Speech Text

April 05, 2024

Risks and Uncertainty in Monetary Policy: Current and Past Considerations

Governor Michelle W. Bowman

Thank you for the invitation to speak to the Shadow Open Market Committee (SOMC).1 The SOMC has a distinguished reputation for fostering substantive analysis and debate regarding independent, transparent, and systematic approaches to central bank policymaking. It's a pleasure to join you today and to discuss some of the current issues facing central banks and monetary policymakers.

In my remarks today, I will review some of the notable developments in the U.S. economy and financial system—as well as review key monetary policy actions and communications—since I joined the Board of Governors of the Federal Reserve System and became a permanent voting member of the Federal Open Market Committee (FOMC) in late November 2018. As I look back over these five-plus years, I will consider how a range of uncertainties and risks regarding the macroeconomy and its measurement have affected monetary policy decisions and communications. I will also highlight some considerations regarding financial stability risks and monetary policy. I will conclude with my own views on the near-term economic outlook, some of the prominent risks and uncertainties surrounding my outlook, and my views on the implications for monetary policy.

An omni-present challenge monetary policymakers face is how to account for uncertainties surrounding the current state of the economy and the economic outlook when setting monetary policy. Macroeconomic models that can help guide the setting of monetary policy often invoke unobservable concepts such as the natural rate of unemployment, potential output, or the neutral real interest rate. These unobservable concepts can be estimated but only with a considerable degree of uncertainty, and the estimates may vary over time—for example, because of structural changes in the economy. Macroeconomic models are also subject to uncertainty, since they must make simplifying assumptions regarding the complex set of relationships and interactions among households, businesses, governments, and the financial system that also evolve and change. Moreover, the data that are used to estimate model parameters and to formulate the economic outlook are inherently uncertain and are often revised as the statistical agencies refine their estimates or gather more information.

In addition to uncertainties surrounding macroeconomic models and measurement, there are a number of risks that, if realized, could shock the economy and financial system, making it more difficult for policymakers to confidently assess the economy and the economic outlook. Despite these challenges, monetary policymaking requires a forward-looking approach, since its actions affect the economy, labor markets, and inflation with a lag.2

When I joined the FOMC in late 2018, despite nearly a decade of accommodative monetary policy following the financial crisis and subsequent recession, one of the primary concerns was that inflation had persistently been running slightly below the Committee's 2 percent inflation target. There was a recognition that the "natural rate of unemployment" may have been lower than many on the FOMC had estimated, and that inflation may have become less responsive to reductions in the unemployment rate.3 This recognition meant that preemptive increases in the federal funds rate based on expected reductions in the unemployment rate alone may not have been needed to keep inflation and inflation expectations aligned with the Committee's 2 percent target.

A central topic of FOMC meeting discussions throughout 2019 was how monetary policy strategies and tools could best achieve the Committee's dual mandate of price stability and maximum employment when structurally low interest rates and disinflationary forces kept inflation persistently under the Committee's inflation target. There was also a concern that the federal funds rate, the FOMC's key policy rate, was too close to the "zero lower bound." And that this proximity could limit the Committee's ability to respond effectively to an adverse shock by using our primary monetary policy tool of lowering the target range for the federal funds rate. More broadly, many central banks around the world were grappling with the prospect of structurally lower interest rates due to a variety of factors, including demographic changes and higher savings rates, lower potential output and productivity growth, and greater investor demand for safe assets like Treasury securities.

At the time, the FOMC assessed that downward risks to both employment and inflation were likely to remain prominent due to the proximity of interest rates to the zero lower bound. In August 2020, the FOMC significantly revised its Statement on Longer-Run Goals and Monetary Policy Strategy to reflect this assessment.4 A notable change relative to the initial statement adopted in 2012 was a change in the language addressing how the FOMC would conduct monetary policy. The new statement noted that the Committee would seek "to mitigate _shortfalls_ \[emphasis added\]"—rather than "deviations"—"of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal."5 By replacing the word "deviations" with "shortfalls" when describing employment and the Committee's reaction to changes in employment relative to estimates of its maximum level, the Committee indicated that it would not act preemptively to curb inflation based only on the perception of labor market tightness.

Another notable change to the strategy statement was the adoption of what some refer to as "asymmetric flexible average inflation targeting" or "temporary price level targeting."6 Specifically, the new statement noted that "in order to anchor longer-term inflation expectations at \[its 2 percent goal\], the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."7

The revisions to the FOMC's statement focused on monetary policy in a world of structurally low interest rates, disinflationary forces, and an apparent insensitivity of inflation to low levels of unemployment. Although the revised statement reaffirmed the commitment to the Committee's inflation target, it did not describe how the Committee would respond if inflation were to run persistently _above_ its 2 percent goal.8

Given the timing of its implementation, the revised strategy guided how the FOMC responded to one of the largest shocks experienced by the U.S. economy in recent years—the COVID-19 pandemic. This shock—combined with the policy responses of governments and central banks around the world—disrupted many of the dynamics that had influenced the economy over the previous several decades and the post–2008 financial crisis approach to monetary policy. These impacts will affect how we think about monetary policy going forward, but let's first put the COVID-19 event and response into better context.

Toward the latter part of the FOMC's monetary policy framework review, in March 2020, the COVID-19 pandemic created an unprecedented shock to the global economy and financial system. Widespread economic lockdowns and social distancing, combined with other pandemic effects, caused the swiftest and deepest contraction in employment and economic activity since the Great Depression. Many critical parts of the U.S. financial system experienced significant disruption or completely ceased to function. The Federal Reserve responded forcefully to mitigate the financial market turmoil and the economic effects of the rapid shutdown of the U.S. economy (and I'll have more to say on this topic later).

As a part of its response, the FOMC quickly lowered the target range for the federal funds rate back to 0 to 1/4 percent and began purchasing large amounts of Treasury and agency mortgage-backed securities. These purchases were initially designed to support the smooth functioning of securities markets and the flow of credit to businesses and households. Later, the purchases provided additional monetary policy accommodation to support economic activity and labor markets.9

Following the return to the zero lower bound, in addition to conducting asset purchases, the FOMC used forward guidance to provide additional monetary policy accommodation to keep both short- and longer-term interest rates low. In its March 15, 2020, statement, the FOMC noted that it expected to maintain the target range for the federal funds rate at 0 to 1/4 percent "until it \[was\] confident that the economy \[had\] weathered recent events and \[was\] on track to achieve its maximum employment and price stability goals."10 Following the release of the revised framework in August 2020, the FOMC revised the forward guidance in its September post-meeting statement to be more explicitly outcome-based to state that the target range would remain at 0 to 1/4 percent "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."11 In its December 2020 post-meeting statement, the FOMC added forward guidance regarding its asset purchases by noting that it expected that the current pace of asset purchases would continue until "substantial further progress has been made toward the Committee's maximum employment and price stability goals."12

This explicit outcome-based forward guidance, like the revised monetary policy framework, was very focused on supporting the economy following the COVID-19 shock amid the risks of persistently low inflation and disinflationary forces with structurally low interest rates. The guidance was also quite restrictive in the criteria for slowing the pace of asset purchases, especially since the FOMC would stop asset purchases before it would raise the federal funds rate.13

One could argue the December forward guidance made it much more difficult for the FOMC to react to new information suggesting that risks and uncertainties had evolved in response to pandemic-related changes in the economy. Other uncertainties such as the accuracy of real-time economic measurements also presented challenges, as did significant supply-side disruptions and the uncertainty about the timing of progress toward their resolution, which I will discuss next.

In the early phases of the pandemic, fiscal authorities around the world implemented support programs for labor markets and households and businesses.14 These generous policies, combined with very accommodative monetary policies, bolstered private-sector and state and local government balance sheets. In particular, they led to what has come to be known as "excess savings"—above-normal household savings from extraordinary levels of fiscal support and a limited ability to freely spend it due to economic lockdowns, supply chain disruptions, and other pandemic- and recession-related factors.

In 2021, novel medical treatments, reduced social distancing, and innovative business approaches in adapting to the restrictive pandemic environment led to a sharp economic rebound. Strong demand (supported by stimulative fiscal and monetary policies), a reduced labor supply (due in part to early retirements, childcare responsibilities, and concerns about COVID-19), and a mismatch between available jobs and workers all contributed to a very tight labor market. The unusually rapid rebound in economic activity, pandemic-driven shift to consumer goods spending, supply chain fragilities, and manufacturing component shortages led to crippling bottlenecks for a number of industries. These supply and demand imbalances, likely amplified by fiscal and monetary policies, led to a sharp rise in inflation over a period of just a few months.

By the second half of 2021, inflationary pressures intensified and became more broad- based. Labor markets were extremely tight, though it was difficult to assess the true extent of tightness, given the decrease in labor force participation and mixed data signals at the time, which all were later revised. Of the many difficult issues the Committee faced, one of the most important was whether inflation would persist or would resolve as supply-side issues eventually eased.

The September 2021 Summary of Economic Projections (SEP) showed the median FOMC expectation for personal consumption expenditures (PCE) inflation of 4.2 percent at the end of 2021, largely reflecting high inflation readings in the first half of 2021. But for year-end 2022, the median expectation was for PCE inflation to decline to 2.2 percent.15 Private-sector forecasters expected higher inflation of 5.1 percent at year-end 2021 but also projected a slowing to just over 2 percent by the end of 2022.16 With the benefit of hindsight, we now know that most forecasters, ourselves included, vastly misjudged the persistence of inflation at that time, with 5.9 percent PCE inflation for both 2021 and 2022. This example underscores the challenge we faced in identifying which factors were driving inflation and how long those forces would persist.

In the second half of 2021, it became clear that the FOMC's monetary policy stance was too accommodative in the presence of growing inflationary pressures and that the Committee needed to move toward a tighter policy stance. It seems likely to me that the experience of the years leading up to the pandemic, when inflation was persistently low, made it hard for many to foresee how quickly that situation could change. Of course, the inflation and labor data did not accurately reflect the economic conditions prevailing at the time and were subsequently substantially revised.17 Together, these factors, combined with the FOMC's forward guidance discussed earlier, contributed to a delay in the removal of monetary policy accommodation in 2021.

The shift in the Committee's forward guidance toward the end of 2021 and in early 2022 was effective in moving longer-dated interest rates higher and in tightening financial conditions, even before the FOMC raised the federal funds rate.18 At our November 2021 meeting, we announced that we would begin to slow the pace of purchases later that month. At the December 2021 meeting, we doubled the pace of tapering, which accelerated the end of purchases to the following March. At the March 2022 FOMC meeting, the FOMC raised the target range for the federal funds rate by 25 basis points. And in May, the FOMC announced its plan to reduce the size of the Federal Reserve's securities holdings—which then stood at around $8.5 trillion—starting in June and at a pace much faster than in the previous episode of balance sheet reduction.19 The FOMC also continued to increase the target range for the federal funds rate over the course of 2022 at a pace much faster than in previous tightening cycles, as it became clear that inflation was higher and more persistent than many forecasters had expected. By July 2023, the FOMC had increased the federal funds rate to 5-1/4 percentage points, and into restrictive territory, where it has remained. And we have continued to reduce the size of our securities holdings.

The monetary policy experience during the pandemic highlights how difficult it can be to assess the current state of the economy and to predict how it will evolve in the presence of major supply- and demand-side shocks, possible structural changes in the economy, and real-time data and measurement uncertainty. An important question I will be thinking about going forward is how to make monetary policy decisions and communications more robust to these types of risks.

We know that monetary policy transmission is most effective during periods of stable financial conditions, and that financial stability risks, if realized, can affect the economic outlook. While monetary policy and financial stability are connected, financial stability vulnerabilities and risks are most appropriately addressed using macro- and micro-prudential regulation and bank supervision. During periods of extreme financial stress, well-calibrated lending and liquidity programs can be used to address such conditions. Of course, where risks impact the outlook for economic activity, employment, and inflation, a monetary policy response may also be required.

The Federal Reserve's use of liquidity and lending programs during the early stages of the pandemic demonstrated the effectiveness of emergency lending tools as backstops to support market functioning and the flow of credit in times of stress.20 Lending programs are most effective as backstops when loans are offered at a penalty rate and are of short duration. When appropriately calibrated, they can help promote market functioning and the effective transmission of monetary policy but limit the Federal Reserve's overall footprint in financial markets in the longer term. This experience also highlights the importance of clearly distinguishing monetary policy actions from temporary central bank asset purchase programs used to promote core financial market functioning, like those created to support Treasury markets in the spring of 2020.21

More recently, the bank failures last spring highlight that responsive, efficient, and effective bank supervision is a strong mitigant for financial system risks and vulnerabilities. The failures revealed that shortcomings in bank supervision can heighten financial stability risks. The primary focus of supervision should be to address a bank's critical shortcomings in a timely way.22 To effectively support financial stability, bank supervision cannot simply rely on pinpointing compliance issues, failed processes, or rule violations. It must go further to examine a bank's risk exposures, including anticipating how the evolving economic environment may influence a bank's financial condition and its assessment of risks. If the supervisory process fails to identify and escalate critical risks, or to hold management accountable for known deficiencies, like excess interest rate risk and disproportionately large levels of uninsured deposits, this raises the potential for safety and soundness concerns.

Last year's bank stress also revealed that the Fed's bank liquidity and payments tools—including the Fed's discount window operations and FedWire®—should be available for extended operating hours and prepared to provide support during times of stress. We should also consider what further steps may be needed to ensure that banks have access to liquidity support. In addition, we should encourage, but not mandate, the exercise of contingency funding plans and testing capabilities, requiring bank management to ensure adequate plans are in place.23 But there is a fine line between bank supervision and interfering in the decisions of bank management. Some measure of risk is inherent and necessary in the business of banking.

While some changes to the regulatory framework may be appropriate to promote financial stability, we should be cautious that these changes do not impair the long-term viability of banks, especially mid-sized and smaller banks.24 In my view, regulatory reform can pose significant financial stability risks, particularly if those regulatory changes fail to take sufficient account of the incentive effects and potential consequences, like pushing activity into the more opaque nonbank financial sector.25 Poorly calibrated regulatory actions can also negatively affect economic activity and reduce the availability of credit by limiting the offering of other financial products or services. These concerns are most acute when the reforms may be inefficient or poorly targeted. As an example, policymakers should carefully consider whether the significant capital increases included in the U.S. Basel III proposal meet this standard of being efficient and appropriately targeted.26

Looking ahead, the FOMC will continue to face a number of risks and uncertainties as it seeks to return inflation to its 2 percent goal. It will be important to evaluate how these uncertainties and risks affect our monetary policy decisions going forward. As this audience knows, members of the FOMC consult a range of models that consider several scenarios and their potential economic outcomes using different benchmark monetary policy rules.27 This type of analysis can provide helpful input in informing my own views on the appropriate path of monetary policy. Given the importance of transparency, it is also necessary that our communications explain not only how the economic outlook affects our monetary policy decisions, often referred to as the FOMC's "reaction function," but also how the risks and uncertainties surrounding the economic outlook matter for those decisions.

With that in mind, I will conclude my remarks with my own views on the near-term economic outlook, including some prominent risks and uncertainties, and the implications for monetary policy.

At our most recent FOMC meeting, I supported keeping the target range for the federal funds rate at 5-1/4 to 5-1/2 percent and continuing to reduce our securities holdings. At its current setting, our monetary policy stance is restrictive and appears to be appropriately calibrated to reduce inflationary pressures. We have seen significant progress on lowering inflation over the past year while economic activity and the labor market have remained strong. Consumer services spending has shown continued strength through February, and payroll employment increased at a very strong pace in the first quarter.

However, most employment gains over the past year have been in part-time employment, and some of the recent strength in job gains may reflect stronger labor supply due to increased immigration. The 12-month readings of total and core PCE inflation through February printed at 2.5 and 2.8 percent, respectively, much lower than a year ago. However, with the annualized 3‑month PCE inflation readings moving well-above the 12‑month measures in February, I expect further progress in bringing inflation down to 2 percent will be slower this year.

Still, my baseline outlook continues to be that inflation will decline further with the policy rate held steady at its current level, and that the labor market will remain strong but with labor demand and supply gradually rebalancing as the number of job openings relative to unemployed workers declines. And should the incoming data continue to indicate that inflation is moving sustainably toward our 2 percent goal, it will eventually become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive. However, we are still not yet at the point where it is appropriate to lower the policy rate, and I continue to see a number of upside risks to inflation.

First, much of the progress on inflation last year was due to supply-side improvements, including easing of supply chain constraints; increases in the number of available workers, due in part to immigration; and lower energy prices. It is unclear whether further supply-side improvements will continue to lower inflation. For example, the rebound in labor productivity last year may have reflected an unwinding of temporary pandemic-related labor market dynamics, such as a slowing in the high levels of employee turnover during that time. Therefore, if wage gains remain elevated going forward, these effects may no longer contribute to lower price inflation in the future.

Geopolitical developments could also pose upside risks to inflation, including the risk of spillovers from geopolitical conflicts and the extent to which food and energy markets and supply chains remain exposed to these influences.

Another upside inflation risk I see is from additional fiscal stimulus or a higher spend-out rate from existing and new appropriations. Although some of the recent policies may increase productive capacity in the medium term, they may add to inflationary pressures by boosting aggregate demand.

I also see upside risks to housing services inflation. Given the current low inventory of available and affordable housing, the inflow of new immigrants to certain regions could result in upward pressure on rents, as additional housing supply may take time to materialize. There is also a risk that continued labor market tightness and continued strong services demand could lead to persistently higher core services inflation. Inflation readings over the past two months suggest progress may be uneven or slower going forward, especially for core services.

Finally, there is uncertainty regarding whether the federal funds rate will need to remain at a higher level than before the pandemic in order to effectively foster low and stable inflation and support full employment. In my view, given potential structural changes in the economy, like higher investment demand relative to available savings, it is quite possible that the level of the federal funds rate consistent with low and stable inflation will be higher than before the pandemic. If that is the case, fewer rate cuts will eventually be appropriate to return our monetary policy stance to a neutral level. In the most recent SEP, some FOMC participants indicated that they now see fewer rate cuts over 2024 and over the next two years than in December. Some also included a higher longer-run level of the federal funds rate than in the past.28

While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse. Given the risks and uncertainties regarding my economic outlook, I will continue to watch the data closely as I assess the appropriate path of monetary policy, and I will remain cautious in my approach to considering future changes in the stance of policy. Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2 percent over the longer run.

To conclude, the experience over the past five years highlights the enduring challenge of setting forward-looking monetary policy amid a wide and evolving range of risks and uncertainties. Taking into account this experience and the lessons I have learned over my tenure on the FOMC, an important question I will be considering is how to make monetary policy strategy and its related communications durable to a wide range of possible shocks and changes in the macroeconomy. We will continue to learn about the post-pandemic economy, and, if history is any guide, new shocks to and changes in the economy will eventually and inevitably occur. While the future is full of risks and uncertainties, the FOMC's mandate of fostering price stability and maximum employment remains very clear. Restoring price stability is essential for achieving maximum employment over the longer run.

Thank you again for the opportunity to speak with you today. I look forward to our conversation.

Q&A Transcript

Q: the challenges with the recent inflation but you also mentioned following the correction in policy. The inflation has been coming lower and lower and lower, but it’s been a bumpy ride and we’ve seen the last few readings have not been as favorable. And now we see the communication coming out of the of the committee and this is what I heard you say as well, is that we need to wait for greater clarity and some resolution of uncertainties before we where we see some more confidence for cutting the federal funds rate. And many of the room would really be interested in knowing a little bit more your views about what are you waiting for, given that inflation has been coming down? Given that as you correctly pointed out, if you don’t do anything so Fed funds rate with inflation coming down policy becomes more restrictive, so some adjustment needs to be made made for that. So what are you waiting for? What are the pieces of information that you would like to see before you’re more comfortable in supporting the cut that markets are waiting for?

Bowman: Well, I think the important issues that I discussed in my remarks especially the fact that we have seen a great deal of progress on inflation since we last raised the federal funds rate back in July of last year. But that progress has stalled. And it’s going up and down in the most recent readings and I think until we see a return to a downward path in a sustainable and ongoing way. I won’t be comfortable changing my view at this point to seeing a cut in the near future. I think there’s so many other variables and things that need to be considered as we’re looking at all of the data to and as it’s being revised, that we have a very strong labor market. We have strong GDP growth and we have we have inflation that has remained at very similar level and has actually stopped its downward progress. So I think all of these things come together to help me formulate my views about the future path of policy.

Q: Okay, but you’re still in the camp of expecting some Fed funds rate cut would be appropriate, as long as the baseline scenario materializes. Recognizing that in the last few months, you have not been as positive as it was. And this is where we are right now.

Bowman: Well, I think there are a couple of scenarios that could happen that would change my view, if we see a deterioration in the labor market or if we see a deterioration in GDP all of those things factor into how you think about making decisions on monetary policy. So even if inflation doesn’t start to go down, if we see a deterioration in economic conditions more broadly, that would certainly influence how I think about decision making.

Q: Okay, this reminds me of Peter Ireland’s presentation on tracking nominal GDP growth and making sure things are stable. So I would also like to touch on one other thing I noticed in your remarks. Something that struck me is quite important, in reference to possible structural changes in the economy and real time data and measurement uncertainty. You know, that quote, an important question I will be thinking about going forward is how to make monetary policy decisions and communications more robust to these types of risks and quote, and this, of course, is very close. To, to our hearts how to how to nudge the community is one of the things we have been trying to do over the over the years to be more systematic and take in a systematic fashion this research into into consideration. This also reminded me reading transcripts from a decade ago, when the committee faced again, the issues of how do you best communicate monetary policy taking into account these uncertainties in 2012? I recall going through the transcripts, Charlie Plosser, for example, I hope I hope you’re still with us online, Charlie had pointed out that the best way for the committee to communicate its intention for future policy would be with a policy role because the policy role is systematic, its state contingent, it can handle the alternative scenario and so forth. So with this in mind, I’d be very interested to hear your views on this. You’ve talked about the challenges with forward guidance and communication. What do you see as a step forward? Do you think that current practices could be improved? Do you think that adopting a benchmark rule and communicating monetary policy with a benchmark rule along the lines of what Charlie Plosser had suggested a decade ago would be a way to go? Is this something that the committee should consider in the upcoming discussion on revising the policy framework? So

Bowman: I think at any given point in our history, and I’ll point to the COVID-19 experience, more specifically, and I talked extensively about the challenges that we had with the data that we were receiving, and how important it was, for me in particular, in the role that I have with the requiring experience for community banking or statement commission experience. I had regular and frequent communications with people who were actually experiencing the economic conditions to help me understand what the data was telling us. And so I’m not sure that given that time period, in my experience during that time, that I could look to any single policy rule that would have helped me more so than trying to get a narrative behind what the data was trying to tell us or that were that it was trying to indicate at the time. So I think we have to retain flexibility given that the economy can evolve and and throw curveballs at us at any given moment. And that the data that we’re trying to rely on to make our monetary decision, monetary policy decisions can often be telling us something completely different than what’s occurring. In the real economy. I think, as I mentioned in my remarks, too, I find value in monetary policy rules and we have an entire section that evaluates how they would be predicting or telling us what we should be doing. With the current with the current economic conditions. And oftentimes, they tell us very different things. And they rely on unobservable concepts like R star or you know, the unemployment rate or those kinds of things. So while I think that they’re extremely helpful and beneficial to informing a more, more robust decision making regime, I’m not sure that I could at this point today with the experience that I’ve had point to a single rule that would be able to encompass all of those different challenges that I’ve had to face over the past five years or so, and that I expect that we will have to face in the coming years as well. But I think that they’re wonderful and very helpful to think about parameters and expectations of how things should be evolving.

Q: But it’s a fair answer very much in line with the historical preference of current FOMC members, or PhD economists have discretion. Now, this is a thing that I find that people inside the institution and I recall, I was doing that as well. And if you’d asked me to be doing that, as well, Jeff, there’s always this, this, this tendency to try to defend maintaining a lot of discretion and flexibility. But if one looks at the history of, of monetary policy, not just in the United States but also in other countries where I can identify how many mistakes can be attributed after the fact to that flexibility that looks so nice, and this is the this is the tension that that would be useful to resolve. Again, it was it was discussed in 2012. transcripts. It was not resolved in a very definitive session. Would you be supporting that? In the review of the policy framework, there is additional effort to identify whether there would be benchmarks that could be useful guidance that could offer useful guidance, or you think we’ve done enough work on that so we don’t even need to bother. Oh,

Bowman: no, I think as we’re looking at all of the different considerations and components of what that engagement will look like as we approach the time as it’s appropriate to discuss that longer run statement. I think we should we should consider everything. But then I’m also someone who appreciates criticism and I value criticism almost more than I value supportive comments because I think we can always do things better. But I found your chart very compelling with the deviation between where we should have been raising interest rates and when we finally did, and it did lead to extremely steep and frequent increases in the federal funds rate that I think can create a financial instability as I discussed too, in my remarks. So I think it’s important that at the very least we are consulting with those and understanding what they’re telling us we should be doing and not ignoring that. But certainly thinking very deeply about the impact that that it could have as we’re we’re considering that. But it certainly monetary policy rules should be a part of all of those conversations and discussions.

Q: well, first of all, thank you again, Governor Bowman, we’re really really thrilled to have you with us. And hopefully we’ll have you back regularly over the next week figured out 10 more years but you’ll be and by the way, I think it’s great. I personally think it’s great to have a diverse committee, including people with a law degree who’ve been a state commissioner in banking. You know, they’re familiar with the challenges of community banks and in smaller communities. And so I think that really strengthens the deliberative process. So two questions One, Fed officials have regularly said, well, policy is restrictive, but then we keep seeing pretty strong GDP growth mostly above what we would usually consider to be the trend and phenomenal employment growth that we’re happy by I need to look into the part time full time thanks for flagging. But so I kind of wonder if, in fact, maybe as we get further to ex post, that we’re gonna get further in the direction of saying, Well, maybe policy wasn’t actually all that restrictive. And that a lot of the decline in inflation was, as you said, using a supply pressures. So I’m just curious, maybe you could share a little bit more about that. The other thing just to follow up on outside CEOs is an alternative or even a compliment to policy benchmarks is scenario analysis. And you mentioned it a couple of times and he remarks and your responses outside says I still puzzled why doesn’t the FOMC incorporate explicitly scenario analysis into your communications? Right, it’s in the staff TLB. It seems like it would be an easy way to say, as you did to some extent in your remarks like, here’s our baseline view, while we’re helping and anticipating here’s an alternative and here’s what we think we would need to do with the policy path and that and of course, they’re illustrative because the reality is more complicated. But certainly we can imagine to your political events causing a downturn in the US economy in the not too distant future and the Fed would need to respond to it. So it seems like it would be easier mathematical formulas are going to always be limited. Whereas scenario analysis, it’s really up to the committee of a given point in time to say, well, here’s the risks that we can see and here’s how we think that would work out. And of course, the rally will be different in some ways, but at least to help the reaction function you were describing, sort of put it into a picture. So I’m just curious again, but what are your thoughts about that?

Bowman: You know, I think that that’s a that’s a bigger question than than a non executive member of the board. Is that how we were described earlier like that? That was good. I think we do discuss those kinds of things. When we have meetings with our with our, with the staff, as we’re preparing for FOMC meeting so it’s, it’s it, maybe because it’s not a part of our official communications, and it could be confusing. I think if we were to engage in you know what else while we’re talking with the press, they generally creates a lot of distraction from I think what we are trying to communicate. So it is important that we’re thinking about what could happen and how we might be needing to react in the future, but in my view, those might be best kept behind closed doors until such time that we might need to talk about them in public.

Q: So thank you for coming. The one new aspect of the financial sector since 2008 has been the payment of interest on reserves. Fed has very generously paid interest even on excess reserves. And it didn’t make much difference when the rates were zero. But now that they’re over 5%, the Fed has low money hand over fist the net worth is minus $100,000. Last time I looked when you take into account the deferred Treasury dividends to the Treasury, but the Fed is under no obligation to pay that interest on reserves. Why is it to just cut the rate to zero or reduce it substantially and cut its losses mean it’s in the same position as SVB except that depositors STB could move their deposits to another bank. But depositors and the Fed can’t move their deposits to another central bank. So the Federal Reserve the monopoly position, why is it so generously paying out all this interest on reserves?

Bowman: Both of these are excellent questions. And I’ll start with the housing, the housing market, I think we obviously are not in the housing business, but we do recognize that challenges with inventory and available interest rates for mortgages and things like that really impact the the number of homes that were the availability of housing more broadly across the across the economy. These are all important constraints and challenges that I think affect other parts of the economy as well. So as I mentioned in my remarks, I think we’re we already know that there’s a housing shortage across the country. But we know that there are also a number of projects that have been embarked upon over the past few years for construction activities. So hopefully, at some point, there will be a little bit of easing as maybe mortgage rates decline and more housing becomes available. Probably didn’t answer your question. Very well, but that’s okay. And I think your question raises a lot of very important issues, and I don’t have an answer for you. But I appreciate the fact that you raised the question.

Q: Thank you so much for the wonderful talk. So my question pertains to whether reductions in the balance sheet are monetary policy in the same way that increases in the balance sheet our monetary policy, but sometimes, members of the FOMC expressed views that reductions in the balance sheet or non monetary policy. And it matters to me, I think because well, for a lot of reasons, but in particular, because changes in the SOE assets so large scale asset purchases, as you know, work through several channels, one of which is reductions in the overall amount of interest rate risk in the market, right. portfolio balance channels, the overall supply and duration to the market, right. That’s sort of a quasi fiscal operation, because the amount of duration into the market pertains to the maturity profile of treasury issuance, which is a decision made by the Treasury Department. Right. So the issue that becomes relevant when allowing balance sheet to reduce in size is that the Treasury can effectively offset the increases in duration injected into the market by the reduction in the balance sheet by changing its issuance profile. Right. So what Treasury has done in the last year or so has been to dramatically shorten the issuance profile of its debt issuance right. Now, that’s had the effect of offsetting the duration injection provided by the Feds reduction in its balance sheet, effectively loosening financial conditions just as the Fed was trying to tighten them by reducing its balance sheet. So my question is What evidence do you think it will take for the FOMC you know, for members of the FOMC to change their views about whether reductions in the balance sheet or monetary policy in the same way that increases our because by sort of eroding the barrier between fiscal policy and monetary policy the Fed has allowed some of its independence to be impinged on by actions by the fiscal authority by the Treasury insofar as reductions in duration supply had been offset, but sorry, reductions in increases in duration added by the Fed’s balance sheet roll down had been offset by reductions in supply by changes in the Feds maturity. Profile. Thank you.

Q: this will be your balance sheet round. Because I have a question also on the surface. You look pretty tight, right? You got a high, relatively high real Fed funds right. And you’ve taken a trillion of liquidity out of the markets with Qt I think that’s approximately Correct. However, under the surface, or your backdoor, as I like to think of it, you’ve got reverse repos winding down to the tune of $2 trillion dollars. So while you’ve taken a trillion of liquidity out of the markets with Qt 2 trillion has flowed in from reverse repos. The the track of reverse repos coincides with a stock market. Boom that’s happened in the last few months and with the easing of conditions. So do you think, broad picture? Do you think that the way you have your policy and balance sheet structured where you’re subjected to these really uncontrollable reverse repo or maybe they are controllable if you change rates but that they’re offsetting what you’re trying to do with tightening policy?

Bowman: I think these are all very complicated questions, and they’re very important for us to think about as we’re as we’re embarking on quantitative tightening or reducing our balance sheet I think it is an important part of the decision making that we that we engage in, at the end of sort of a quantitative easing cycle and understanding what the appropriate level of our balance sheet should be. It’s we don’t control the issuance that Treasury makes and we recognize that their role is to support fiscal spending. So while it is related, it’s it’s not our responsibility to oversee or control that. It is critical in my mind that we’re continuing to reduce the level of the balance sheet at eight and a half trillion dollars, as I mentioned in my remarks, from eight and a half trillion dollars to where we are now which is just about 1.4 trillion Lower than we were then I think there’s still some ways for us to go before we’re at any point where we might define that as ample reserves. So I think we do need to continue doing that. I am not sure that I think that it is a monetary policy action to engage in allowing for the securities to roll off our balance sheet. And I think as we see financial conditions potentially being impacted by that, then we understand where where the right level is for us to, to stop doing that or to ease up on the pace of balance sheet reduction. And again, you raised important points on the reverse repo issues and things that we’re thinking about and talking about now. So I appreciate that. The raising the issue.

Q: Okay, something maybe a little simpler than in reverse repos and all the rest of it. You there’s a camp out there that says, Hey, what’s wrong with 3% inflation? Just relax policies, restrictive cut rates. And I think the other side of that would be what if inflation stalls out around 3%? That’s roughly where it is. Now, depending on which measure you’re looking at. What do you do? Do you say, Okay, fine. We’ll just wait and see what happens. do you what do you think of raising rates? Or would it be a case where if it stalls at 3%, that’s okay. Unless the labor market gets eaten tighter and hotter? How does that look to you? I know you’re not there yet. You’re You did say it wasn’t your baseline, you thought there could be a chance that you would actually have to hike rates in the future.

Q: I just in terms of its sort of historic role in connection to money is the Fed tracking the price of gold and the fact that the SATA high which in effect means the dollars at a low in relation to it? Just curious.

Bowman: Okay, so I’ll first talk about commodities and gold and of course, we look at a number of different measures to help us understand price pressures and influences of very influential conditions that we should be thinking about, especially in the role of the dollar internationally. So So yes, we were thinking about it. I don’t know that we’re thinking about it more strongly than any other indicator. At this point. So broadly, looking at financial measures. Your question about 3% inflation, of course, is one that has been asked a number of times, I think, over recent history, given where we are with the level of inflation and it’s an it’s an important thing to think about. We do have a goal of 2% inflation. So in my mind, as I’m thinking about it, and as I said in my remarks, if we find ourselves at a point where inflation has stopped, we’ve stopped making progress on lowering inflation, or if we’re seeing other indicators of that would tell us that the policy rate is not restrictive enough to make more progress than we certainly should be? It’s not my baseline outlook is not in my SEP. I don’t have any increases. I took those out in December of last year. But I do see that there’s a likelihood that things could evolve in a way that might require us to to affect the policy rate again in an upward way.