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Transcript

Gina Chan: Please welcome John Williams, President and CEO of the Federal Reserve Bank of New York. Good morning everyone. I did not know that David was so funny. We'll see if John can bring the jokes. No pressure. Obviously, we're here when a lot of Central Bank Governors and Finance ministers are in town, and the Fed is the talk of the town. You have an important role as a permanent member of the Fed rate-setting committee. We just heard J. Powell throw some cold water on the idea that the Fed could possibly cut rates later this year, as it had projected earlier. Are we in a "higher for longer" stage where we could see this pushed off to next year?

John Williams: Well, first of all, we always say that we're data-dependent, and the data have been really pretty good on the economy. We added 3 million jobs last year. Job growth still has been very strong coming into the first quarter of this year. GDP growth's been strong. All signs of consumer spending are strong. So we have a strong economy, we want a strong economy, that's all very good news. But it also means that the high rates that we have haven't caused the economy to slow too much. It seems like monetary policy is working the way we hoped it would. We're seeing imbalances in the economy come down. We're seeing the tightness of the labor market become less over time. We're seeing inflation come down, and we're seeing wage growth come down. So monetary policy is in a good place. I think we've got interest rates in a place that is moving us gradually to our goals. I definitely don't feel urgency to cut interest rates. I think monetary policy is doing exactly what we'd like to see. Over time, the data will inform our decisions. I think eventually, my expectation is, as inflation gets all the way to 2% on a sustained basis, as the economy is in good balance, interest rates will need to be lower at some point, but the timing of that's driven by the economy. The economic data, like I said, are strong on the labor market, GDP, spending, and on inflation. It's a little bit of a bumpy road, but overall, the trend is that inflation is gradually coming down.

Gina Chan: Is there a possibility that the US economy is so hot that the Fed would consider actually raising rates? Because we've seen the recent retail spending numbers were stronger than expected. You talked about the jobs market. The last jobs number was kind of a blowout compared to what the expectations were. And we're seeing inflation not tick down in the way that the Fed had hoped for. Consumers seem to be feeling better, actually, where consumer sentiment had been the lagging factor, but now that seems to be getting better as well. So is there a possibility the Fed could even raise rates?

John Williams: Well, it's not my baseline. My expectation right now is that interest rates are in a good place. Eventually, at some point, we would want to lower interest rates as the economy really gets to the 2% inflation that we're headed towards. Of course, you never know what can happen. If the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that. So it's not my base case. But one of the things we've learned over the past few years is it's hard to predict the future, and we need to adjust our policy stance as appropriate to achieve our goals. I think one thing that's really important is when you hear 3% growth, 3 million jobs, or 275,000 jobs a month that we've been seeing in the first part of this year, it's in the context of a supply side of the economy that is really strong. We're seeing really strong labor force growth. We're seeing really good productivity growth. So these 3% numbers, I think, are driven in large part by strong supply and strong demand. That's why we can see these strong numbers, and at the same time, the unemployment rate is relatively flat at 3.8%, and we're seeing the imbalance in the labor market actually recede, not get tighter. So this is really more of a supply-driven expansion right now. And for monetary policy, we just need to make sure that demand and supply are in balance.

Gina Chan: Talking about not being able to predict the future, you talked about getting to that 2% target. For years, the Fed had undershot that target, and now it's overshooting it. We saw former Fed Chair Ben Bernanke do a major review of the Bank of England and its inflation modeling tools and forecasting tools, and basically, they've called for a major overhaul. Bernanke sort of detailed some of the failings. We obviously heard Fed Chair Powell walk back the whole "transitory" language, and maybe there was a better way to describe it in the past. Do you think that the Fed also needs a similar sort of postmortem review?

John Williams: Well, first of all, I thought former Chairman Bernanke's report for the Bank of England was very good, and it made a lot of really important points. I think some of those points we at the Fed very much take to heart already. We need to constantly make sure we have the best economists, best analysts, the newest models, the newest data. The data we use at the Fed today is dramatically different than the data of the past. Obviously, we look at GDP and unemployment, but now we have all this granular, high-frequency data from various different suppliers that's telling us what's happening in much finer detail, much quicker. So it's not nearly as backward-looking, and we were able to do that. That's something that we've embraced. I also think an important point that Ben Bernanke made was the importance of clear communication and transparency in monetary policy. This is something that in my career, the Fed has moved from being somewhat opaque to more and more transparent and clear, not only in setting our 2% inflation goal, explaining how we think about the economy, giving our projections and the dot plots, and all that to help, as best as we can, for the public to see how we're thinking, what's driving our decisions, and hopefully align the public's expectations with what we're trying to do. I think those have been hugely beneficial to us. These are things that former Chairman Bernanke mentioned in his report, things that I think we've been doing that have been very helpful. Down the road, obviously, as we get through this episode of the high inflation from the pandemic, Russia's war on Ukraine, and everything that's happened, we are looking carefully at our models, our analysis, the kind of conclusions we draw from that. And I think that assessment will be best done once this episode is kind of over, which I'm talking about in the next year or two, because then I think we'll get the full picture. If you had asked me two years ago what were the lessons of the pandemic and the war and everything, I think the answers we would have gotten would be incomplete and somewhat misleading. Now we've seen inflation come down pretty quickly around the world: in Europe, in Canada, in South America. Everywhere, we're seeing a very different dynamic. Let's see how that plays out, and then we will very carefully continue to study what are the lessons to how we can get better.

Gina Chan: Are there any sort of sacred cows, if you will, at the Fed? You mentioned the dot plot, which was in itself sort of an innovation after the crisis. Larry Summers mentioned yesterday that maybe the Fed shouldn't give so much forward guidance, that maybe messaging to the markets as often as you do after FOMC meetings, at hearings and that sort of thing, maybe that's too much communication. Are there some things that should be communicated more conservatively?

John Williams: Well, clearly communicating on something like monetary policy, which depends on billions of people around the world and the economy and everything that happens, is always going to be challenging, no matter what the situation is. My personal view, I'm speaking for myself here, is that transparency has helped us. Doing things like providing multi-year projections, the chair's press conferences after meetings, these are helping people understand, whether we make the right decision or not, they're understanding the reasoning, the inputs that went into that. And obviously, we have to then adjust as the data come in and revisit our decisions every meeting and move forward. So I personally think the transparency has been helpful. We've seen inflation expectations, for example, basically around our 2% long-run goal before the pandemic. We got hit by the biggest shocks that we've experienced in generations. Let's be clear about this: these are the biggest shocks around the world that we've seen in generations. And we did see inflation go up a lot, far too high. We saw inflation expectations move up. But as we and other central banks around the world took very strong, decisive action, inflation came back down. It's not all the way there. We still have work to do. But inflation expectations came down very quickly. So I think that the clear communication about our goals, about what we're thinking, and how we're viewing the economy has actually helped make monetary policy more effective in this period. There were times where you could look back and say, "Would you make a decision differently, or would you have communicated a decision differently?" Absolutely. If you can go back in the past and change things, there's a lot of things I would probably change in my life. But I think from the point of view of being effective, the transparency has been a big positive.

Gina Chan: What about the 2% goal itself? Should that be revisited? Is that something that would require global central bankers, because it had been basically a global goal of major monetary policymakers?

John Williams: So I have a one-word answer to that, and that's no. I think the 2% inflation goal is the right one. A lot of people ask me over the years, "Well, where did that 2% come from? Did you pull it out of a hat?" No, that came out of years and years of experience with countries around the world, years of very careful analysis about the pros and cons of inflation. If you have inflation and push it too low, you run into issues of hitting the lower bound or deflation. That's not good. If it's too high, that causes bad effects on the economy. I think the 2% inflation target has served us very well. Other countries have similar goals, of course, slightly different goals depending on the jurisdiction, and that makes sense. But I think for us, the 2% goal is really important. We have to not only have that goal, but we have to importantly achieve that and reinforce that credibility. As someone who's an academic economist in my background, it's easy to write papers, analyze at conferences, and debate, "Do people really care if inflation is a little higher?" And then you go and look at what happened the last few years. There wasn't anyone here in the United States or pretty much in any other country I know of that thought 7% inflation was a good thing, or 6%, or 5%. It's clear that low inflation is the bedrock of prosperity. Stable price stability is absolutely essential. Theoretically, you can think about these things. In the real world, I think we need to have a low, stable inflation rate.

Gina Chan: I wanted to ask you about what's a bit of the elephant in the room during a lot of the meetings here: the prospect of another Trump presidency and what that means for the Fed in terms of its independence, its resiliency as an institution. We had seen Trump, when he was in office, call Fed Chair Jay Powell an enemy of the people, pressuring him to lower interest rates. Do you think that the Fed is up for possibly round two, and are you worried about the Fed as an institution?

John Williams: I'm not worried about the Fed as an institution. Personally, I've been in the Fed now nearly 30 years. I've been on the FOMC 13 years. We are a group of people who get together, and we focus on one thing, and that's the economy, that's achieving our maximum employment and price stability goals. The world happens around us. Of course, in Washington, D.C., there's politics, not just in election years, but any time. But we have a very clear mandate around monetary policy. We focus on that. You can read the transcripts. They come out five years later. Especially if you're having trouble sleeping, you can see that we spend eight hours [Fed joke, yeah, that's a Fed joke, it's like a dad joke] talking about the data in all of its details. And there's a wide range of views and disagreements. The wide range of views and disagreements are about how do we best achieve our goals. And there's a commitment to both our 2% inflation goal and our maximum employment goal. It's really just about getting that done. The best way to ensure independence of any central bank is to do our jobs well and focus on that.

Gina Chan: But are you worried about any challenges? They've been talking, possibly some of his advisors, about ways to lower the value of the dollar to make our exports cheaper, things that would just throw some obstacles in the Fed's way.

John Williams: Well, I'm not going to speculate on any hypothetical at all around any of those currency manipulation. I'm not going to engage in that. The value of the dollar, that's the domain of the administration, the US Treasury. Again, we're focused on monetary policy.

Gina Chan: I know we're out of time. I just want to ask you really quickly, as you look forward, what are the things that you're keeping your eyes on that will help sort of influence your views on what the Fed should do going forward?

John Williams: I think one big question is this supply-side thing. We've seen this big increase in the labor force. We've seen very good productivity growth. Roll back the clock two years ago, there were a lot of concerns that the US economy wouldn't get back on track with the pandemic and everything. We are back on the growth track that we saw before the pandemic when you look at the overall economy. So watching if that continues, I mean, that's a very positive development for real incomes, for growth, and also for bringing inflation down. So that's one thing I'm very focused on. The second, clearly, is China, what happens in terms of their economy, their efforts to keep their growth near their target level, and especially given what's happened in real estate in China. So that's something to focus on. I think the third is the most important lesson again of my 13 years on the FOMC: expect the unexpected.

John Williams: well, last five or six years, we've learned the importance of planning and preparation and being nimble and agile in how you see what could happen, being prepared for things you didn't expect, not being locked into a certain view, but really coming into any situation thinking things can develop very differently and being able to adjust to that. So those are the things that I'm focused on.

Gina Chan: Great. Well, we'll have you back again to see how all of that plays out. Thank you so much, John.

John Williams: Thank you.