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Hello everyone. I'm Howard Schneider. I write about the Federal Reserve and the economy for Reuters, working from Washington. Thank you for joining this conversation with Federal Reserve Board Member Chris Waller. Chris joined the Fed in 2020 after being appointed to the Board of Governors by President Trump and has become one of the Fed's most prominent voices on monetary policy and the economic issues and debates that influence those decisions.
Prior to that, he was the director of research at the St. Louis Federal Reserve for about 11 years and a professor of economics at the University of Notre Dame. Immediately before that, he was one of several people President Trump was considering as a possible Fed chairman. We will have a conversation with him and hope to cover many topics.
But before that, Chris prepared an opening statement to start the discussion. Chris, you have the floor. Good. Well, thank you, Howard. Before we talk, let me outline my view of the economic outlook today and its implications for monetary policy. In short: while inflation remains well above the Federal Open Market Committee's 2% target, recent data suggests that we are finally seeing signs of disinflation.
If this trend in the data continues over the next two weeks, I am inclined to support keeping the federal funds target rate at its current level. However, there remains significant uncertainty about how military conflicts, trade policies, and artificial intelligence will affect prices and economic activity.
If new data for August shows that this movement was fleeting, then it may be appropriate to raise the policy rate at the FOMC meeting on September 15-16. Now, having described my outlook on the economy and monetary policy, I will share my thoughts on how I communicate these views to the public. So, let me start with the real sector of the economy.
Despite the uncertainties I mentioned , most of which weigh on economic growth , real gross domestic product, or GDP, continues to grow at a solid pace. In the first half of this year, real GDP grew by 1.8% year-on-year. Consumer spending growth was solid in the second quarter after a slow start to the year.
While business investment was strong throughout the period, total real domestic final private sector purchases—the spending measure that best reflects the underlying strength of consumer demand— rose by a solid 3% in the first half of 2026. We currently have only limited data for the third quarter of this year, including weak retail sales in July, but this decline reflects the fact that Amazon's Prime Day promotion took place in June, which dragged down seasonally adjusted sales in July.
Excluding non-store sales, retail spending increased. Given the increase in wealth due to rising stock prices this year, I believe this should support consumption growth in the future. On the business side, data center plans point to continued rapid growth in business investments related to AI development and related technological upgrades.
High-tech investment continues to grow rapidly, and investment in software, which some feared might decline due to AI's ability to write code, has risen to almost its long-term historical average. Some might argue that these investments in a narrow sector that is more capital-intensive than labor-intensive are deceptively supportive of GDP and should in some sense be excluded.
I disagree. Investment in AI is a legitimate part of GDP today, and I expect this technology to remain an important part of the economy after the peak of development, when AI becomes as integrated a part of our lives as the internet. More broadly, one of the signals of further growth in business spending was another increase in sentiment among purchasing managers of non-manufacturing firms in July to a level that I would also call solid.
New orders for these firms, which represent the majority of businesses in the economy, continued to rise in July, and the index of supply problems continued to improve. Today we will receive the results of the August survey in the non-manufacturing sector. So we'll see if this trend continues. Combining the different parts of the economy, I expect real GDP to grow by just over 2% this year.
This is a decent result, considering all the uncertainties I mentioned. Now let's move on to the labor market, it is also in satisfactory condition. Although there were signs of weakening labor demand relative to supply in the second half of 2025, these signs have disappeared. Job creation , while somewhat erratic, has increased by an average of 60,000 per month this year as of July.
This is close to estimates of what is needed to maintain the pace of slow labor force growth, and probably slightly higher, largely due to much lower net immigration. Job growth has spread across most sectors of the economy in recent months, and the unemployment rate fell slightly to 4.1% in July —a historically low figure that is just below the median long-run equilibrium rate of FOMC participants.
The number of layoffs and initial claims for unemployment benefits are also at a low level. I expect similar figures tomorrow when we get the August employment report. Since economic activity and the labor market are in good shape, they are not determining factors in my decisions about the appropriate parameters of monetary policy.
However, they provide an important backdrop for the aspect of the forecast on which I am now focused— inflation and my assessment of how effectively the current policy stance is helping to return inflation to 2%. More on that in a moment. Inflation is currently well above the FOMC's 2% target and has been above that mark for five and a half years.
In July, prices based on the Personal Consumption Expenditure Index, or PCE inflation, rose 0.2 %. And core prices, excluding food and energy, also increased by 0.2%. While I was pleased to see this monthly core inflation figure as it continued the downward trend we saw earlier this year, what caught my attention in the PCE report was that non-market services prices accounted for about half of the increase in core PCE prices.
As you probably know, I am not a fan of excluding certain categories from the calculation of PCE inflation, but non-market services have always been a problem for me because they are estimated, not real, price changes. So, ignoring this factor, I believe that core inflation is showing even better results than last month's data suggests.
Currently, annual PCE prices have risen 3.7% over the past 12 months, and core PCE inflation is 3.3%. While it is important to recognize these 12- month increases because of their real impact on businesses and consumers, they are not the best guide to understanding the current level of inflation. I say this because, despite the uncertainty about the geopolitical factors that have pushed prices up, I do not view higher energy prices and tariffs as a significant source of long-term inflationary pressure.
The data suggests that the price impact of tariffs is already largely factored into inflation, and my previous concern that higher energy prices would lead to higher prices for many goods and services has not yet materialized. After these price shocks, to understand the current inflation trend, it is useful to focus on more recent indicators, such as how inflation has changed over the last three months of the year.
To deal with the ongoing volatility in energy prices, I will focus on core inflation, excluding food and energy, which is usually a good guide to future inflation. So, three-month core inflation as of July is 3.05% —a level that still falls short of the FOMC's 2% target. Nevertheless, it is important to note the trend.
Three-month inflation has been steadily falling from 4.76 % in February to 3.05% today. This is a significant change in the three-month inflation rate. This is a significant improvement. And the speed of this downward trajectory is encouraging. One factor that I expect will slightly reduce the rate of reported inflation is the expected change in the way the Department of Commerce assesses commissions paid to stock traders and related professionals .
This change in the measurement of non-market prices, which I expect to be implemented soon, could reduce 12- month PCE inflation by a few tenths of a percentage point. Given my questions about pricing non-market services, I see these as welcome adjustments to the measurements. Now I see certain risks of rising inflation.
Energy prices have risen again and remain significantly higher than in early 2026, and the economy faces both price pressures on technology goods related to the development of AI and the possibility of further tariff increases. But unlike the period of high inflation after the pandemic, wage growth, when adjusted for productivity gains, is broadly consistent with expectations that inflation will continue to decline to 2%.
I am also closely watching that public views on future inflation may deteriorate after a prolonged period of inflation exceeding the FOMC target. Fortunately, the Fed has a very good track record of meeting its commitments, and we have not seen a significant increase in long-term inflation expectations.
But this needs to be recognized as a risk that the FOMC should be prepared to respond to if long-term expectations begin to rise and progress in fighting inflation slows. So, this brings me to my monetary policy outlook, which I outlined at the beginning of these remarks. As of today, the labor market is stable, employment is close to its maximum sustainable level, and inflation is slowly but surely moving towards the 2% target.
Tomorrow we will get another employment report and another inflation figure before the next FOMC meeting. I don't expect the employment data to be significantly different from what we've seen so far. So my decision on the appropriate policy stance will depend largely on what we learn about August inflation.
If progress towards our 2% goal continues, I will be prepared to support keeping the policy rate at its current level. But if inflation turns out to be high, I will consider raising the rate. In my opinion, current policy is only slightly constraining aggregate demand, and it may take a very small acceleration in inflation to persuade me to support a tighter rate.
If evidence emerges that progress towards 2% inflation has stalled in August, a minor adjustment to our stance would help restore it. Finally, I want to talk about central bank communication, which I consider an integral part of the monetary policy process. I highlight three types of communication that are important for monetary policy, and how I personally try to convey my views to the public.
First, I try to explain why I chose my current political position. If I vote to keep rates, I will explain how current economic conditions influenced my decision. I readily supported the FOMC's decision in late July to keep rates unchanged because the data at that time indicated stability in the real economy, and we finally saw signs that disinflation might be beginning.
So I was willing to be patient and see if disinflation would continue. The second way to communicate is to explain how future economic data will affect my future policy decisions. In short, I am trying to describe my reaction function. When I think about future data, I say that if— note that word— if the data is reliable, I will advocate setting policy accordingly.
The key point is that this is not a commitment to specific political action. This is a conditional statement of policy. A different economic outcome would prompt me to advocate for a different political action. In my speech today, I outlined what would be needed for me to support a further pause, as well as what would compel me to support a tougher policy.
By communicating my reaction function, I allow consumers, businesses, and investors to better understand how I will vote on policies based on the outcomes and to factor this into my planning. Is this response function perfect? No. But my years as a professional economist and politician have given me a solid understanding of how policy should respond to shocks.
In this sense, I see myself as a home plate umpire in baseball. The pitcher is trying to strike out the batter. The batter is trying to hit the ball or get on base. Both want to play, but can't until they know the umpire's strike zone. The strike zone is a function of the referee's reaction. If the ball flies here, it's a strike.
If the ball flies here, it's a pain. Players don't expect a perfect strike zone from an umpire. They only need a rough idea of its parameters and a guarantee that it will not change with each throw. Perfection is not required to play well. So when it comes to my response function, I don't let perfection become the enemy of the good.
The third and final type of communication is forward guidance, which sets a path for the discount rate that is essentially independent of input data. This type of communication is most appropriate when the rate is at the effective lower limit and additional signals are needed for the market. For example, in September 2021, it was clear to me that we needed to raise the rate to combat accelerating inflation.
But since this was only to happen after the asset purchases were terminated, I supported the forward guidance and gave a clear signal to end these purchases, paving the way for a rate hike in 2022. Having signaled to the markets that a rate hike was imminent, market interest rates began to rise. By March 2022, two-year Treasury notes had risen 200 basis points, although we had not yet moved the rate from the effective lower bound.
So, in this example, forward guidance helped strengthen economic conditions long before the actual rate hike. But it is important to remember that these actions were taken when the rate was close to zero. I agree with Chairman Worth that forward guidance is not appropriate now or in many other situations, but when it is truly needed, I believe it should be used.
I think I've said enough on that. So, Howard, let's move on to your questions, which I'm sure will be better informed than most of my answers. Thank you, Chris. We'll move over here to the chairs. After you. Thank you again for the detailed and, as always, provocative speech . Let me start by saying that a lot of weight is being placed on the Consumer Price Index right now, and I'm sure CPI rates are constantly fluctuating up and down right now.
So let's dig into this a little bit, if we can. The 2% inflation target is set based on the personal consumption expenditure index. It works differently than the consumer price index. So, you need to convert the CPI to the ISI. Uh, give us a little more detail on what you 'll be looking at on September 11th when the next CPI data comes out to say, yes, it's going to be bad, or yes, things are continuing to improve.
Yes. So, once we get the CPI and the PPI every other day, we have a pretty accurate idea of what the PPI will be. Therefore, we can focus on these two indicators, because they almost completely indicate what will happen. Now. I have been arguing for over a year that the tariff effect on the price level will be a one-time thing, and that by the summer we will see a rapid decline in inflation.
The energy price shock at the beginning of the year created some uncertainty about this. But if we go back to January 2025, the core inflation rate of the ISV was about 2.3%. We weren't that far from it. So if we get this decline that I talked about, which is almost a whole percentage point, we should see pretty low numbers.
Uh, so I think that's what we're going to start seeing. As I said, the increase in energy prices has not yet spilled over to other goods and prices. Therefore, I expect that next month we will get acceptable CPI and PPI figures. True. Now people will accuse me of depending on individual data. It seems you've already started doing that.
But what I'm trying to point out is that if you only look at the trend, you'll always miss the tipping point. Turning points are not reflected in the trend. That's the whole point. So when you reach what you consider to be a tipping point, you have to pay more attention to short-term data if you want to capture that moment.
In my speech in July, I tried to argue that we may be at a tipping point in inflation. It could go up, but I thought it would potentially start going down. Two reports have come in, and they look exactly like this . I am willing to wait and be patient to see if the third report is the same . But if the trend reverses, then, you know, it will be time to act and raise the stakes.
So, with respect to the CPI, does core inflation matter compared to overall inflation? Of course, the core, because, as you know, the overall indicator is often too volatile to draw conclusions about future inflation. This does not mean that we should ignore energy sources or food. I never said that.
But when it comes to inflation forecasts, we try not to focus solely on the volatility of energy prices this year. This is a great example of why it's worth ignoring general indicators and focusing on the fundamentals. Of course. So, I don't want to depend on individual data, but give us a guideline for the monthly and three-month CPI: what level do you think would tip you towards a certain decision?
Yes. I mean...I'll just say: if the data is high —and I'll let you decide for yourself what "high" is. Okay . Then you say: " Okay, two percent is not enough." This has happened to us in the past. We had some weak numbers in the summer, and then inflation went up again. I got burned on this in 2024, for example.
So I don't want to give a specific number, but if we see signs of a decline in the three-month figure, which is currently 3.03...So if you get it down to 2.8... that's good. Then you can start taking action. For now, refrain from making changes. Let's discuss the change in PCE methodology, as well as the index that Chairman Powell mentioned in Jackson Hole last week: what share of the PCE basket is growing by more than 3 %.
Yes? So, is this index a good indicator, and what is the risk that we will be focusing on the CPI in September when the PCE target could be revised down in two weeks? Yes, that's exactly what I mean . We all expect the revision to lead to a decline. So, if we add this to the current data, we could see a significant drop in core PCE.
So... if it's 3.3 now, it will drop to somewhere around 3.1. And if we get good data, the annual indicator will drop below three, and even lower in the three-month period . Of course? That's why I'm willing to take a chance and see...you know, to paraphrase John Lennon: give disinflation a chance, okay?
We can wait for one meeting. I just don't see the need to rush. The mistake is that if we are indeed at a tipping point and disinflation is starting, as we have long expected—or at least I have hoped—you raise rates in a disinflationary environment. you're late, or, I mean, you're just too ahead of the curve, or you're relying too much on the past.
That's why I say, look, what is the price of waiting for one meeting? A rate hike of 25 basis points at one meeting will not currently bring the CPI down to 2%. Of course. So let's just, I think, it's risk management. You want to take a risk to see if disinflation will continue, but I don't want to take a big risk.
Of course. So, uh, in July when you were talking about this, it seemed like you were leaning towards a raise in the near future. Your position seems to be shifting a little to the side... Yes. Because that's exactly what I mean . In July, we saw about six months of growth in core PCE. Instead of decreasing, it was increasing.
So the trend was saying: uh, it looks bad, so be prepared to act. But we got a soft report, and then the question arose: Can we wait for one meeting to see if this continues? And I felt that yes, we can . And this was confirmed. We received another acceptable soft report. Even, as I said, if you exclude non-market services, this figure was about 0.12, right?
Okay, maybe let's see if we get another one like that, shall we? And, to make it clear to the audience, these non-market services, such as portfolio commissions to brokers and so on, are a function of stock market prices. They are independent of supply and demand in the economy. And it's also about quantity.
It's like saying, you know, if you buy more shares, you're going to pay more, right? Their commissions, overall commissions, are increasing. So you're mixing up price and quantity when you look at this. That's why I, you know, applaud the efforts to fix this thing. In the past, it wasn't a big problem, but for some reason over the last year it's become...
I mean, these professional financial fees account for almost all of this increase in prices for non-market services. So... You're scratching your head if you're going to let one thing drive half of the PCE, and it's not even an actual measured price. Maybe you just want to say, let's put this aside.
And I hate to do this, but this is one of those times where I think it's worth at least keeping an eye on it. Let me move on to a few other aspects of what you just said, regarding the inflation discussion. So, 2%+ growth is good for this economy. This is above the long-term trend, right? So, I guess the question is, is this a type of growth without inflation, or is it stretching the output gap to the point where you feel like there's inflation under pressure in the economy because of the exhaustion of our productive capacity.
Yes. That is, if you increase your production capacity , potential output increases. So, this isn't inflation, right? I mean, we always...this is not something new that the Fed discovered. The Fed and its research staff have always done this . So when you take output growth, you look at the potential and then assess where you are relative to it.
So if potential is growing and approaching the actual level, then the output gap, or as we say, excess demand, is not so bad. Not bad. Therefore, disinflation can be observed even with fairly good growth. So you think the potential is growing now? I think so. We have been observing this for the last few years.
We have seen growth increase. Productivity has increased for many reasons besides AI. This started before AI. Mgm . AI will probably do this at some point in the future. I think this is amazing technology . I watch my wife program with it all day. It's just incredible what she can do with him. What is her best program at the moment?
What? What is her best program? I can't tell you. I don't want to, I don't want to do commercial advertising of what my wife does. Because I'll probably get arrested. So, um, but I just watch what she does with it , and it really fascinates me, what she can do with code and other things. So I really think so.
I mean, I heard a joke recently that's a paraphrase of a Robert Solow line: We see AI everywhere except in the financial results of companies' bottom lines. Of course. Yes. You know, we think that at some point it will manifest, but it hasn't manifested yet. Another aspect: you mentioned that you do not consider the current monetary policy to be a little restrictive, but not too restrictive.
You and the Fed chairman seem to be of the same opinion on this. That's what he said at Jackson Hole. Current policies don't seem to be holding anything back . So that's a lot of weight for an opinion that supposedly indicates that maybe you need to raise the stakes. Yes. I mean, I've said it before.
There is a difference between financial conditions on Wall Street and financial conditions on "Main Street." Mortgage rates aren't low, are they? Car loans, rates are not low. How do average Americans look at, you know, credit spreads and all these other rates on corporate bonds. They're like: What does this give me?
That is, I don't understand. So I've made this point before that what looks like loose financial conditions is actually a reflection of stock market prices. I'm looking at macro data. This is what worries me. And if I see the housing sector in decline, new cars have become almost a luxury item, not something that a middle-class family can afford, these are not soft financial conditions, you know, and most of the shares are not owned by the bottom half or even the bottom three- quarters of the population.
They are mostly concentrated in the top 25% of the income distribution. So given such a differentiated outcome among households, do you allow for the possibility that the current level of policy could get us back to 2%? Yes. Good. I think so. At least let's try and see. As I said, I'm not going to say, "let's wait until next year," but let's just wait and see if we have any improvement.
Um, let me go, if I may, to...I think that's pretty clear. Okay, fine. I hope so. Anyway, bond markets, rising yields , and let me start by saying, I know you're not into fiscal policy , but from a less informed person to a more informed person, from a taxpayer to a taxpayer, what do you think about the U.S.
national debt right now? Because I want to provide a little context. Everyone in your shoes always says: $40 trillion, 6% debt to GDP, three trillion dollars a year spent on interest now. This is unstable. "Unsustainable" is a very strong word, but it's also somewhat empty, because it begs the question: for how long, right?
So are we standing on the edge of an abyss or not? And if not, where is she? So, when it comes to fiscal policy, I mean, you have about a 6% nominal deficit, half of which is interest. I don't know the exact numbers, so no...yes. But that means you have about a 3% structural deficit. You can't do this all the time.
You simply can't . So it's not so much about percentages. You are throwing away a percentage. This is the structural part after the interest. It's like you're simply spending more than you earn, fundamentally eliminating interest payments. most of the calculations you make cannot be maintained in the long term.
Does this mean you will fall into the abyss? Maybe not. You can see the profitability start to go up because people say, " Look, you have to pay me more to hold this debt." I am not going to stop funding. They'll just pay me more. And this is what I was saying — this is probably going to start happening.
So profitability will likely increase due to budgetary factors and AI competition for funds. Remember, when AI development began, they used their own internal resources. They didn't take anything from anyone. Now they compete with the US Treasury in the corporate bond markets. So I think this is a factor that pushes profitability up.
And the last thing that no one emphasizes: interesting research has emerged . US Treasury bonds, as the reserve currency and safe liquid asset in the world, had a premium in the form of higher price and lower yield. There was interesting work by Hannah Lustig at Stanford Business School and her colleagues about this prize disappearing, right?
Now it is negative. That's why. So that's another reason for this yield, and I gave a speech in Iceland a few years ago about the neutral rate, and that was my biggest concern about the rise in neutral rates -- the lack of a premium for safe, liquid U.S. Treasury bonds, and that's what leads me to raise my estimate of the neutral rate, which means higher policy rates at any given level of inflation.
Maybe you're not as restrictive as you thought and all that. Yes. Yes. Yes. So, you mentioned math, let's talk about math. Mathematically, how difficult is it for the US to get out of the debt hole through growth? It's not that difficult if we can reduce the structural deficit closer to zero. That was the idea of the best after-tax option, right?
As I said, I'm just saying that a 3% structural deficit is unsustainable. How to fix this—I have no advice. Of course? That's not my job, that's Congress' job to figure out how to fix it. I'm just curious how the lines intersect when looking at growth alone. Yes. First of all, we are talking about nominal growth.
Remember , the debt-to-GDP ratio is debt divided by nominal GDP. And, you know, the bad news about this argument is that you achieve this through inflation. truth? What did the US government do after World War II? They leveled off a huge amount of debt with inflation. This is not the best result. It doesn't make people richer.
Real GDP growth is needed. But, you know, that's exactly what I'm talking about. If your deficit is growing by 6%, and the economy is growing by 3 %, and inflation is growing by 2%, then this indicator is growing. It still adds to it. It still keeps piling up. It's just arithmetic. It's just arithmetic.
There is nothing political here. It's just math. That is, it's just like that. So let's talk about profitability in the world, because there seems to be a certain aspect, and you mentioned it a little bit, but let's go into more detail. You know , there's kind of good news, right? which seems to be the one that the Treasury Secretary and the Fed Chairman are leaning towards, that all of this is a result of a sudden abundance of investment ideas.
There is real competition for capital for productive use, which means there will be a fight for the money that is available in the market, and as a result, profitability will increase. The bad scenario is demographic headwinds, a fractured global order and the resulting higher inflation, as well as fiscal deficits, not just in the US but almost everywhere in the developed world, all piling up, which will lead to a difficult readjustment process.
So far, it doesn't look like the Fed will lose control of inflation. Inflation remains stable, but what do you stop at: is it great because people are putting money into the business, or is life just too expensive and we're digging ourselves a hole? Yes. So, to be honest , in any standard model of economic growth—without getting too bogged down— real interest rates depend on two or three key factors.
One of them is population or labor force growth. Well, it's at zero. This will reduce profitability, right? It won't push her up, will it? If you have good growth, then you will see higher returns because firms can afford to pay higher real rates. Products or their investments become more profitable and they can pay higher rates.
And that's a healthy growth indicator for why real rates are rising. The third factor is what I just said. There is an income from the convenience of this debt, and it disappears. Well, that will cause rates to rise. This is not a very good story. It's, you know, a pretty bad story if you're losing your profit from convenience.
So, that's part of the story, but you know, I'm not convinced that's the whole story. There are many other factors. But there is still, you know, the risk of a term premium. If you look at the growth, it's all a real risk term premium, right? This means that investors are saying they are a little unsure about where the world is heading.
I'm a little unsure about the dollar's status as a reserve currency. Maybe I should get a bonus for this. This, again , is not a very good sign. But the growth factor is certainly part of it, right? So, some good news, some bad news. And what can be controlled to some extent is probably the downside, right?
To fix some structural problems. Yes. If you fix some of this, you can achieve a lot. Agree. So, let me ask you about some recent action in the Treasury bond market. I think the Treasury Secretary and the Chairman had to listen to a lot of criticism in Asheville at the G20 about what's going on, and also about the recent Treasury interventions, the yen, and the buybacks.
Did any of this surprise you? You know, what the Ministry of Finance does is their business. you know, um...I never believed, as an economist, not as a politician, that such short-term innovations produce much results. But you know, if they want to do it, it's their right to do it or not. Of course.
What are the implications for the Fed? Well, if you think these interventions had a very short-term impact on long-term returns, then no, no effect. Of course. If they want to correct it and it somehow takes hold, then perhaps there will be some correction in the aspects they corrected, that's good too.
I have no problem with that . So let's move on to...I mean, the chairman mentioned this in Jackson Hole, that he prefers unfiltered views of the market. And if you have a Ministry of Finance that is more actively intervening, you could argue that it is a market distortion, right? So, it's related to...and he mentioned that too .
This brings us to the issue of communication. Kind of a " hall of mirrors" problem, isn't it? Are you seeing a pure market signal and an undistorted price, or are you in a situation where the Fed is talking to the markets, the markets are talking to the Fed, and you're not really getting an objective picture of the world.
So, is this a problem now? Are you in this circular world of the "hall of mirrors"? Well, I'll use an example to set the stage: as many of you know, I lift weights. Yes. And my wife is my coach. Of course. This is that application. Yes. The first thing she told me when I started working out was not to look in the mirror.
I asked: why not? She said: because if you start looking in the mirror, you'll be more concerned with how you look than what you do. So don't look in the mirror. Focus on technique, do the exercise, and don't think about how it looks. I'll tell you what it looks like. The same goes for the problem of the "hall of mirrors" in communications.
Just don't look in the mirror. And if you noticed, in my speech I said almost nothing about financial conditions. I look at macroeconomic data . Macroeconomic data is not part of this “hall of mirrors.” So, if you are focused on your work and the variables that really matter, you can consider the financial market as a kind of indicator of what is happening .
But ultimately, our mandate is price stability and full employment, not financial conditions. Here's how I've always avoided it: I just look at the macro data. So just don't look in the mirror. Former Vice President Rich Clarida seems to have had a similar explanation a few years ago. He wrote about this and pointed out that it wasn't a problem because you could compare market data with survey data, econometric data, and other information to see if they were consistent .
In your speech today, you outlined very clearly what you call your response function. The chairman at Jackson Hole said, “I won’t do it.” Because it can't be perfect. You used a baseball metaphor to explain that it doesn't actually have to be perfect. It just has to be, you know, general parametric to outline broad boundaries, right ?
So, what is the optimal way to do this? Yes. As I said, part of it is this: if you take any standard macro market model for forecasting, you have to have a rule of thumb for how the Fed will react, otherwise you won't solve the model. You won't be able to make a prediction. So I think every forecasting firm on Wall Street has some kind of built-in reaction function.
There are many different reaction functions you can use, but the main thing is that you want them to be consistent in how they respond to events. If inflation is rising, you will raise rates. If GDP is growing, look at inflation to see if it needs to be compensated. If unemployment rises sharply, rates may have to be lowered.
These are just the basics of economics. You don't give any weird advice. That's what I mean by reaction. I'm just using economic theory to understand what I should do as a central banker if unemployment exceeds its long-run maximum, or if inflation starts to rise or fall. But exact magnitude is sometimes where imperfection arises.
I can't necessarily tell you what the right magnitude is, but at least qualitatively I can indicate the direction in which things are moving, right? Because it occurred to me: you are not only addressing the financial markets, you are addressing the public, shaping society's expectations. So if we all act blindly, it's probably worse than if we had some awareness.
Yes, you want to be certain, as I said, it's the same as with the strike zone. She is not perfect. It doesn't...and it varies from judge to judge. That's right. Yes. True. But the players just say, "Just tell me what it is ." I don't care, the main thing is that I know, and then I can continue the game.
So is the head, as you called it, now allowing the pursuit of the ideal to get in the way of the good? What do you think? Well, I think that's exactly what his statement said. You know, they say, I'm not going to give a forecast because it's too complicated and we can't really do it. Okay . I mean, that's good, but I just have a completely different perspective on it.
That's right. So, let's talk about communications in general, because I think there are two ways to look at it. Some say, “There is too much noise, everything is getting too confusing; " One says one thing, another says another, " and this applies not only to Kevin Warsh or the chairman of the Fed. However, if we recall the 1980s and 1990s, there were really serious political battles in the United States over the transparency or secrecy of the Federal Reserve System.
There have been bills introduced, there have been attempts to expand the use of the freedom of information law, and since then the trend has been to say more, not less, right? Quite consistently. So do you think this drive for transparency and more information has already reached a point of diminishing returns, or is that a problem?
Again, I studied the academic literature of the 80s and 90s, which is where it all started. Yes. It's like: why surprise people? What is the benefit of this? For years, when teaching macroeconomics, I gave this example. If you worked for the state department of transportation and had to close three lanes of a highway for construction, right?
You can choose one of two communication strategies. You can say nothing, let people drive into the construction zone and get into trouble. Or you can set up signs in advance: " Renovation work ahead." "Look for detours." Which of these two worlds do you want to live in ? I think we all prefer to receive information in advance to make better decisions.
This is my take on communication: I don't want to call it " predictive guidance," but it's important to give some idea of what lies ahead so you can make any decisions that are important to you. So, if we expect this from the Department of Transportation, I think it wouldn't be unreasonable to expect this from the central bank, right?
That is, do you think that in our era, when suspicion is the norm, it is worth hiding behind a wall and saying: “Listen, we are better off this way. Trust us, just let us stay out of the way." Well, that was the old model: never explain, never apologize, right? Oh, good luck with your return to that world.
It just doesn't work. And this is not the best model for thinking about economic well-being . So I try to communicate as best as I can so people can make the best of their decisions. Surprising people has never been my goal in the way I approach things. Although that doesn't mean you won't be surprised.
Sometimes it's just inevitable, but I don't set myself the goal of saying, " Look, every step I take will be a surprise." Um, let me sum it up . We are running out of time, but regarding working groups: Fed Chairman Voltz announced the creation of five such groups. Communications, balance, AI and productivity, inflation model, and I forgot the fifth.
Yes. Yes. So, which of these issues have been talked about a lot already ? Data was the fifth point. Many of them are quite new. You know, AI and productivity is something that's coming into focus for the first time in an acceptable way. Where do you think it would be easiest to achieve results in the form of actionable recommendations from committees that the FOMC could implement so that in six months or a year people would say, " Yes, this is a better approach "?
Yes. I mean, we've been talking about communications for the entire 17 years I've been at the Fed, and as you just pointed out , it's been going on since the 90s . So there are small improvements that can be made, but we just had a complete review of the structure where we discussed communications, and people have very strong views on how to communicate—just take the scenario analysis that Chairman Bernanke promoted last year.
People's reaction was...I appreciated the idea, but the resistance was quite strong. So I'm not sure anything really new will come out of this . Um, the issue of balance is where, in my personal opinion, there will be the most disagreement on how to proceed. If you want to reduce the demand for reserves but maintain a sufficient amount of them, I don't mind.
But if you say we should move to a reserve deficit, I will be strongly against it. Regarding private data, great, we use it all the time . But what concerns me is that you are starting to make decisions based on data that the public does not have access to. then the public, and especially the market, will pay too much attention to your words, thinking they have something I don't know.
You also risk losing trust . If I can't back up what you say with data, I'll have trust issues; and this does not lead to anything good. As for AA1, who knows? I mean, that's still a long way off, and we're not necessarily setting monetary policy for two years ahead right now. exactly, epically. Yes, and the inflation scenario may turn out to be, frankly , the most interesting.
I don't know, I know the people on this committee, they have very different views, so I wonder what they'll come up with, but if they have a new inflation model that will help me forecast better, give it to me. I am willing to try to make it better with open arms. True. Good. Well, that concludes this.
Thank you so much, Chris, for being with us, and thank you all for watching and listening to us.
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