll start taking marine air asset
purchases and then we'll -- our asset purchases they'll stay on our balance sheet.
And they don't get to the point where we -- raise rates that we need to put pressure
on reserves with a lot of reserves out there we're gonna have put pressure we can
drain them. We've got a term deposit facility we can do reverse repose which ended
a longer term we can -- them overnight. And we can also increase interest on excess
reserves to start. Think about it to start incentivizing banks to not win. It's rapidly.
Is they'll be doing in the period when we're worried about inflation. Because when
inflation expectations and inflation starts to take off and if it's the size of our
balance sheet that's the problem is this is being converted an end to. Which got
a lot of bank lending like David -- said the other period and we'll be trying to
distance and lending.
It's hard to think about it that way as we'd like analog hole and right now we get
the economy going but the but the times change. And we'll all be in better situations.
So we have these tools. -- looking ahead. I think that the current long run strategy
that the committee agreed to. In January 2012 which we ratified last year in January
next you'll ratified yet confident. It says take a balanced approach to the deviations
of output from its current level unemployment from its natural sustainable rate and
inflation from. It's hard when there -- deviations that's important. -- personally
think that emphasizing that inflation preferences are symmetric around inflation
is really critical because. Sometimes I think we're trying to thread the needle and
get inflation up to two without going over to. That's really hard to do.
-- easier if you will want to make sure you've got enough at the outset having confidence
-- can control what. You might go over a little bit not too much that would be a
good thing but making sure you've got enough. At the beginning -- -- -- actually
get there instead of falling short -- the -- he has done that too many times. And
then lastly we have to recognize limitations monetary policy I'm not saying anything
different. You know -- that I agree with that I recognize that and there are times
where the real cycles will certainly deviate. That's a risk management point and
we have to be careful about I've always tried to say even when I was advocating some
of the strongest monetary policy measures. The way I see it is the right policy.
I don't see inflation picking up. No worry about seventies though but wages were
gone up a lot so I can be wrong I could be wrong and things turn out differently
so we've got risk management in place.
That was and that's that important in the past not paid attention to in the seventies
it's important today it'll be important in the future. So with that thank you very
much. Reluctantly. College -- -- me to answer questions. The ground rules that the
questions you mentioned this from a from the non interest folks the press host of
the chances to on. So again. Raise your hand -- colon you're uploading my intent
upon yourself and your creation and let's have an experienced person to call. A these
are questions he gives his speech and you have to question. Thank you -- curl --
veteran of former -- guys as George says.
The unemployment. Rate obviously is one of the two statistics that Zuckerberg keep
us. You alluded to this hello this participation. In the labor force him to be here
he would end. Defining that number. How do you factor that in some analytical way
you or judgmental which expand on that little bit with such an important item --
-- Sure yeah -- that that's right that's so wrong. You know we have a lot of discussions
that the committee level there's been a lot of discussions. In the public -- absent.
Commentators. Talked about this. I personally have always believed that. When we
could be more explicit about the criteria under which we were going to make adjustments
monitored calls that was good that that's a period. Strong -- transparency. And the
entire committee mr. -- -- the way we'd like to have us -- policy that's possible
but of course. There are limitations in that they in the data. And so the community
has had to recognize that there are times where we'd like to be very explicit. But
other times where the data might not really allow it to just just look at -- two
tools right now. We got that worked iTunes. Where. We went down and we eventually
came to agreement that we would be explicit about the -- 06%. Unemployment rate.
Well now. The unemployment rate is our best single measure. The labor market. But
it's an imperfect measure and the labor force right now use a room. You know making
unemployment rate -- in ways that I had been surprised by let me just put it because
I thought so with the open -- asset purchases. We were less comfortable being explicit
so we exit in labor market improvement. Substantial improvement and and 80% of the
questions that I did really well it would mean -- actually -- Did you tell us what
that was all red why wasn't that enough so. I I would have thought played out like
this you get the economy. To start a little bit better and if you're seeing increase
reductions in the unemployment rate hit its growth has been stronger. Businesses
have decided that they need to expand there's more customers walking through the
door. They're currently very comfortable with their size they can meet. To me again.
But once more people come through the door they have to stand they have the heart
hiring will be -- -- drive the unemployment rate down. The labor force has been different
because people. And part of it is they become discouraged. Part of it is they might
generous unemployment insurance benefits and they were willing to. Step away from
the labor force but while I'm still getting those benefits I'll tell you that I'm
looking for jobs or maybe that dropped out after. Benefits. -- surely there's some
about that I don't think a lot but but some. But people dropped out of labor force
maybe their retirement. -- -- baby boomers and things like that kids who work while
they're in college now they spent more time. On college world activities but not
-- that that certainly use in these numbers of it hasn't played out quite the way
that I thought it would but that means at a point where it's come down quickly. So
a lot of people say it will come down pretty quickly must be happy about that why
-- you kind of being nervous. Very important that this is sustainable. So the question
is are we gonna see enough growth and growth is critical. You know those quick third
quarter GDP growth rate you know it was revised -- tree. Point six I think but the
inventory accumulation final sales was more like 2% that's likely sustainable. Side
of that people looking at the fourth quarters well under 2% so. How are we gonna
continue to get those improvements but we look at the labor force it's very important
we look at job openings. Vacancies. You know people getting hired and things like
that to get the best assessment but unfortunately. It's it's more difficult come
to a judgment as to. Actual stated -- market economy I think it's improved. -- --
to DePaul a two questions first of all on the federal funds rates averaging around
nine or ten basis points. Yet banks combine and he'll lead the money at the -- for
25 basis points for questions why would a bank lend money in the federal funds market
in the current. System and so who's doing if not who's doing landing in the second
question is about your long term interest rate policy -- buying. Long term by Johnson
and securities. This is having -- negative effect than insurance companies and pension
funds by. Their ability to earn interest income and also present value of liabilities
and and -- -- so -- been considered as part of -- -- reasons but the setting is offs.
Neighbors to arch. Long term financial intermediaries. Affect us in that negative.
Questions. But if I went through all of them up so on the first run. I dearly love
to be able to sort of say you know will. Discussion about financial markets as much
more in line with the answers that that funds question but but I guess you could.
Up for me. The real key measures the fact that the funds rate is close to zero. And
when it comes to macroeconomic front generated just like to me and it's like you
know can we get it. You know should we raise interest rates no not now can we lower
rates now we can't really do that not short term there at nine basis points that's
effectively zero. Yes there's industrial organization aspect of how banks are actually
you know getting nine year when he flies over one but in terms of the actual credit
environment. Right now I don't think that that's really the first order issue now.
Whether or not banks.
You know instead of you know if if by that we are was 25 but it was lower than ever
so slightly got more incentive to do something else. But but a typical discussion.
Your other question game monetary policy tremendous amount of effectiveness the way
you. Just said it because -- -- would -- an asset purchases and then that's hurting
life insurance companies. Like insurance companies are being hurt because of the
low interest rate environment which is blowing up the sides of the future liabilities
and so. We kind of give us credit for driving down long term. Interest rates I think
it got it right but there's but other factors to which. Kept interest rates down
chairman Bernanke came. The Chicago back in June and spoke before board of directors
and answered a question like that. You know way that I thought was really. You know
quite good which is. You know our our treasury ten year treasury rate well now it's
like you know two point eight or something. Wrong. You know the -- back ten year
treasury it is one point eight. You know UK is more like us. You know Swiss that
you worldwide interest rates are low it's not just US policy that has been so effective
at lowering but there's an entire. Global phenomenon that's working to keep. Market
interest rates down. Beyond just our actions and even without what we're doing these.
You know financial institutions which you know higher. You know future liabilities
dogs and -- still be -- same is sort of troop receivers it is troopers favors me.
You know we would all like interest rates higher my wife is looking proceed he raised
it zero should really put my money out for eighteen years and -- -- you know but.
Everybody would like higher interest rates but we need them to be high for the right
reasons we just increased its consciously short term policy rates. The economy wouldn't
do very well but the more urgent that would be more of a disincentive to borrow loans
would be you know the burden would be harder. And I think we'd end up having to backtrack
the way that the Bundesbank. Sort ECB did in 2008. And and also after that and a
way to thank -- it was done on occasion after occasion. Another way interest rates
my go up that would be good is -- and inflation took off in a big way. I think you'd
have a difference of opinion from some financial institutions as to whether or not
they would find that it's difficult anybody's trying to extract management trees
along. You know interest rates or something they don't care what the source of that.
Higher interest rate is that it please be able -- extra pictures -- points for management
fees but the that would be the right thing you know that would be -- cost. Get the
real economy going get real interest rates up. Get people to the point where they
don't want to save him not his receivers and get that then would be among others.
Here. You can -- and therefore it. OK but again questioning. I have no idea what
may be a very stupid question Allan Schoenberg is from Iowa. How does this translate
through. Each market in terms of salary increases and targeting of labor unions yours.
Right vote authorizing a strike for the professors at universities. -- go. If they
target realistically 2%. Are -- in line with what you're hoping for or should they
be looking for what are you looking for 10% and sharp. At the more realistic figure
to project to. Wage increases are fundamental issue. That that we're facing or at
least they're also symptomatic below inflation environment now it's also. That the
fact that we have. Continued high unemployment. Changing skill requirements.
Businesses are re arranging how they go about doing things and the kind of work force
that they want that's having some. Effect but there's there's still enough slack
there that businesses. There are reluctant to go out and hire new workers if it which
were won over though it's still the case. -- leave that you know there's a waves
where you'd rather employ the workers than why a particular type of machine or something
so you've still got that trade off. Now in a world where inflation was higher. Where
we had 2%. If it's the case that you need a real wage adjustment for certain segment.
Of the labor market they have to have a lower real wage in order for businesses actually
-- hired him full time with benefits it'll. Then. But the business. But when you
don't have inflation and you're not hitting your target more of the burden has to
come from nominal wage adjustments and it just happened. It just seems to be -- fact.
That everybody's reluctant to reduce nominal wages below zero the evidence is much
much too great that there's a big pileup that hero. People don't necessarily get
the same percentage of minus one minus 2% nominal wage cuts that a normal distribution.
Pile up at zero because there's a reluctance to do that so if inflation were higher.
Then you know you get. Re arrangement we have. You know higher wage growth so. Now
in terms of the inflation risks. In the 1970s. I think the case that always worries
us. It is worries me -- you know what we have outsized inflation increase in the
seventies were a time where. Businesses. You know workers struck but they ask for
higher wages. And businesses were kind of saying enough. Prices are -- -- and I can
I can get the wage increase and I can pass that along Costco. They increase their
prices that goes on -- labor goes. I'm not being compensated for the cost Olympic
and they needed higher wages and had a wage price spiral. That would lead to higher
inflation that's the case that gives us great -- but. When I don't talk to businesses
and you know look around the idea that those wages are about to pick up. In a strong
way I don't hear that from businesses with some sort. And their first. They go on.
Which if he's on on England's Greg Weston Adam. The speaker so fired on the language
-- pointing to important it is a bust and and -- outs and important. -- in the zone
no mean. Phenomenon phenomenon. And it's been things one of that the discussions.
Except that the recent crises about financial phenomenon and that the importance
of for implementation monetary policy and talking most about with Norman I'm not
so much crisis times. Of course these discussions that much ongoing but do you think
there's anything that can be seen as you Clinton's old. Should for example central
banks who can -- markets these kinds of discussions it is there anything that can
be seized it.
As of today. Right that's that's that's an important issues so. You know how how
do. Developments in financial markets open forum. Monetary policy setting up -- crises
but there during normal times. So I I think it's I think it's always difficult to
know how to evaluate song. Increases in asset prices mean judging others -- the stock
market it is the right level is treacherous.
You know investors put a lot of beer money at risk and stake in order to. Make bets
on that against others that helps. Deliver the best information available among everybody
who's paying attention. Translating in the prices that are supposed to be an accurate
price discovery. They're famous examples though of course. -- coming up on an anniversary
of when Alan Greenspan. In December of 1996. Maybe the stock market took -- you know
how can you ever know there's irrationally risen. Exuberance and the Japanese. Stock
market is how you -- that of course it looked fabulous. -- at 6500 at that point
and it kept going after a little bit above volatility. And then he eventually changed
his story -- is so you know there's a lot of productivity you know earnings are --
it is forecast seemed justified.
After making cyclical adjustments and in fact that was born now. But then later was
too much it's very hard to judge that we have to make some determination. Clearly.
Old the old line that we need to take account of what that's me doing four. Consumer
business -- views of what their future well that's going to be in Lebanon they're
borrowing against that than that stimulate consumption more than the ability. For
the economy -- without inflationary pressures that's important judgment but beyond
that you might still see. Increasing risks and asset markets that papers you know
eventually lead to something worse like 20072008. IE and not in favor of degrading.
Our monetary policy tools when they're most needed to address unemployment that is
to and inflation that is to swallow. In order to address something that I don't have
confidence and that is actually work right now some effervescent. In asset prices
because if we increased interest rates now to. The tax something that we're not confident
-- might not be there. All of our theories as an unemployment should go up and inflation
should go down further. That would tell me that there's something wrong in financial
markets you know how much additional positive social value are they adding with this
configuration. If they mean we have to suffer through. Higher unemployment. And lower
inflation. I'm more optimistic about financial markets that that. Particular line
because I think that weekend. Supervise them provide macro credential. Guidance at
the appropriate to it's not registry we won't get it right all of the time. But I
think that judgment. Is much more likely to be effective end. You know I'm just worried
about asset prices and if I have to drive the unemployment from 7% up 8%. I'm just
not willing to make that judgment. At the moment. Well you gonna stay on time.
-- Michael brought us -- alone don't. I wanted to know. Since you oversee Detroit.
What's the story. And in Atlanta speculation is the way it's. Companies. Economic
accidentally at -- demise but. X.s. Right Feller you've learned that you may have
a more specific against me. Well his case that Michigan is in our district. Numbers
received greater. Like that but you know it it's certainly the case that that the
city of Detroit.
Is you know terrible situation in terms of their ability to fund. You know they're
liabilities and pensions and in -- -- You know others that he tax base relative so
that it that they. Built up its it's very challenging environment it's not something
that happens overnight most of the time. -- US cities and municipalities. And it's
been a long time coming and it's one of those very difficult situations that politicians
often find it. You know on. -- attractive to address them leave it to other people
and so that's very challenging and so now they're in bankruptcy and there's some
hope that that will be dealt with it away so that the entire city Detroit can can
grow from here and take care that it would be very thankful for a lot of people and
most reasoned judgment on pensions mean that you know the pain is going to be located
in particular ways that. Perhaps work. Expected by those people or other people or
Wednesday. But you know it is a reminder to us all that we need to have as much fiscal
prudence and everything that we do. And you know not. You know think that there's
anything that's for free win. You know it's instructive for the current US fiscal
situation that we ought to address. Her problems we have. In the US you know situation
I would say that most of all those problems -- in the future. And I think that in
this situation it's important actually to address them for the rising. Under which
they're going to be. Hitting. A loss of -- is high right now but it's not burdensome
now but it it's going to be we keep on that trajectory and we don't make any improvements
but it but just think about it. It's kind of like the Greenspan Commission in the
early eighties that address the Social Security. Looming insolvency problem and the
commission agreed that they would. Increase the retirement age for Social Security
somewhat over -- That's addressing the problem over the horizon where you're gonna
end up having problems so that's a really good. An appropriate one. But another --
that they did was increase payroll taxes. An increase payroll taxes at a time where.
There was already more revenue coming head than the expenditures but of course the
idea thinking about hell -- this -- Let's say that operate yet and the rainy day
with every day. Because congress and the president -- spent more. Reduce taxes. And
they could report smaller deficits because those were -- use in the Social Security
trust fund. You just can't do you know you can't build that because somebody's gonna
use -- so I think you have to address from the time period. And that. You know you
have to convince markets that you've got to maintain that think -- That's that's
what was it. Thank you very much. Break and we'll reconvene here let's -- what time
is a quarter after. 23 yet