Refinitiv Newscasts - ECB Forum on Central Banking holds a policy panel 1

Dynex Capital

28/06/2023 18:22

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Source: Reuters

Description: ECB Forum on Central Banking holds a policy panel Andrew Bailey,
Governor, Bank of EnglandChristine Lagarde, President, European Central
BankJerome Powell, Chair, Board of Governors of the Federal Reserve
SystemKazuo Ueda, Governor, Bank of JapanModerator: Sara Eisen, Closing Bell
anchor, CNBC
Short Link: https://refini.tv/3NsZoR9

Video Transcript:

>> Hello welcome back to the final panel of our conference. Inflation is
lingering. The European Central Bank, the Federal Reserve, and the Bank of
England have all raised rates. Even the Bank of Japan is considering
unraveling its decades long, ultra loose monetary policy. The question now is,
how long will policies have to stay in restrictive territory to bring
inflation back to institution's 2% goals? And is it possible to do so without
creating a recession? Ladies and gentlemen, the members of our next panel will
bear a great deal of responsibility for bringing inflation back down to two.
And not only that, but keeping it there. Sarah Eisen, the Closing Bell anchor
at CNBC will be moderating this session. Sarah, over to you. >> Thank you so
much, Claire. Let me just say, as a business and financial journalist who
started out in foreign exchange, this is pretty much as good as it gets so
thank you for having me talking to the big four today. And what I love, I'm
excited for this conversation because it's always fun when everybody's in
different places and going at different speeds, maybe disagreeing if you dare
to do so today. So thank you all. President Lagarde I'll start with you as the
host of this meeting. On the view from Europe, I'm curious where all of you
are in terms of this policy path. We've certainly seen a fight against
inflation. You've been very clear that there's more work to do. How much more?
>> Thank you so much, Tara. It's very nice having you in this closing moment,
and I'll take this opportunity to thank all the contributors, Those who have
prepared papers, those who have worked with the presenters, and all the panel
members. It's been really a rich conference and I want to thank you. As far as
the European Central Bank is concerned and the Euro system at large, we have
covered a lot of ground. We have increased our interest rates by no less than
400 basis points, in a very short order, less than a year. And we still have
ground to cover. I think that as I said earlier on, we are data dependent. We
will decide on a meeting by meeting basis but we know that we have ground to
cover. And if our baseline stands, then we also know that we will very likely
hike again in July. >> What about September? >> That I will tell you, and for
a very simple reason that I just mentioned, we are data dependent. We'll
decide meeting by meeting and we'll tell you. For the September meeting we
will have received a lot more data information, survey results, and it's going
to be another projection meeting prepared by the staff of the ECB. We will
have a lot in our hands to make our decision then. >> Governor Bailey, you
surprised the market recently, raising interest rates by 50. You did a double.
Why did you feel the need to do that? >> It really picks up on theme that
Christine has just developed. First of all, the UK economy has turned out to
be much more resilient and that's a good thing, there's many good aspects to
that. But what goes with that resilience is signs of a very tight labor market
which is showing through in pay awards but also showing we've got an
unemployment rate of 3.8% which is historically right at the low end, that
resilience is coming through that way. But again, to Christine's point, when
we looked at the data, because we too are being driven by evidence at the
moment, the cumulative data, both particularly on the labor market and the
inflation release we had, which to us showed clear signs of persistence,
caused us to conclude that we had to make really quite a strong move at that
point it was justified. My own view on that was if we were really of the view
that we were going to do 25, and then we were really baked in for another 25,
based on the evidence we'd seen, it was better to do the 50. Then, as
Christine said, we will be evidence driven, so we will wait for the next set
of evidence for our next meeting, which to Christine's point, again, will also
be one where we will have a full forecast. >> Have you received a lot of flak
for the move? >> Well, I think at the moment I can understand why there are
critics of us and central banks. We have a job to do. I'm very clear that our
job is to return inflation to target and we will do what is necessary. I
understand the concerns that go with that, but I'm afraid, I always have to
say that it is a worse outcome if we don't get inflation back to target. >>
Something I know you've all been saying, Chair Powell, you've said it many
times and yet you paused but you're not calling it a pause and you're not
calling it a skip. So, what are we calling it? Well, first of all, Sarah,
thank you and Christine, thanks for hosting us here in Centra. What we're
calling it is maintaining the level of the federal funds rate at its current
level for this meeting. Thank you. If you think about it, we've raised the
federal funds rate by 500 basis points since a little more than a year ago and
we've come a long way. We also think that there's more tightening power coming
through. Policy hasn't been restrictive for very long. We started at negative
real interest rates and we've now moved up to where we actually are in
restrictive territory. But we haven't been there very long. We believe there's
more restriction coming. And what's really driving to Andrews's point and
Christine's as well is very strong labor market. We've got a labor market
where jobs are being created. There are strong wage gains and that's driving
real incomes and driving spending which is driving more demand and continuing
to drive labor market. The labor market is really pulling the economy. And my
colleagues and I, as you will know, wrote down in our RCP two more additional
rate hikes, the median was quite a strong majority actually wanted two or more
rate hikes. And the reason for that was, if you look at the data over the last
quarter, what you see is stronger than expected growth, a tighter than
expected labor market, and higher than expected inflation. So that tells us
that although policy is restrictive, it may not be restrictive enough. And it
has not been restrictive for long enough. >> So I don't get why you didn't
raise rates at the last meeting, especially, I think it was a surprise that it
was a unanimous decision to hold rates steady. When you said a majority think
that they still need to go further on raising rates. >> As you get closer and
closer to the goal what we're aiming for is a stance of policy that's
sufficiently restrictive to bring inflation down to 2% over time. As you get
closer to that, you get closer to the place where the risks become more
imbalanced. We did 475 basis point hikes in a row, starting in June of last
year. In December we moved down to 50. Then we did three consecutive 25 basis
point hikes. This is really just a continuation. We're going to move the
decisions a little bit, make them with a little bit more time in between them
in an effort to get more information from the data, to see how much restraint
is really coming through the pipeline, from rate hikes that we only made now,
in many cases 6, 8, 9 months ago so, that's why we did it. >> Maybe in every
other meeting hike. >> We've not decided so the only thing we decided was not
to raise rates at the June meeting. We have not made a decision to go to that.
It may work out that way, it may not work out that way but I wouldn't take
moving consecutive meetings off the table at all. >> I'm trying. Governor Ueda
first of all, it's great to talk to you. We haven't heard much from you
outside of your policy meetings in Japan. I think the world wants to know why
you're the global outlier here. You have decided to maintain easier monetary
policy in the face of rising inflation. Why? >> A simple answer would be,
although the headlining rate of inflation is above 3% which is well above the
2% inflation target, we think underlying inflation is still a bit lower than
2%. That's why we are keeping policy unchanged at the moment. >> Even though
we've seen measures including core higher than the 2% level? >> Yeah, the core
is also above 2%. But let's look at the rate of increasing wages, which is an
important determinant of underlying inflation. It has risen, but is now
running at around 2%. Now, if you want a 2% inflation rate, wage inflation
that's consistent with that, would be slightly or well above 2%, if you assume
productivity growth rate is positive. So there's still some distance to go, we
think. >> And as a result of your policy being different than all these
policies of your colleagues, the yen has gotten very weak and continues to
weaken by the minute. Is it too weak? >> Well, the yen is being influenced by
many factors other than our monitory policy, including the policies of these
three banks. So we'll see. We monitor the situation very carefully. >>
Monitoring the situation? >> Yes. >> For intervention purposes? >> No, it's
the jurisdiction of the Ministry of Finance. Decision is on intervention. >>
President Lagarde, how much would you like to see inflation moderate from
these levels, because we've already seen a nice moderation, for you to feel
comfortable taking a pause or potentially going the other way? >> Well, this
is not what we're considering at the moment. But if I look back at what we've
covered, inflation was, I think the highest reading we had was 10.3. We are
now at 6.1, headline. Core has moved a bit down, but we're really looking at
both headlines, which is the measurement that we have agreed in our strategy,
and that is visible for people, for the consumers of Europe, but we're also
looking at underlying inflation. And on that front, we are not seeing enough
tangible evidence of the fact that underlying inflation, particularly the
domestic prices are stabilizing and moving down. So we're looking at as many
measurements as we can because we want to be in sufficiently restrictive
territory for long enough so that we're confident that we reach our 2% medium
term target. >> Why is it so sticky, Governor Bailey? And why is your
inflation rate higher than that of Europe's? >> Let me distinguish headline
and core for a moment. So with headline inflation, I do expect it to come down
markedly this year, as we've been expecting for some time. And a lot of that
is to do with the fact that the unwind of energy measures in the UK is on a
somewhat longer track. So that we will see some quite and discrete jumps down
in headline inflation in the UK throughout the rest of this year. And indeed
actually energy prices are now somewhat weaker anyway than we thought they
would be even quite recently. So it's core, that's the issue, just as
Christine has said. Core is much stickier. I come back to the labor market
again, we have a very robust labor market and strong labor market in the UK.
One of the striking things about the UK is that the size of the labor force is
smaller than it was at the outbreak of COVID. We have had a shrinkage of the
labor force. We're seeing some reversal of that now, but we're still not back
to where we were pre COVID. So that is causing the position in the labor
market to be very tight. And I see this when I go around the country talking
to firms because what they say to me very frequently is that their plan is to
retain labor as much as they can, even in the event of a downturn, because
they've been concerned and it's been difficult to recruit labor. So that's
certainly taking place. So I would say there's a backdrop of a very tight
labor market going on. >> Is it Brexit related also? >> I don't think Brexit
is a part of that labor market story. I think a lot more of it is actually to
do with frankly the response to COVID. UK is a little unusual in this respect.
We saw people come out of the labor force during the COVID period. Other
countries have tended to see that position reverse more quickly and more
strongly than we've seen in the UK. >> Governor Ueda, when it comes to the
inflation path for you, I know you'd like to see it continue to rise from
here. What would it take for you to really strongly consider abandoning the
yield curve control and negative rates? >> So we have a forecast projection of
inflation path that looks like it's going to go down for a while toward the
end of this year on declines in import prices and it's spill over to domestic
prices. And from there on, we are forecasting some increase in the rate of
inflation into '24. But we are less confident about the second part. If we
become reasonably sure that the second part is going to happen, that could be
a good reason for a policy change. >> If you see a steady increase? >> If we
are reasonably sure that the second part of the forecast is going to do it. >>
But didn't you learn from these three that inflation turned out to be not
transitory? >> Excuse me. >> I mean, wasn't one of the lessons from the last
year that inflation wasn't transitory and that there are some elements of it
that are sticking and proving difficult to fight? >> Right. So the second part
is the sticky part, but it's still, as I said, we think less than 2%. We hope
to make sure that it's going to go up to 2%. >> Chapel, we've seen some
progress in the US. Certainly if you look at the headline, CPI from 9% down to
4%. I know you're focused on core, but what would make you feel better about
it that you could remain on hold? >> So the progress on headline inflation
coming down is certainly welcome and ought to help keep inflation expectations
anchored. But I think it actually helps to think about core inflation broken
into three pieces. The first of which is goods inflation. And we've seen goods
inflation coming down for six months now. And that's because supply chains are
improving, the shortages are more or less gone, and also because consumption
is moving back to services and away from goods, so that part of the story
makes sense. Housing services is the next piece, and between that and goods,
you have a little bit less than half of the total index. And you see now the
new rents that are coming in are at lower increases or no increase and so
there's significant disinflation in the pipeline there, but it's going to take
12 months or 18 months to get there. The place where we haven't really seen
much progress is in non housing services, which is a little more than half of
our core PCE inflation index. And that's hotel services, travel services, food
service, financial services, health care, those things. It's generally very
labor intensive. Some of it's quite cyclical extensive but some of it is not.
The point is that's where we're not seeing a lot of progress yet. And the
reason is that, or one explanation for it is that labor costs are really the
biggest factor by far in most parts of that sector. We've seen a lot of signs
of softening in the labor market, but it's just beginning. We need to see a
better alignment of supply and demand in the labor market, and see more
softening in labor market conditions so that inflationary pressures in that
sector can also begin to subside. >> Are you surprised that hasn't happened
yet, after 500 basis points of tightening already in a little over a year? >>
Yes. Well, I think widely, it's been surprising that inflation has been this
persistent. But I think the bottom line is that policy hasn't been restrictive
enough for long enough to start to see those effects. The service sector is
not especially interest rate sensitive, by the way, as opposed to, for
example, the goods sector. So we wouldn't expect it to be the first to be
affected, but we would ultimately expect as demand softens and as labor market
conditions go more into balance between supply and demand, we would expect to
see inflationary pressure subside in that sector as well. >> Do you guys
coordinate? Do you talk amongst yourselves? >> Yeah, of course we do. >> Do
you call before policy meetings? >> Yeah, I just want to follow up on what J
said, because I think he's completely right. And I think that this is what I
call the catch 22 issue. Where we have an expected catch down, where services
will align on manufacturing, and that would be the logical consequence of the
lag time that it takes for services to align with manufacturing, and to see
prices go down in that sector. The catch up is that of labor, because it is,
as J said, labor intensive. It's generally relatively low productivity and low
skilled jobs in those sectors, and also, those jobs that are going to seek the
catching up with pre-COVID times. And how that catch down, catch up will be
resolved is going to be critically important for where inflation is heading.
Because if we see inflation going down in that service sector, and movement of
wages while increasing at a moderate pace, then we would be in a relatively
good place. But that is totally question mark for the moment. >> Yeah. It
raises the question, Chair Powell, about whether we need to see a much higher
unemployment rate in the US, and you're all dealing with a tight labor market
to finally really break inflation. >> The way we think about that is that
there seems to be a path still for labor market conditions to soften and for
demand and supply to get back into balance without the large job losses that
have happened in many prior cycles. And the reason for that is the level of
job openings that still exist in the labor market. It's still 1.7 job openings
for every person who counts as unemployed. That has been coming down.
Actually, the number of job openings has come down now by almost two million.
What you're seeing is, you're seeing wage pressures, they are still high, but
definitely coming down. You're seeing surveys of workers and businesses
suggest that the labor market is not as tight as it was a year or two ago. So
you're seeing job creation is beginning to come down. There are a number of
indicia that would suggest that we're getting the softening that we need,
we're getting it slower than we'd expected. But nonetheless, it's happening.
So it's still a possibility, but it's so uncertain right now. In my view, the
least unlikely case is that we do find our way to better balance without a
really severe downturn. I think there's a significant probability that there
will be a downturn as well though, but it's not, to me, the most likely case.
>> That's the hard landing scenario? >> I wasn't even thinking of hard
landing, I was thinking of even a recession. To me is not the most likely
case, but it's certainly possible, and of course many forecasters do predict
that. >> Is Europe in recession, President Lagarde. >> We've seen two negative
quarters of GDP, I don't know how you define it. >> I think the first quarter
of 23 was actually completely flat, wasn't negative. So technically, I think
you could argue that we did not see a recession, but it's stagnant to say the
least. And the expectations for Q2, particularly in the industrial sector, if
I look at PMI numbers are not giving us great hope that there will be a strong
recovery. We see a second half of '23, up from the first half, certainly, but
moderate, we have a 0.9 forecast for the whole year. >> Do you agree with
Chair Powell, do you think you can get away with this tightening cycle without
dragging Europe into recession? >> Our baseline does not include a recession,
but it's part of the risk out there. >> Are you willing to tolerate a
recession? >> The interesting thing for us is that if you go back to last
autumn, last November, when we did a forecast, we were predicting quite a long
but quite shallow recession. So the economy, as I said earlier, has turned out
to be much more resilient so far. Things that underlie that, one of the things
I would point to is the fact that we've had a very sharp fall in energy prices
in Europe. And that obviously helped with the whole question as the terms of
trade shock that we've been having, it's done quite a bit to reverse that
terms of trade shock, and that feeds through international income. So I'm not
surprised that we've had this reversal in one sense. What was surprising, but
actually very helpful, was that, of course, we did have this big fall and
energy prices in a much better winter, frankly, than we thought we would have.
We're going through this year now in a more resilient position than I
expected. So we're not currently forecasting, but obviously we have to watch
it very carefully. >> How's the Japanese economy faring? It's very exciting,
if you look at the Japanese stock market at a 30 decade high, what's happening
fundamentally? >> It's doing fairly well. Apart from the contribution from
some inventory investment, domestic economy is expanding at a pace slightly
above potential, I think, driven by pent optimum relaxed pandemic related
restrictions in May. And this is stimulating consumption and investment.
There's also green GX DX related business fixed investment taking place. So
investment is fairly strong at the moment. We think the economy is going to
expand a slightly above potential for some time. But there's of course, a lot
of uncertainties going forward, including what may happen in Europe and the
United States. >> I asked if you guys coordinated or talked about monetary
policy before, does that happen? Should it be more coordinated? Because you're
all doing different things right now. >> Well, I start, obviously what we
don't do is say, what should you do? Because we're all setting monetary policy
for our areas. That's the law in all of our areas. Actually, we don't do that.
But we do talk a lot. And I think it's important at all times, but is
particularly important in recent times at the moment, because we're facing
such big global shocks, we've got common shocks. They differ a little bit in
terms of their impact and their effect, but there's some huge global events
going on. They're affecting all of us. So we do talk quite a lot and we see
each other quite a bit because it's important we do that, and we share wisdom
on how we're interpreting the things that are going on around us. >> We are in
a flexible exchange rate, so we do policies independently, but of course we
exchange information which is very variable. >> Governor Ueda, do you think
that they are over tightening? >> No. >> No. You don't, you approve of the
policy. You've had a very tight labor market for a long time in Japan even
before COVID? >> Yes. >> Demographic? >> Demographics it's working in a way to
tighten the labor market for quite a long time and it's going to continue this
way for a while. >> I mean in the economic conversation, it gets into an
interesting question. Chair Powell were now wondering it's easier to fight
inflation last year when the economy was doing better. But now that we're
seeing signs of softness and weakness in manufacturing, and you mentioned the
labor market starting to cool off about overdoing it and the risk of overdoing
it. Do you wonder about that or you're still just focused on inflation? >> Let
me say the US economy has actually been quite resilient and the data that
we're still seeing, including since the last meeting, still is consistent with
an economy that's resilient and growing, albeit at a modest pace. As I
mentioned earlier though, yes, there was no question. The first question was,
how fast should we go? And we went pretty fast. And we got to a level that we
believe is restrictive. We're in restrictive territory. If you take the
federal funds rate and you subtract some forward looking measure of expected
inflation, you'll get a significantly positive real rate. Meaning we're
probably in restrictive territory. So I think we have steadily slowed the pace
of our moves and it's appropriate to do so for one reason. Because the more
information we get, the better decisions we'll make. The risks of doing too
much versus doing too little become more imbalance. I wouldn't say they're
imbalance yet, but they're becoming closer to balance. I still believe they're
in. And the committee clearly believes that there's more work to do, that
there are more rate hikes that are likely to be appropriate though. >> So you
think the risk is still of doing too little and not getting control of
inflation? >> Yes, of course. >> But inflation expectations are, I don't have
to tell you very well anchored. >> No. But the thing with the risks is that
there may be social costs associated with restoring price stability. The
social costs of failing to restore price stability will be higher in almost
all likely cases. We've seen what that looks like and it's just something that
we have to do. It's the one of the principal things that society counts on us
to accomplish, and I think we all feel committed to accomplishing it. It is of
course, a good thing that inflation expectations have remained anchored all
this time. But our understanding of inflation expectations is not a precise
one. And the longer inflation remains high, the more risk there is that
inflation will become entrenched in the economy. So the passage of time is not
our friend here. >> What about a higher inflation target? I know none of you
want to talk about that, but on Wall Street, there's this idea that a lot of
things are changing in our economy. Structurally, the onshoring of supply
chains and chip plants and all of that is going to be expensive and could
permanently create higher inflation rates, couldn't it, President Lagarde? >>
Well, at this point in time, and given the fight that we lead against
inflation, the yachts sticks, that there is the strategy that we've agreed,
the expectations that we have and the inflation targeting as it has been said,
there is no way that any of us, I think, would consider changing the gate post
halfway or more than halfway through that journey. I think it's wonderful to
have a forum like Sintra, which brings together academics and other than
policymakers to actually consider those ideas and to explore them and to weigh
the cost and benefit and all the rest of it. But at this point in time, I
think we have to be as persistent as inflation is persistent. And we have to
be resolute and decided and determined in reaching the target that we have
set. And not debate the target as we are running that race. >> But it does
raise the question, Governor Bailey about how far inflation will come down to?
>> It does, but let me reinforce what Christine said. What is the inflation
target? It is the definition and practice of price stability. In our
legislation, it is what price stability is taken to be that is the 2% target.
And I don't think anything has changed in terms of what we mean by price
stability. I think that's a very important point to start with. It's the
anchor that we have to always maintain. Now, in terms of bringing it down,
yes, we have faced and are facing the biggest challenge for a very long time.
But we have to meet that challenge. I don't think it is the right thing to do
to say, well, this is all a bit difficult, let's change the target. I really
don't think that is the right thing to do that would be a very bad thing to
do. And although I very much agree, team is saying that there are things we
understand about inflation expectations and things we don't understand about
inflation expectations. I think taking risks of that nature with inflation
expectations, but also fundamentally changing what we mean by price stability
when there's no good reason to do that, I think would just be the wrong thing.
>> How do you read Governor Da the inflation expectations. Because they've
crept up in Japan as well? >> Yes, we've been for a long time trapped in zero
inflation, zero inflation expectations equilibrium. So we've been trying very
hard to move this to 2% inflation, 2% expectations equilibrium. To do so, we
had to de anchor expectations from zero, raise inflation expectations. In the
future we'll have to re-anchor them at 2%. This is a formidable task, and now
we are seeing signs that inflation expectations are rising. But as I said, not
to the extent that we are fully in the 2% inflation expectations equilibrium.
>> It also raises the question, you mentioned the labor market and some of the
post COVID changes about how COVID has distorted the data and has made travel,
for instance, so strong for so long. And I wonder Chair Powell, how you look
at the COVID impact on the economy and how it's changed the way you make
forecasts and you think about what's happening right now. >> Well, I think
there are changes and we don't know how persistent they will be. Certainly
work from home. And you can see the effect on commercial real estate,
particularly office real estate and the surrounding retail that is suffering
in many major cities. We don't know how long that will last. It feels like
some part of that will be persistent and will last. You mentioned the data as
well. I guess response rates to a lot of the data that we collect and other
organizations collect. Response rates have gone down and you're seeing a lot
of volatility in some of these data series. I would say more so than we've
seen historically. The data, even a little bit foggier than they usually, in
terms of the effects of COVID, it's going to have long term effects on the
economy may be loss of productivity. There's certainly been generation of
kids, some loss of education and training. I think it's hard to say how
persistent all this will be. >> What is your level of concern of commercial
real estate since you mentioned it in the US? >> It's something that we, of
course, are watching carefully the way it lays out. >> The large banks don't
have large concentrations of commercial real estate. So that's a good place to
start. A surprisingly large part of exposure to commercial real estate is in
the banks that are under 100 billion. But there the worry is more banks that
have a high concentration and they're relatively few. So it's something that
we're carefully monitoring. Bank supervision has a playbook for this. So
supervisors are talking to banks about their concentration of real estate and,
what can they do and how do they manage themselves out of this. It's something
that we're well aware of. It's not a surprise. And, we're focusing on it. >>
Is it one of the reasons you were cautious in the last meeting. >> Commercial
real estate? I wouldn't say so. Generally speaking, at the last meeting, it
was about, how far we've come, what's in the pipeline. I will also say that
though that the bank stress, that part of the decision, in my thinking anyway,
was the bank stress that we experienced earlier this year. There's a fair
amount of research showing that when something like that happens, bank credit
availability and can move down a little bit with a bit of a lag. So we're
watching carefully to see whether that does appear. Of course, tightening and
financial conditions is what we're doing intentionally. So we have seen bank
credit conditions tighten and that's what we're trying to achieve. The
question, is there another channel of that or a greater amount of that coming
from what happened in March? We don't really see any evidence of that. But I
think that's certainly in the back of my mind to see whether we do see that.
>> Yeah, it gets into the question about lags. How long are lags? Governor
Bailey. And do you expect to see more? >> It's a very interesting question in
terms of the transmission of our monetary policy decisions. So if I can just
illustrate it with the UK case. And obviously it's not the only part of the
transmission mechanism that would be clear, but it's an important part to
illustrate it with the UK mortgage market. So we've seen a big structural
change in the UK mortgage market since the last tightening cycle of monetary
policy. Which of course accepting passage of time was about 20 years ago
actually. And that change has been a change from a variable rate mortgage
market to a fixed rate mortgage market. Now I must say, obviously with J here,
it's not US style fixed rate mortgage market, it's a much shorter term. So the
average term is often around five years. But we think we're at about 85% of
the stock of UK mortgages. And now in that part of the market, so we know that
the transmission of monetary policy is going to be slower as a result. Because
obviously, it depends upon the timing and the sequence of those fixed terms
coming to an end often. So we have to judge that, it's another factor and
another element of uncertainty that we have to judge when we're taking our
decisions. Which is how much of the tightening that we've already done has
come through and how much is yet to come through. And we know that referring
back along quite a way into the past isn't going to help us in that respect.
So we have to formulate those views afresh. And so it is part of our decision
making Calculus is how much more has to come through, when will it come
through, and also how powerfully will it come through. And all things we have
to take into consideration. As I said, history isn't going to be a great guide
for that, given the change in the market. >> So a year. What's a lag? >> Well,
what you see, and of course you can compute, is the profile of mortgage is
coming up for renewed terms. And we can see that over the next year or so,
there's quite a lot of fixed rate mortgages are coming up for renewal. We can
factor that in. There is another element of so uncertainty as to just how that
will work its way through. >> President Lagarde, how do you think about the
lags? >> I think of the lag in three steps, if you will. The first one is
transmission in terms of tightening of the financing terms that are made
available and how markets absorb the decisions that we make. And on that
front, we have a good and reasonably rapid transmission. We see it in rates.
We see it in volume of loans and on both accounts there is a good absorption
and a rapid transmission of our monetary policy decision. But that's only Step
1. What we need to see is Step 2 and how it materializes on investment by
corporate and for households is predominantly mortgages. And for the Euro
area, there is a lot of interordinating because you have markets where
mortgages are at fixed rate, markets where mortgages are at floating rates,
some that are readjusted every so many years. So we have to look at all those
data very carefully, but it seems that the transmission is likely to be less
rapid than it had been in the past, because there are many more fixed rate
mortgages now in the Euro area than there was 15 years ago. And that's not it,
we need to see it then channel to the third step, which is inflation. So we
want to see that transmission strength through Step 1, Step 2, Step 3. And
make sure that this is really having an impact in terms of the fight we have
against inflation. >> Governor Wada do you worry about the lagged impacts of
their policies on the global economy and on your economy? >> Yes. But for
ourselves, we haven't had any serious monetary tightening for three decades. I
was a board member of the BOJ 25 years ago. Then the policy rate was about 20,
30 basis points now, minus 10 basis points. >> And it doesn't sound like it's
changing anytime soon. >> So in terms of that, the lag in the effects of
monetary policy could be at least 25 years. We'll see what will happen if we
get to normalize policy seriously. But we'll have to be very careful here. >>
Be careful what you wish for, I guess. So chair Poll are you more worried
about the lag impacts than they are because they're still hiking rates? >> I
don't know. I wouldn't want to compare. I would just say again, what's
different this time is actually though that markets move substantially in
anticipation of moves. So by the time we lifted off in March of 2022, the two
year had moved from 20 basis points up to 200 basis points. So financial
conditions now move in expectation and the whole modern communication strategy
really helps that long. So that is different, may or may not be different. And
we also haven't had this tightening in three decades really. We've had
tightening, but looks more like tightening cycles from the '70s and '80s. So
what we see is a picture of the older literature says a year or two for
activity and add a year for inflation. There's new literature that says it's
much faster than that, and I think we just have to to watch and see what's
happening. There are reasons to argue that it would be faster this time or
slower this time, but I just don't think we know at this stage. >> It gets
into the question about the markets and you're saying that it's a transmission
mechanism. You're all talking very hawkishly and saying there's more work to
be done and we're still worried about inflation. The markets pretty much think
you're almost done. All of you guys, maybe one more hike in July and then done
and then into cuts next year. Is that wrong, President Lagarde? >> I look at
the data we have, I look at the mandate we have, I look at the transmission
lag. And we've decided for ourselves that we would use three criteria. That's
what we are focused on. Of course, we're not completely oblivious to what
happens in markets, but we have to be guided by what the mandate is, what the
data delivers, and what criteria we take into account in order to determine
our policy and to establish our stance going forward. That's the only way to
go. >> But I guess there's financial conditions and, I don't know, Governor
Bailey, are they're working against you? You're trying to fight inflation and
MSCI World is up nicely this year. >> Well, by the way, the market, I don't
think things were nearly done at the moment, and they've got a number of
further increases priced in for us. My response to that will be, well, we'll
see, because as I was saying earlier, we're essentially evidence driven in
that sense. So we'll make our decisions based on that. I think you're right to
point out, as you said earlier, and I would draw this point out, that there
are two parts to this. There's where the peak is and then how long it's
sustained beyond that. And I think both of those are relevant. Both of those
are things that state the blunt and the obvious, will emerge with time. But
I've always been interested that the market thinks that the peak will be quite
short lived in a world where we're dealing with more persistent inflation. >>
They did finally price out the cuts in the US a few weeks ago. Market was
primed for cuts. I assume you were pleased to see that that's no longer the
case. >> So if you go back and look at forecasts from the participants on my
committee on inflation, you'll see we've been consistently thinking this is
going to take some time. It's going to be a process that will take longer than
we would've hoped. And it may well be a bumpy process, but markets have gone
back and forth between appearing to price and pretty quick declines in
inflation to coming back to being more in alignment with the thinking of the
committee. And that's where we are right now, is closer to where committee
participants are. But as Christine said, we're not focused on what the
market's forecast is. We have our forecast. All of us who are on the
committee, we work hard to develop an understanding of what's driving
inflation and what the path forward for inflation is. We make our best
estimates, and that still is that it's going to take some time. It's just
going to take some time. Inflation has proven to be more persistent than we
expected, not less. And of course, if that day comes when that turns around,
that'll be great. But we don't expect that and we don't plan for it. >> So is
it counterproductive to you that the stock market has rallied, the bond market
has rallied? The market is fighting the Fed. The market thinks you're closer
to the end and that does make financial conditions easier. >> You can't fight
the Fed. >> You can't fight the Fed, but they're fighting the Fed. Is that a
problem for you? >> I don't see it that way. I don't look at it that way at
all. Honestly, we have different jobs. Our job is to bring inflation down to
2% and sustain maximum employment. That's our job. That's what we think about.
We look at the data and that's what we care about. And different parts of the
market react in different ways. It's just not something that is a principal
focus of our work. >> But it did seem last year like you wanted a weaker stock
market. You used the word pain at Jackson Hole. It seemed like you were trying
to communicate that financial conditions should tighten and less so this year.
Is that right? >> Not really, no. Of course, we work through financial
conditions, that's what we do. And all the things we do and say work through
financial conditions to affect the real economy. That's how it works, but it's
broader financial conditions. So we're not focused on any one market. We're
never thinking, let's do this to this market. It's just in general, let's
communicate what we want to do and why we want to do it and financial
conditions adjust, and that's really all we can do. We do not target
particular parts of the market. Although of course we do monitor market
conditions. >> So you don't care what the stock market's doing. >> I look at
broader financial conditions. It's one of many conditions, along with interest
rates, credit spreads, everything. All of the conditions, and the availability
of credit. It's one of many things. Again, we don't focus on any one thing as
the key thing. >> Governor Ueda, how important is it to you, the markets as it
relates to financial conditions and the mechanism for monetary policy? >> You
mean the stock market? >> Stocks, bonds, currency. >> So stock prices have
been rising fairly sharply since spring this year. Stock prices theoretically
are affected by interest rates and investors' view of the economy. We haven't
changed interest rate, so probably investors have become more optimistic about
the future of the economy. Of course, we don't want serious financial
imbalances in the economy, so we keep monitoring. >> How do you think about,
President Lagarde, the risks to the economy, especially geopolitical risks? In
Europe we were all glued last weekend to the news out of Russia and the Wagner
rebellion and we're wondering if now political instability in Russia presents
a further geopolitical risk to the global economy. >> But I think we all look
at it and we are all concerned about geopolitical development by virtue of the
profession that we have because it does have an impact on supply chain, it
does have an impact on trade, it does have an impact on the uncertainty, and
we can only say that at this point in time, uncertainty is high overall and a
big factor of that uncertainty has to do with the geopolitical difficulties
and conflict or quasi conflicts that abound at the moment. So yes, we are
looking at that. But do we have to make a moral judgment on this, that, or the
other? This is not the job that we have, but it clearly has an impact on how
the economy is going to change and be transformed. And whether it will have an
impact that is inflationary or disinflationary I think is also to be
determined. I think there will be various schools of thought along those
lines. >> I wonder how you think about next winter. Europe got lucky. >> We
hope it's mild. >> What if it's not? >> But storage is what? Sixty nine
percent. Michael, the expert on Isabel's panel, said that 69% and we are going
to hit 95% by the end of the summer. So that should put us in a good position
for the winter. But I'll say one thing, which probably we had not factored in
sufficiently and maybe that applies to all of us. It's the resilience of our
economies and the resilience of the entrepreneur, the corporates, the way in
which we have, in a matter of a few months, reorganized ourselves. Just think
one year back, everybody thought that the German model was dead. That Europe
was going to be completely on its knees. Well, these things have not happened
and the resilience has been demonstrated at all levels of society. >> Just to
add to that, I totally agree with Christine on this. That resilience, you see
it when you talk to businesses. And I spend a lot of time talking to
businesses and I've spent a lot of time in recent months talking to food
producing businesses to try to understand the slower than frankly we expected
decline in the rate of food inflation. And one of the things that I get quite
consistently, and this is where the Ukraine, Russia situation comes through
for real is they say, well, last year we bought forward supplies to a much
greater extent than we would normally do because we were not confident we
could actually get them. Consequences, we've locked in higher prices for
sometimes they say six months to me. And that of course is affecting the
passage of inflation, particularly for food prices in this case. So these
things do have a very direct effect and are continuing to have a very direct
effect actually. >> But there's nothing central bankers can do about that, is
there? >> Well, the first thing we need to do is understand it. That's a good
starting point. >> [inaudible 01:12:26] just keep crushing demand, but you
can't do anything [inaudible 01:12:29]. >> Yeah. We have to design policy and
take our decisions with the best. We always take policy decisions on a forward
looking basis. So we have to do it with the best information and understanding
we can get of these things. >> So to what extent I guess is the war in Ukraine
driving supply side inflation for materials around the world? >> Well,
following on from what I was just saying, I think the conclusion I draw from
that is, and this is what the businesses tell me, is yes, we are going to see
actually a fall in the rate of food price inflation, for instance, but it is
taking longer than we expected. So that's what we have to factor in and decide
how best, in a sense, to respond to that with monetary policy. >> It's not
just Russia. Governor Ueda, also we're following the tensions that have
increased between the US and China, between Europe and China. Do you think
that's having a material impact on global growth? >> But at least there's a
tendency to relocate production sites out of, say, China into other Asian
economies, including to some extent, Japan. So in the short run, this is
having a small positive effect on the Japanese economy through business fixed
investment. But in the long run, there will be inefficiencies all over the
place. So we'll see. >> So Japan's a beneficiary of the flight out of China?
>> In one sense and in the short run, but in the long run, I'm not sure. >>
Chair Powell, it's obviously a risk and it hurts trade. How do you think about
the US-China relationship as it impacts the economy. >> So that is the way to
think about it because we don't have any role to play in the relationships
between the countries, but China is a very large, important economy. It's a
big trading partner. Mainly consisted of us buying things that are made in
China. And the Chinese economy came out of the COVID and looked like it was
recovering strongly. Now it doesn't look like that. It looks like it's slowed
down and there's some issues there. From the US standpoint, at the margin,
that probably means a little bit less global demand. I wouldn't say it's a
first-order consideration for us though. >> Chair Powell referenced the
disappointing nature of the Chinese economic recovery. How does that play into
Europe's recovery or the global growth picture? >> Well first of all I think
we have to be attentive to the emerging market economies at large. At the
moment they are producing about 60% of global growth some of which is now a
bit more focused on domestic development and consumption and less so on trade
but if you look at the trade volume numbers from China to many other countries
particularly the advanced economies, that has not changed significantly. So
the trade volume is still significant and I'm not breaking any news here the
Chinese authorities themselves say that they're likely to have a 5% growth
this year in 23 rather than the 6% that they had initially forecasted. That
will have an impact given the size of the Chinese economy on global growth at
large. When we do our projections, when we look at the economy, we look at the
global economy and then we narrow down and zoom on the European economy and
the Euro area in particular. But everything that happens in China, in the
United States, in the UK, in Japan in emerging market economies actually
matter for us because we are strongly interrelated and have been trading with
each other for a long time and If anything we've learned from COVID in
addition to the pain and suffering for many is the fact that we are vastly
dependent for the supply of rare earth and various metals that will be
critical for the development of the economy of tomorrow if we decide to firmly
go towards the green economy that we should be aiming for. >> [inaudible
01:16:48] As an open economy one of the things is just exactly as Christine
says in terms of how we do our process. One of the things that we spend quite
a bit of time on is world export prices. Now actually in the recovery from
COVID and of course, this was the supply chain shock. We saw quite a big
contribution to goods price inflation from world export prices. We're now
seeing those prices definitely start to weaken. So that will be another
determinant going forward of policy. >> As central bankers do you plan for the
worst-case scenarios on the geopolitical front? If China invades Taiwan then
what, what does a central banker do? Is there a contingency for that, Chapel?
>> We use our tools to achieve our legal mandates if that happens  LAUGHTER .
>> Got that Fed speak down. >> Well what I'm I supposed to maintain? >> You'll
hold a special meeting. It's a volatile world we live in and then there's a
pass. >> So we do have in every FMC cycle we look at our staff works up six or
seven or eight alternative simulations and they simulate different things.
It's not so much geopolitical events though it's more different ways the
economy could play out and all the participants read those and think about
them and talk about them and they come up in our meetings we talk about them
so it's very helpful because you can't get too focused on the modal path in a
world where it's just very hard to predict the economy even in normal times
it's very hard to predict the economy let alone in times like today. >> What
simulations do you talk about? >> I'm going to leave that to your imagination.
 LAUGHTER  >> I bet I can think of a few. President Lagarde Chapel did talk
about me one of the things that I don't know that there was a simulation of is
we had a few bank failures in the US this year and I know it forced some of
you into action to shore up banking systems. Are we in good shape now, is the
global and European financial system in good shape, have we healed? >> I can
only speak to the banks over which we have supervision and those are the
European banks but I'm looking at the Euro area specifically. We have been
enforcing Basel III to the entire banking sector. The capital ratios are very
high, 15.3% if I recall. The leverage liquidity coverage ratio very high as
well. So we have not experienced the turmoil or the difficulties in Europe and
Europe does not include Switzerland, thank you very much. But we are extremely
attentive, we reinforce the stress testing constantly. I'm very pleased to see
that the Basel III agreement has now been reached as I understand between
Parliament, the Council, and the Commission so that we can actually roll out
Basel III with as limited exception as possible and we have to continue doing
that job. >> Any lessons that you took Governor Bailey from what happened
earlier this year? >> Well, let me start with a bit of a backdrop. I think
it's important drawing what Christine was saying. I think it's important to in
a sense reflect the fact that the regulatory changes we made after the global
financial crisis have paid off in the sense that we've been through and we are
going through some huge economic shocks and the banking system certainly I can
speak again as Christine as I can speak for the UK banking system is resilient
to them and is doing what we want it to do which is support the economy not
the other way around to be honest, that's become as a crisis. So that's an
important starting point. Now, I think there are important lessons from
important issues that we have to reflect on from what happened. Christine made
her subtle reference to Switzerland  LAUGHTER  well there's a huge sense of
irony in the British, Christine.  LAUGHTER  There is obviously a question
posed by the Credit Suisse Handling which is are the resolution plans for the
major banks that we've spent the last 15 years developing, fit for purpose, or
are they not fit for purpose? Will come to that, if they're not fit for
purpose then of course we cannot sit here and say all is fine. Because
clearly, we're going to be regrettable though it would be after 15 years of
work, we're going to have to tear them up and start again. Now, I'll give you
my view on it. I'm going to say this, I have not yet heard the case made to me
which suggests that they are not fit for purpose I'm going to state that but
I'm not going to leave it there. We've got to have consent, we got have this
out and decide whether it goes one way or the other. My starting point is I
remain to be convinced of that assertion but we can't let it rest there. I
think we've all got the question of how our banking systems handle a steep
rise in interest rates? We do stress tests to test that, we've got capital
provisions related to that and I think the third thing I'd say is we've got to
think hard about the speed of run question. But I think we've got to think
pretty carefully about that because if we go to extremes on that argument
we're essentially heading to narrow banking and speaking of myself I don't
think that is a sensible place to head to so we've got to think quite
carefully but I think creatively about how we maintain the banking system that
does what we wanted to do which is create credit in the economy, create assets
that are naturally are liquid, and deal with the speed of running question and
we've got to take that one on. >> We're actually going to get stress tests
this afternoon in the US which I won't ask you about Chapel but I will ask if
you think that the US regional banks are resilient right now? >> I do so, I
think first of all I think the overall banking system is strong and resilient
with very high levels of capital and liquidity double the levels that they
were at and then some before the crisis so the innovations that we put in
place, the regulatory changes and higher capital those are all in place in the
United States as well. So when it comes to the events we had earlier this year
with three banks that had pretty idiosyncratic business models and funding
models as well I think we need to learn lessons and we're not hiding from that
at all we understand they're going to need to be regulator strengthening of
both regulatory and supervisory practices as it relates to institutions of
that general size I would say. >> You got a lot of questions on that from
Congress last week. >> That's mostly what they wanted to talk about. >> They
want to make sure that you aren't, in part, not going to increase capital
levels and choke off the small and regional banks in this country and make it
hard for them to compete. >> So the US has something like 4,500 banks the most
banks by a pretty big margin I think of any major economy and we think it's a
real benefit to have banks of different sizes and business models that serve
local communities and offer different products as well as having the large
banks and the large banks in the United States are very strong,
well-capitalized, a lot of liquidity, and they've been a source of strength I
think through the last couple of events. >> I think it's important that
whatever changes we do make, keep in mind the need to preserve the business
models of smaller banks and not just of the largest banks. >> Any concerns for
you, Governor Ada, on the strength of the global financial system at this
point as we go through this, I don't know, once in several decades tightening
period? >> I can only talk about Japanese banks. I think they are well
capitalized. They have enough liquidity. It's true that some smaller banks,
regional banks, are sitting on non-negligible amount of valuation losses on
their security holdings. But on average, that's about 1% of their column
capital. So it would be okay. But if we do get to normalize our monetary
policy, because we get to go into the two% inflation rate equilibrium in the
sense I discussed earlier, then rates may go up by large margins. And we will
have to be careful. We'll have to be carrying out all stress tests, I think.
>> I also want to ask you if you go into more normalization stance away from
negative rates and the yield group control how you'll manage the risk of the
government's enormous financing needs. And whether that's a concern that you
think about. >> We keep saying that's the business of the government and the
diet to create a sustainable government finance. >> Fiscal policy in general.
I'm curious if you guys will bite on this. Is it helpful right now or hurtful,
President Lagarde? >> Everybody has to do what everybody has to do. A man's
got to do what a man's got to do. Monetary policy makers have to decide on
monetary policy, and fiscal policymakers have to do their job. It is true that
there are circumstances where working hand in hand and supporting each other
has proved helpful. I think we had a very good demonstration this morning in
one of the lectures that we had. I think what we have very clearly stated as a
governing council of the whole Euro system is governments, please it's time
now to roll down the measures that you had decided for COVID and for energy
purposes and that you adopt a path that will take you to better sustainability
of your public finance. So we hope to see that. And the fiscal space that has
been allowed for the various non-conventional fiscal support that were decided
back in 2022 and 2023 very much should be rolled back in the course of 2023
and certainly should not be expanded in 2024 bearing another major shock. But
that's our recommendation and we make it very clear in our monetary policy
statement and have made it very clear in the last statement that we issued. >>
We learned in the UK what was that last year when monetary and fiscal policy
don't work together, it can be a big problem. >> Before we had to do with in
the Uk last autumn was actually a financial stability issue. We dealt with it
and it was very clear that that was the issue we dealt with. We didn't deal
with anything more than that. It's not our job to get involved in fiscal
policy in that sense. And we always, when setting monetary policy, take fiscal
policy as announced as a conditioning assumption for our decisions. So I don't
go beyond that in terms of commenting on the stance of fiscal policy. The one
thing I've said in recent times and I don't mind saying it again, is that I
welcome the fact that the Chancellor is very much using fiscal policy to try
to address the structural issues in the economy. That's not a comment about
the stance of fiscal policy more or less, it's a comment about the fact that
going back to the point I've made about labor markets and actually the low
potential rate of growth in the UK economy. The more we can do to tackle that,
frankly, the better. >> What about you Chair Powell? I mean there's been a lot
of fiscal largesse in the United States, the COVID stimulus and now even new
policies that are just filtering through like Inflation Reduction Act ,
infrastructure, chips. They're still American Rescue Plan Act, money getting
doled out. Isn't that making your life harder? >> So echoing my colleagues,
our assignment is to deliver price stability regardless of the stance of
fiscal policy. And we don't play a role, formal or informal, in advising the
fiscal authorities. There are other agencies in Washington that do that, and
that's really not our job. I will add though, without crossing any lines, that
the spending during the pandemic was very high and it's come down. And so we
look at the fiscal impulse from the level of spending. And it's really not
material. It may even be slightly contractionary. But let's just say it's
flat. You identify those bills. And I think you are seeing some of that money
showing up in construction numbers. It's supporting construction activities,
particularly the infrastructure bill. If you look at where the inflation is in
the economy, I wouldn't say that that's an important driver of inflation or
something that we think about or consider. >> So you mentioned the consumer.
So the excess savings, you think it pretty much come down. Where do you think
the US consumers headed? >> The consumer had savings from two sources. One was
just the fact that people couldn't travel and couldn't spend money on
services. That was a lot of it. And there were also the fiscal transfers that
happened. And there are many different estimates, I would say, for people at
the lower end of the income spectrum who tend to have a high marginal
propensity to consume most, but not all of that money is gone. So there's
certainly some residual support for spending in that, in the laws that passed
at the beginning and during the pandemic. But again, I wouldn't say that's
today the main driver. I think if you look at the strength of the labor
market, still creating more jobs, then there are new entrants to the labor
market here and wages are still pretty high. So you're driving up disposable
income and that is consumption and that's driving the economy. >> I wanted to
also ask you guys about the balance sheet, very hot topic. Governor Wada, how
do you think about the expansion of the balance sheet and how much is too
much? >> Well, it's a tough question to answer. At the moment we are using
government security purchases to hit the range for the long-term interest rate
we have set, which is zero plus minus 50 basis points. So the size of the
balance sheet is an endogenous variable. >> The rest of you are in shrink mode
in the balance sheet or rollout mode, you've been more aggressive. Governor
Bailey, has it gone smoother than you expected? >> So far I don't want to
tempt, it's gone very smoothly actually. By the way, the reason that you say
more aggressive, just to be clear, is that we've got a longer duration of
government bonds in our portfolio. So leaving it to an organic runoff would
mean a lot longer runoff for us, I think. >> That's why you're outright
selling. >> That's why we're selling. So the target we set for the year, the
80 billion target was the sum of the natural runoff plus the difference
between the target we set. And that's element that we're doing as active
sales. That's gone I would say very smoothly actually, so far. I'm very happy
with the way it's gone. I think the second question that we're certainly
looking at actively, of course, is just how far will we go? And I look at it
particularly in terms of the stock of reserves now in the system before we hit
what I call the Equilibrium level of reserves. Now, we may go on selling the
QE stock below that. Because we would shift our operations around. But we
expect to do that. But it's important to focus on where we think that natural
level of the balance sheet, which won't be constant over time, by the way. But
where we think that natural level of the balance sheet is relative to where we
are today. >> How do you think about it President Lagarde? Is there pressure
building for you to go faster when it comes to shrinking the margin? >> I
would say that the interest rate is the primary tool that if we're using at
the moment. Second, there is almost a contractual reduction of the balance
sheet of the CB because there is a reimbursement of the tetra we had put in
place during the pandemic, and that is actually happening now, if not
yesterday or the day before. Third, as of 1st July, we will stop any
reinvestment under the asset purchase program. So there is a natural declining
of the balance sheet of the CB, which is only a first step. We are discussing
our operational framework. Hopefully, we will be able to complete that work in
the next 6-9 months. And that will really determine the desirable size of our
balance sheet, which is always a factor of also the circumstances and the
situation we are. That is coming. >> Is it going smoother than you thought it
would as well, Pal? Qt. >> It's working as we had hoped and expected it would
work. We have a entirely passive program, as treasuries and mortgage backed
securities mature, they roll off subject to a cap and it's been moving along
at the underlying pace. If you hit the cap is about trillion dollars a year,
and reserves appear to be quite ample, so it has ways to go. >> Is there
anything that would make you speed that up or slow that down? >> We always say
that we're prepared to adjust in light of evolving conditions. But I don't see
anything that would cause us to want to do that right now. >> So in the
moments that we had left, we've talked about a lot of the risks, we've talked
a lot about some of the concerns out there. I want to hear some optimism maybe
and what makes you feel, none of you are really talking doom and gloom on
recession but what makes you, President Lagarde, optimistic right now? >> My
professional field. >> However you want to interpret the question. >>
Otherwise there's lots of things that make me happy and I hope for all of you.
I'll just mention one success which I'm really proud of, and I'm very proud
that Fabio Panetta was the one who led that exercise on behalf of the entire
group. Today, the European Commission has published the legislative draft for
the European Digital Euro, for our CBDC. And that gives me hope because I
think it really demonstrates the capacity to innovate, the capacity to work as
a team, the capacity to anticipate what digital payments will be tomorrow. Now
some people are very skeptical and they say, well, you're taking risk.
Financial stability, possible runs that will be accelerated by this. And all I
would say is, number 1, you have to be ready. You want to keep the sovereignty
of your currency. So many years ago, who would have thought about all the
users and the applications that you have on your cell phone? None of us. So
being prepared, being ready, paying attention to what actually Europeans and
particularly young Europeans want in terms of currency and form of currency is
something that we have been doing. That we have accelerated, that we have not
decided for sure, but at least the legislative piece is on the table. There
will be a lot of discussion. And that's in a way also the result, one of the
good benefit of COVID. We have talked about the downside of COVID and the
consequences but the way in which so many of us have become more digital,
better equipped, probably more productive. It will be demonstrated probably
with a lag time. But when I look at my member states, the countries that were
least digital have really traveled very fast to become much more digital. So
that's a good reason to hope and the resilience demonstrated, but I have
mentioned that earlier on, by everybody, from the individuals to the
entrepreneurs, to the corporates, to governments in Europe, decided to get
together to borrow jointly, despite the fact that it's laborious, that it's
painful, that it gives a lot of things to report about to journalists is also
a sign of progress. >> And just to be clear, digital Euro will happen when? >>
That will be decided by the governors in governing council. We will decide
that at the end of October and then there will be another phase of piloting
experimenting, fine tuning. Because if and when we go, as will be decided by
the governing council at large, we want to get it right. So we're not going to
do a half start or a fake start. We will move with success. >> What makes you
optimistic, Governor Bailey? >> Well, actually I'm going to build on
Christine's theme because as well as we're also working on retail digital
Euro. We're actually also working on wholesale digital money. And completely
rebuilding our wholesale payment and settlement system in the Bank of England
to enable what could be a complete revolution in the infrastructure of
financial markets and trade finance. And this is very exciting. So we put the
wiring in a lot that we can before last, the engine should go in next year and
this has enormous potential to change, the world at the wholesale level as
well. >> It's interesting. I feel like the world has moved on to AI beyond
digital payments. So are you guys incorporating AI into your thinking about
economies and your toolboxes? >> I think we're all on a learning curve. I feel
quite old when it gets to this. We're looking at it in three respects. One is
how it will affect the economy, two how we can use it ourselves, both in our
analytical functions but also actually in our operational functions. But we're
looking at it, I would say, with very open eyes. You can see the strengths,
and you can see the current weaknesses of it and of course, it moves very
rapidly. We're certainly to speak for ourselves, we're having to devote quite
a bit of time out of what the potential is for that. >> Jerome Powell, is AI
one of the things that makes you optimistic? >> So on AI, we're just doing
what everyone else is doing. We're trying to get smart about it and it's
obviously has huge possibilities. Technologies tend to propagate through the
economy fairly slowly and this may be the exception, maybe not, I don't know,
but it's something that we're spending a lot of time on way too early for
conclusions. I wouldn't use optimism, but I would say this in answer your
first question, which is, when inflation first arrives, it's really due to
very strong demand for goods and goods pipelines that just aren't working and
shortages. So that's where it comes from. It wasn't about the labor market at
all, or very much. As we get to this stage and looking forward, we think it
will be significantly about getting the labor market supply and demand back in
alignment. I would say it's a positive thing, I'll say it that way. It's a
constructive thing that we've been able to raise rates, 500 basis points, with
the expectation of going further and we still have a very strong labor market.
But nonetheless one that is in fact cooling in just the way we would've hoped
which is to say through things like lower job openings. Job openings are
coming down. The quiz level has returned to its pre pandemic level. Wages, if
you look at employment compensation index or average AI earnings, they've
moved down about 1% still very high but a more sustainable level that's
consistent with 2% inflation. So I would just say that's the makings. If that
process continues in a gradual way without really any effect on employment,
the longer that goes on, the better. And in a way I take that as a very
constructive path. It is not guaranteed but the fact that this is really
there, and that's what's been happening for more than a year into our
tightening cycle, I would take as a positive thing and perhaps a hopeful one
for the future. >> Just be careful not to overdo it. What about you Governor
Ueda. >> Let's see. As other central banks are thinking of issuing digital
monies, we're taking a different route and we have decided to issue new
currency bills starting next year. >> Hold on, and paper. >> That's will chair
up public's confidence in the BOJ, more seriously. As I said, wages have
started to rise at 2% or so for the first time in three decades. More
importantly, we are seeing as a sign of a change in inflation expectations,
changes in price, wage setting, behavior of businesses. So previously,
businesses hesitated to increase prices because if they did, others will not
follow suit. Now say they are raising wages, because if they didn't, they will
have trouble recruiting workers because others are raising wages. We think
this is a good sign. >> So the topic of Centra, of this CB forum is inflation
volatility. So now is prediction time. In one year, hopefully, I'll be invited
back, President Lagarde, inflation rate in the UK is what? >> Well I lost
forecast. We expected inflation to come back to target towards the end of next
year. We're going to start the next forecast in about two weeks time year. >>
Do you get to 2% by this time next year, President Gard? >> You said a year.
>> From now, right? >> Yes. >> So the projection we have is 3% for next year.
Headline. >> Will you be satisfied with that? >> I want it to be timely. We
all want it to be timely. >> Timely. To you Paul. >> I don't see us getting
back to 2% this year or next year. >> You don't? >> No, I see us making
progress, steady progress on. This is core inflation, Headline inflation is
coming down that was lower than core. But for core inflation, I don't see us
getting to 2% this year or next year. I see us getting there the year after.
>> 2025. >> Yeah. >> Core inflation, 2%. So you're going to be restrictive for
a long time? >> No, well we will be restrictive as long as we need to be. But
if inflation is coming down sharply and we're confident that it's on a path to
2%, that would be a different situation. You would begin to think about
loosening policy, but we're a long way from that. That's not something we're
thinking about now or in the near future. >> Governor [inaudible 01:44:46],
are you going to get to the 2% by your measure? >> So our projection as of
April, inflation projection has for 23 fiscal year 1.8%,1.8 headline 2.0% for
24. Now this makes my job of justifying underlying inflation rate staying
below 2% to be harder. But we keep saying that we don't have a lot of
confidence in this 2024 forecast. This may change depending on the data to
come up. >> Do you guys feel relative, you've been through a lot of hard
moments, COVID and inflationary challenge, and now we're starting to see
economies weekend, do you feel like it's a particularly difficult point in
your Central Bank journeys? Governor Bailey? >> No. Until we get inflation
back down to target, we've got a very big job to do and it's a job we have to
do. >> Is it stressful? >> Well, that's stressful. But I think we sign up for
this job and you don't get to determine the conditions that you do it in. So
we just got to do it. That's our job. >> For you, President Lagarde. >>
Likewise, men's got to do what a man's got to do. We signed up for the job and
a woman's got to do what a woman's got to do as well. Thank you. >> Chair
Powell. I haven't seen you stressed. >> Sorry >> I haven't seen you stressed.
>> We have a job to do. We know that society is counting on us to do this job.
And that it really matters for stability can matter for decades. It can
benefit for people over time. I think we all know that. And we'll do the
things that we need to do to restore it. >> Governor Wada is feeling good. >>
I didn't know that there was going to be so much traveling and so many press
conferences. >> Welcome to the world of central banking. Thank you all so much
for taking the time today and all my questions. It's a pleasure. Thank you. >>
Well, thank you for that excellent closing panel to the event. You did a great
job of chairing there and thanks a lot to all of our panelists. Very nicely
done. We learned a lot about your commitment to stay firm until you hit 2%
however long it takes. We learned about the strength of labor markets and the
resilience too of the economy more broadly, as well as some long legs. So with
that in mind, I want to turn now to the final part of our program, which is
about another way in which the Sintra forum has been persistent. And that is
in seeking the young economists who can provide answers to the challenges
future generations face. So the final part of our program is to award the
prize chosen by an expert panel, as well as taking your votes into account for
the best paper by some of the most promising young economists in the world.
Madame Lagarde, I'll leave it up to you to announce the winner. >> Thank you
very much, Claire. Please do not go, especially the economist in the room,
because here is the future. The future is those 10 young economists, PhD
students who are short-listed from many other applicants and came from all
over the world to present their research here in Sintra. It is really
important to discover and encourage young talents. These people will be the
bright minds of tomorrow. They will lead our economy through future
challenges. The papers that you shared, all in the back of the room over
there, the papers that you shared and that you presented to many of us earlier
today of a fresh perspective on challenging central banking issues that we
face today. Such as changes in inflation, in inflation expectations, green
investment, transmission of monetary policy, open banking, customer data
sharing, you name it. All submissions were assessed based on their academic
quality and policy relevance. Many, thanks to all of you who rated the papers
and thus helped us to select the winner. I would also like to thank the
members of the selection committee for evaluating them. Namely Jordi Galli,
professor at Pompeu Fabra University, who presented this morning, who discuss
the paper this morning to Helen Professor at London Business School. And to my
EC colleagues, Philip Hartman, Isabel Onsen, Kist, and Irca Slack to all of
you. Thank you very much. Now what I would like to do before I announce the
winner of the trophy and the €10,000 check that goes with it, sorry,
we'll transmit digitally probably, I think we should give all of them a big
round of applause and recognize them. I know that this is a bit nerve-wracking
for some of you, but it's time now for the announcement of the one who is
actually receiving the trophy. The trophy is going to come along, I'm sure,
somewhere. The trophy is here. Excellent, very good. The winner of this
competition is Lucas Nord. Lucas congratulations. So for those of you who did
not have a chance to listen to his presentation and to have a look his big
table, Luca is a Ph.D. student at the European University Institute in
Firenze. And he is receiving this award for his paper on "shopping, demand
composition, and equilibrium prices." The paper analyzes how the degree to
which consumers shop for bargains influences retailers price setting
strategies. Lucas finds that this mechanism reduces inequality and helps to
explain the amplification of aggregate shocks through reactions in firm marks
up. Our warmest congratulations to you Luca for this very well-deserved award.
And let me now give you so you can hold it and be photographed with it. You
are here receiving the trophy of the ECB Forum 2023. Congratulations. >>
Thanks a lot. President Lagarde. And thank you also to the jury who selected
me or by the public vote, I guess all of you. Thank you very much. It's really
an honor to receive this award and it's a particular honor to receive it in
very nice company. I spent the last 2.5 years, 2.5 days, it feels like 2.5
years by now. I spent the last 2.5 days getting to know an amazing group of
young economists. And I think I can only agree with President Lagarde if this
is the future of economics. I think the future of economics doesn't look too
bad. Thank you very much. And maybe join me again. An applause to all of my
fellow finalists. Thanks. >> You can stay here if you want because as you say,
you look pretty good. Stay. We want you to keep at it, but it's time to bring
this conference to a close. I'm sure you would agree with me that we had
really excellent rich discussions. Great papers were presented. Great
discussions actually argued eventually or found room for further discussions
on all the four papers. And the two panels that we had were also fascinating,
both in terms of the leadership of those panels and also the content and the
contributions by all panelists. So thank you so much for bringing all this in
a very candid, honest, and open way to the Central Conference. This is the
value of this conference. We are from many different horizons, academics,
policymakers, journalists, of people from the finance world directly. And we
all come with propositions with an open mind and the willingness to actually
accept others' ideas and discuss them eventually. So we will do it again,
promised, and I would like you to note the date, it will be next year from
July 1st to July 3rd. So a little bit later in the year. We have tried to
figure out whether the wind would be a bit more gentle with us, but there is
no guarantee, and we will continue to have the benefit of this fascinating
microclimate. In the meantime, hopefully, inflation will have gone down a bit
and we will have been more successful in delivering on our mandate. And you
will have helped us in thinking more deeply and more comprehensively about
many of the factors that we have to look at and take into account when we
decide our policies. In the meantime, I'm going to ask you not to leave right
away, but to go outside because we have, as we always do, a family photo for
all of us. You don't have to put your jackets on. You can even take your tie
off. You have noted that all Central Bank governors, the big four as they're
called, none of them was wearing a tie. Final announcement that I make on
behalf of my colleague and friend, Mario Centeno, who is somewhere, Mario,
he's probably preparing dinner in that case because he's hosting us tonight
for dinner. And for those of you who do not come for dinner, please have a
safe flight and come back next year. Thank you so much