Tariffs will probably worsen inflation, Federal Reserve Chairman Jerome Powell said Wednesday, echoing widespread warnings about the impact of President Donald Trump’s trade policies, and crucially indicating tariff-related price increases may complicate the Fed from pursuing further interest rate cuts.
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00:00to the greatest financial researcher under age 40. He's since over age 40, but
00:07he was the inaugural winner. He is a member of the group of 30 and he was the
00:1223rd governor of the Reserve Bank of India and before that chief economist
00:18and director of research at the International Monetary Fund. You probably
00:22know him as a regular contributor to the Financial Times. He speaks extensively
00:27on economic and financial issues. Please give a warm welcome to
00:32Professor Rajan.
00:39And then our featured speaker will be Jerome Powell, the 16th chair of the
00:44Board of Governors of the Federal Reserve System. As head of the U.S.
00:48Central Bank, as you know, Chair Powell plays a crucial role in the
00:52country's monetary policy, oversees major financial institutions and
00:58maintains economic and financial stability in this country. He was first
01:03appointed as a board member of the Fed by President Obama in 2012. He was
01:09subsequently elevated to chair of the Fed by President Trump in 2018 and then
01:16re-nominated to his post by President Biden in 2021. He has been, he has the
01:22respect of members of both parties and I believe that no one as Fed chair has ever
01:30had to deal with more and varied challenging issues than Chair Powell has had to
01:36deal with. From the pandemic to fighting inflation to bank runs and on and on, his
01:44leadership at the Fed has been a steady hand and one of the all-time greats. Before
01:51coming to the Fed, Chair Powell was a visiting scholar at the Bipartisan Policy Center in
01:56Washington, D.C. He first entered public service at the Treasury Department under
02:02President George H.W. Bush with responsibility for financial institutions, the Treasury debt
02:07market related areas. Outside of public service, Chair Powell has worked as a lawyer,
02:15an investment banker and been a partner at the Carlyle Group. In addition to his
02:20service on corporate boards, he served on boards of charitable and educational
02:25institutions including the Bendham Center for Finance at Princeton and the Nature
02:29Conservancy of Washington, D.C. and Maryland. He is a D.C. native, received a B.A. in
02:36politics from Princeton and a law degree from Georgetown University where he was
02:41editor of the Georgetown Law Journal. Please welcome to the Economic Club of
02:46Chicago again, Chair Jerome Powell.
03:08Thank you and good afternoon.
03:09It's great to be back in Chicago. And thanks for that kind introduction, Austin.
03:21So I'm looking forward to our conversation, my conversation with Professor Rajan, Raghu,
03:27but first I'll briefly discuss the outlook for the economy and monetary policy. So at the Fed,
03:33we are always focused on the dual mandate goals that Congress has given us, maximum employment,
03:39and stable prices. Despite heightened uncertainty and downside risks, the U.S. economy is still in a
03:46solid position. The labor market is at or near maximum employment. Inflation has come down a great
03:53deal but is still running a bit above our two percent objective. Turning briefly to the incoming data,
04:01we'll get the initial reading on first quarter GDP in a couple of weeks. The data we have at hand so far
04:07suggests that growth has slowed in the first quarter of this year from last year's solid pace. Despite
04:14strong motor vehicle sales, overall consumer spending appears to have grown modestly. In addition,
04:20strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential
04:26tariffs, are expected to weigh on GDP growth. Surveys of households and businesses report a sharp decline in
04:34sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns. Outside
04:42forecasts for the full year are coming down and for the most part point to continued slowing but still
04:48positive growth. We are closely tracking incoming data as households and businesses continue to digest
04:57these developments. In the labor market during the first three months of this year, non-farm payrolls
05:04grew by an average of 150,000 jobs per month. While job growth has slowed relative to last year,
05:11the combination of low layoffs and lower labor force growth has kept the unemployment rate in a low and
05:17stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above one near its
05:26pre-pandemic level. Wage growth has continued to moderate while still outpacing inflation. Overall,
05:35the labor market appears to be in solid condition and broadly in balance and is not a significant source
05:43of inflationary pressure. As for our price stability mandate, inflation has significantly eased from its
05:50pandemic highs of mid-2022 without the kind of painful rise in unemployment that has frequently accompanied
05:58efforts to bring down high inflation. Progress on inflation continues at a gradual pace and recent readings
06:05remain above our two percent objective. Estimates based on the most recent data from last week show that total
06:12headline PCE prices rose 2.3 percent over the 12 months ending in March and that excluding the volatile
06:20food and energy categories core prices rose 2.6 percent. Looking ahead, looking forward, the new administration
06:29is in the process of implementing a substantial policy changes in four distinct areas. Trade, immigration,
06:38fiscal policy, and regulation. These policies are still evolving and their effects on the economy remain
06:45highly uncertain. As we learn more, we will continue to update our assessment. The level of tariff increases
06:53announced so far is significantly larger than anticipated and the same is likely to be true of the economic
07:00effects, which will include higher inflation and slower growth. Both survey and market-based measures of
07:07near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs.
07:13Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored as
07:20well. Market-based break-evens continue to run close to two percent. So as we gain a better understanding of
07:29the policy changes, we'll have a better sense of the implications for the economy and hence for monetary policy.
07:35Tariffs are highly likely to generate at least a temporary rise in inflation.
07:40Inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the
07:48effects, on how long it takes for them to pass through fully to prices, and ultimately on keeping
07:54longer-term inflation expectations well anchored. Our obligation is to keep longer-term inflation
08:00expectations well anchored, and to make certain that a one-time increase in the price level does not
08:06become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum
08:14employment and price stability mandates, keeping in mind that without price stability, we cannot achieve
08:19the long periods of strong labor market conditions that benefit all Americans.
08:24We may find ourselves in the challenging scenario in which our dual mandate goals are in tension.
08:31If that were to occur, we would consider how far the economy is from each goal and the potentially
08:37different time horizons over which those respective gaps would be anticipated to close.
08:42As that great Chicagoan Ferris Bueller once noted, life moves pretty fast. For the time being,
08:56we are well positioned to wait for greater clarity before considering any adjustments to our policy
09:01stance. We continue to analyze the incoming data, the evolving outlook, and the balance of risks.
09:06We understand that elevated levels of unemployment or inflation can be damaging and painful for
09:13communities, families, and businesses. We will continue to do everything we can to achieve our maximum
09:18employment and price stability goals. Thank you, and I look forward to our discussion.
09:32Thank you very much, Chair Powell, for those remarks. I look forward to your elaborating on them in the
09:44course of the next 40 minutes or so. I understand last time you were here, Melody Hobson interviewed you.
09:51Well, I'm a poor substitute, but I'll try and compensate in the quality of the questions.
09:57As you repeatedly emphasize, communication and transparency are very important for the Fed.
10:06I would like to get more from you on some of what you just said. As a former central banker,
10:13the only sort of caution I've been given by the economic club is to not lapse into central bank's
10:20peak. So I'll try my best not to do that. Let me start by saying you've guided the Fed through some
10:27really difficult events, including the pandemic, the dash for cash in March 2020, the great inflation,
10:34the banking crisis centered around Silicon Valley Bank. And then over the course of the last year,
10:40we've seen a growing possibility of a Fed engineered soft landing. And now it seems like everything has
10:49changed. In the course of a couple of months, JP Morgan has shifted to estimating the probability of
10:57a recession this year at around 60%. What do you think about all this? Well, first of all, thank you for
11:05being here today. It's a pleasure to be here with you. Actually, the speech, the appearance I did here was
11:10my very first appearance as chair seven and a half years ago. So it's great to be back. And I would agree with
11:15you that it's been an eventful seven years, putting it mildly. I keep waiting for the three months of
11:22calm, you know, that never comes. But to your question, I guess to set the stage, let's look
11:29back at 2024. 2024 was a year where the economy grew 2.4%. Unemployment remained in the low fours,
11:36close to mainstream estimates of maximum employment. And inflation came down and was running at the end of
11:42the year around two and a half percent. That's the economy that we had. And I won't decide how to
11:49characterize that. But that was that's that's where things were. Where we are now, again, to your
11:54question, is the administration is, as I mentioned in my remarks, is implementing significant policy
12:02changes and particularly trade now is the focus. And the effects of that are likely to move us away from
12:08our our goals. So unemployment is likely to go up as the economy slows in all likelihood. And inflation
12:14is likely to go up as tariffs find their way. And some part of those tariffs come to the come to be
12:21paid by the by the by the public. So that's the strong likelihood. And you know, my hope is that we'll
12:26we'll get through this and get back what we're always going to be aiming for maximum employment and
12:30price stability. That's what we do. I do think we'll be moving away from those goals, probably for the
12:35balance of this year. And then or at least not making any progress. And then we'll resume that
12:40progress as we can. Let's talk a little more about tariffs. I mean, you recognize that some of the
12:48effects of the tariffs will be one of transitory. But you also have said that perhaps they will give
12:55room for a number of firms to raise prices. You mentioned dryers when washing machine prices went up
13:02because of tariffs, drier prices also went up in tandem, even those even though they weren't tariffed.
13:09What's your sense about the effects of tariffs on inflation? What would make them more persistent?
13:16And what would, you know, make them have effects on growth? So in a kind of a simple starting point is a
13:25one tariff comes in, that gets passed along in prices and raises inflation, but it's just a
13:30one-time thing. So the price level goes up and that's it. But that's, and that can happen in some
13:37circumstances. But it depends on a number of things which we don't know yet. And I would point to a
13:41couple of them, or three of them actually. One is just the size of the effects. And as I mentioned,
13:46the tariffs are larger than forecasters had expected, certainly larger than we expected,
13:52even in our upside case. We looked at a range of cases. So that's one. The second one is how long does it
13:58take for the tariffs to have their effects on inflation. To the extent it takes longer and
14:03longer, that raises the risks that the public will begin to experience higher inflation. They'll
14:10come to expect it and companies will come to expect it. So that risks higher inflation. And the third is
14:17just what I mentioned in my speech, which is my remarks, which is got to keep inflation expectations
14:23well anchored. So if we have those, those three things under control, that that's what it will take.
14:29And indeed, our role is to make sure that a one that this, this will be a one time increase in prices
14:36and not something that turns into an ongoing inflation process. That's, that's a big part of our job.
14:42What about the effects of tariffs on quantities? You know, with the level of tariffs that, for example,
14:48have been currently applied on China, there's a fear that the supply chain may get disrupted,
14:55that firms may not be able to import their relevant stuff from China, given the level of prices.
15:03If it turns into a supply shock, would the Fed's response be different than if it was primarily
15:11something which affected just prices?
15:13So I actually had dinner at the Chicago Fed last night, and with a number of directors of
15:19various parts of the Chicago Fed, and many of them are CEOs of significant companies. And they,
15:28this uncertainty that they're feeling and the issue with imported components to their products is just
15:33a huge issue. But with, if you look back at the pandemic, if you remember, there was a shortage of
15:42semiconductors, and that led to a shortage of cars at a time of extremely high car demand.
15:47And it was a prolonged shortage because production couldn't keep up. And that led to an extended,
15:54one of the things that led to an extended period of inflation. So when you think about supply
15:58disruptions, that is the kind of thing that can be, that can take time to resolve and it can lead
16:04what would have been a one time inflation shock to be extended, perhaps more persistent, and we would
16:09worry about that. In this case, you can look at the car companies, which their supply chains are likely
16:16seem to be on track to be disrupted significantly. And you would worry that that process will take some
16:21years, and that the inflationary process might be extended. So these are all, all of this is highly
16:27uncertain. We're just, we're thinking now really before the tariffs have their effects, how they might
16:33affect the economy. And that's, that's why we're, we're, we're waiting really to see what the policies
16:38ultimately are. And then we can make a better assessment of what the economic effects will be.
16:44Let's move to immigration. You, you talked about the labor markets being in reasonable equilibrium right
16:52now. Of course, what we've seen over the last few months, the last months of the previous
16:58administration continuing into this administration is immigration has fallen off considerably.
17:04What's your sense on how that will affect the labor market?
17:09So what part of why growth was so strong in the last couple of years was just very high levels of
17:15immigration. And those people went to work, the economy hired them, you know, there was a lot of
17:20demand. We were still working off the labor shortage. What's happened since the prior administration
17:25changed their policy, as you mentioned, uh, immigration has fallen very sharply and therefore
17:30work, work, work, the growth of workers has really stopped. It's really stagnant. But at the same time,
17:37demand has also fallen. And so it demand for workers. So payroll job creation has also fallen,
17:43and they've kind of fallen in tandem, which is why the unemployment rate has been pretty stable for about a
17:49year. So, uh, in a way demand and, and coincidentally, perhaps to some extent, uh, demand and supply for
17:56workers has fallen. In terms of, so in terms of the effect on the labor market, um, right now we're,
18:02we're still at full employment, uh, and, um, labor force participation is still strong. Wages have moved
18:08back down to levels that are, that are now pretty sustainable, given an assumption about productivity.
18:13So the labor market's in a really good place. Longer term, you know, the, uh, the effects of
18:19immigration are not thought to matter much for inflation. The effects on demand and supply will
18:24more or less, uh, cancel each other out. So we wouldn't expect there to be a big impact on inflation.
18:31Um, you've, uh, seen in recent, uh, recent weeks, substantial talk about layoffs in government,
18:39as well as freezes in research establishments and universities in, in, in jobs. Um, how soon
18:47and how big will this be in its impact on labor markets? So it's, it's too soon to say, but what
18:54I can say is, um, of course the people being laid off in government, this is highly significant to them.
18:59We don't know how big that's going to be. Um, right now it's not big enough to affect a workforce of 170
19:06million people materially. Um, in terms of, uh, the, of the cutbacks in funding and for science and
19:14things like that, um, we do see in areas in particularly in cities that have a lot of universities
19:22and research hospitals and research institutions, we're really hearing significant, uh, layoffs and,
19:27you know, significant impacts on, on employment. I don't know how much that will total up to.
19:32And of course, in addition, cutting back on scientific research may have implications for
19:38economic growth, for productivity, for health, for all kinds of things, but those are very difficult
19:43to estimate in real time. Now, given that, uh, we're talking about the future, you may be confronted
19:51in the not so distant future with both higher levels of unemployment as well as potentially higher
19:57inflation. And of course, uh, the policies that each one requires could be different.
20:04You talked a little bit, uh, at the podium about how the fed would see these two and how
20:09it would address it. Just giving you a chance again to elaborate on that.
20:14Right. So, um, most of the time, uh, when the economy is weak, inflation is low and unemployment is high.
20:22And both of those call for, uh, lower interest rates to support activity and vice versa. So,
20:27most of the time, the two goals are not intention and they're not really intention. Now, the labor
20:32market is still strong, but the, you know, the shock that we're experiencing, the impulses we're
20:36searing fear of feeling are for higher unemployment and higher inflation. And, you know, our, our tool only
20:44does one of those two things at the same time. So it's a difficult place for central banks, you know,
20:50to be in, uh, in terms of what to do. And so we, you know, the best we can do is we actually have a
20:56little provision in our, in our consensus statement, which is the thing that we, we vote on to embody
21:02how we approach these questions. What we say is we will look at how far each of the two, how far the
21:07economy is from each of those two goals. And then we'll ask, uh, might there be different paces at
21:14which they would approach those goals? We'll look at those things and think about them and we'll make,
21:18we'll, we'll, we'll no doubt be a very difficult judgment. Again, we're not, we're not experiencing
21:23that now, but we could well be in that situation, as I mentioned in my remarks.
21:28Um, just want to pick up on a word that is often used today, uncertainty. Um, as a respondent to a
21:36Dallas Fed survey said, I've never felt more uncertainty about my business in my entire 40 plus years career.
21:43The worry today is not just about immediate policy uncertainty, but an entire change in the US's
21:50economic philosophy, not just policy uncertainty, so to speak, but structural uncertainty.
21:56You know, one of the effects is, as you've pointed out of higher levels of uncertainty is that firms
22:01postpone investment. Uh, for instance, even after the tariffs stabilize, firms that contemplate reshoring
22:08production facilities will hesitate, not knowing if the tariffs will be reversed in the future,
22:14maybe by the next administration. How do you take such longer term uncertainty into account in your
22:20policies? Um, it's, so let me just, uh, agree that we're, what comes back very strongly and you'll,
22:31you'll, you'll, you'll, everyone will understand this. Uh, these are very fundamental policies,
22:36changes in, you know, long held in some cases policies in the United States. And there's not
22:42any real experience. I mean, uh, uh, the, the Smoot-Hawley tariffs were actually not this large
22:47and they were 95 years ago. So there isn't a modern experience of how to think about this.
22:51And businesses and households are, are saying in surveys that they, they are experiencing incredibly
22:58high uncertainty. There's a lot of research, some of it from the Fed showing that, that does lead,
23:05uh, to businesses and households stepping back from decisions, which of course makes, makes common
23:11sense. Um, and you know, you hope that that's something that you go through a phase and then you,
23:17then you know what the things become more certain. And, and therefore, uh, you know, people can resume
23:24normal economic activities given their understanding of what is the new normal. I mean, your question
23:28really is what if the, if the uncertainty remains high? I think that's a difficult environment. I think,
23:33you know, I think people's expected rates of return would have to be higher. I think, um,
23:37people would be, it would, that would weigh on to me investment just in general. If, if, if the United
23:44States were to become jurisdiction where risks are just structurally higher going forward, that would,
23:50that would make us less, less attractive as a jurisdiction. I don't, we don't, we don't know that
23:54at this point, but I think that would be the effect.
23:56Well, let me turn to financial markets. Uh, we've seen some volatility, um, especially
24:04stock wallet, stock market volatility. I mean, the levels of the VIX are up, uh, to the levels they
24:10were in, in the early days of the pandemic coming off somewhat now. Um, some people believe the Fed
24:17will intervene if the stock market plummets, the so-called Fed put. Are they correct?
24:22I'm going to say no with an explanation.
24:31So what, what I think is going on in markets is, um, markets are processing, uh, what's going on.
24:40And, you know, it, it's really the policies, particularly the trade policy.
24:46And, and really the question is, where's that going to come in? Where's that going to land?
24:49And we don't know that yet. And until we know that, you can't really make informed
24:54assessments that would still be highly uncertain. Once you know what the policies are, it'll still
24:58be highly uncertain what the economic effects will be. So markets are struggling with a lot of
25:03uncertainty and that means volatility. But having said that, markets are functioning, you know,
25:09conditional on being in such a challenging situation, markets are doing what they're supposed
25:13to do. They're, they're orderly and they're functioning just about as you would expect them
25:18to function. So we've, we've seen volatility also in the bond market. And, uh, at a time when usually
25:26there's a traditional, there's a flight to safety, we saw yields on the German bond and the Japanese
25:33government bond come down. But we saw yields on U.S. Treasuries go up. What do you attribute this to?
25:41So I would just say the same thing. I, I, I think it's very hard to know in real time. I've had a lot
25:48of experience with, with significant moves, for example, in the bond market where there's a narrative
25:52that people land on. And then two months later, you look back and go, that was completely wrong.
25:57So I think it's very premature to say exactly what's going on. Clearly there's some delevering
26:02going on among hedge funds on in lever trades and things like that. It's also, again, it's the markets
26:08processing historically unique, uh, developments and with, with great uncertainty. And I think
26:14you'll see, you'll probably see continued volatility, but I, I wouldn't, I don't, I wouldn't, um, try to
26:20be definitive about exactly what's causing that. I would just say markets are orderly and, and they're
26:25functioning kind of as you would expect them to in this time of high uncertainty.
26:29So, uh, the Fed in its last meeting slowed the pace of shrinking of its balance sheet. Uh, was this
26:38driven by uncertainty about how much reserves and liquidity the market needed and you wanted to take
26:43a little more time to find that out? And flip side, you said the market was orderly. What if, uh, market
26:53disruptions, uh, emerge? Would the Fed intervene? So the, um, we, we think that reserves are still
27:02abundant. So we don't think we're, we're close to the point, particularly close to the point where we
27:07would stop, but we were facing a situation in which, uh, for other reasons, there were going to be big
27:14flows, uh, into and out of reserves as the, it's, it had to do with the debt ceiling and, and, uh,
27:20the treasury general account. For those of you who are treasury market people, that'll make sense.
27:24But we, we, while that, those big flows are happening for over a period of six months, we would
27:29actually be shielded from being able to see evidence that we were, or were not getting close to the
27:36level of, of less abundant reserves. And so we decided to slow the pace. We thought about pausing
27:41and instead we, we debated it. It was one of these great debates that we have at the FOMC. We decided to
27:46slow the pace instead. And people really came to see the merits of that because, you know,
27:50the slower we go, the less, the, the, the, the smaller the balance sheet can get without disruptions.
27:56And we, you know, we want that process to continue and now it's at quite a slow pace. So we think
28:01that's a really good thing. So that means we can go on for a longer amount of time and we'll be able
28:06to reach kind of, uh, very carefully what we think is the right level of reserves. Still, still, um,
28:12plenty of reserves. What about the international dollar-based system? Uh, with all these disruptions,
28:21uh, do you stand ready to supply dollars to central banks as you've done in the past
28:27when there's been a global shortage of dollars? Sure. Absolutely. We do. Just, just for everyone's
28:33knowledge, we have standing dollar swap lines with five large central banks and they, they go to, um,
28:40the jurisdictions where there are big overseas dollar funding markets. And in effect, those are,
28:46those are overseas markets where, for example, a European or Asian institution is buying an asset
28:53backed security that is backed by loans to American consumers. So in effect, these are loans to American
28:59consumers and we support that. We want to make sure that, that dollars are available. They need dollar
29:04funding to hold those dollar assets. So the way it works is when needed, we lend to the central bank
29:10in dollars and they pay us back in dollars. They then pay in their, in their currency. They lend on,
29:16they lend on in dollars. And so we take no credit risk or anything like that. And it supports dollar
29:22funding markets. Dollar funding markets are very sensitive during times of crisis and it's very helpful.
29:26And the reason we do it is it's really good for us consumers. So we'll continue to do that just as,
29:33as part of the dollar being a reserve currency, the reserve currency most important. And, um, we will do
29:38that. You mentioned amongst the, uh, issues you were focused on was, uh, the U S fiscal situation.
29:48Well, clearly U S sovereign debt continues to rise. And, um, what, what are your thoughts on the
29:55longer term implications for interest rates and economic stability? How much further can we go
30:01in terms of national debt before we cross a line that might be unsustainable in the long term?
30:08So the U S is on U S federal debt is on an unsustainable path. It's not at an unsustainable
30:14level and no one really knows how much further we can go. Other countries over time have gone much
30:20farther, but we're now, um, you know, we're running very large deficits at full employment.
30:26And, uh, this is a situation that we, we very much need to address sooner or later. We'll have to,
30:32and, and sooner is better than later in terms of if, if I can say from, um, my time working on these
30:38issues, it's not the feds issue, but the, if you look at a pie chart of, of federal spending,
30:44the biggest parts and the parts that are growing are Medicare, Medicaid, social security, and now
30:50interest payments. Um, and so that's really where, where the work has to be, has to be done. And
30:56those, those are issues that can only be touched on a bipartisan basis. You know, neither party can
31:02figure out what to do without both parties being at the table. So that's, that's critical. All of this
31:07domestic discretionary spending, which is essentially where a hundred percent of the conversation is,
31:12is small as a percentage of, of federal spending and is declining as a person. It's already declining as,
31:19as a, uh, a percentage of federal spending. So when, when people are focusing on cutting domestic
31:25spending, they're not actually working on the problem. Domestic discretionary spending is already
31:29going down. I just, I like to make that point because so much of the dialogue that the politicians
31:35offer is about district domestic discretionary spending, which is not the issue.
31:39Well, let, let's turn to stability and regulation. Um, turning to the U.S. financial sector,
31:47uh, uh, we still have some concerns about, uh, distressed commercial real estate loans
31:54on bank balance sheets, uh, whether they've been fully dealt with so far. There's some sense that
32:00they haven't. Add to that the very rapid growth in various forms of private credit over the last, uh,
32:07last few years, which arguably haven't been tested by a full blown recession. How would you put the
32:14resilience of our financial institutions at this point and their ability to weather potentially
32:20uncertain times?
32:21So I, I think our, our banking system is well capitalized with liquidity and is, is, um, quite
32:27resilient right now to the kinds of shocks that it may face. I, I do believe that. In terms of the
32:31commercial real estate, there are, um, and this, this has been the case really been, we've been working
32:37on this for four or five years now. There are some banks, it's mostly medium and small sized banks who have
32:42elevated concentrations of commercial real estate, some of it troubled, and we've been working to make sure
32:48that those banks have a plan, have capital, and can absorb the losses that they're doing. So, and
32:53that's been, that's been going on for some time. The very largest banks don't tend to have high
32:58concentrations. So this is a problem that we have known would take years to work through, but we're
33:04really well into the process of working through it. In terms of non-bank, the non-bank financial sector,
33:09it's grown enormously. The provision of credit by non-banks, uh, has grown just really fast. Most of it has
33:16been funded, though, with a private equity-like structure where, where it's limited partners
33:21who are signed up for 10 years to, to a general partner to invest that money. They're not depositors
33:26who can run, you know, your, your money's committed. And that's, so that funding model is, is kind of
33:32run-proof. That's, that isn't, uh, some law of nature though. So, and you do start to see shorter term
33:38funding creeping in. To your point though, Raghu, the, um, the, the, this very fast-growing and now quite large
33:46private credit part of the, part of the economy has not really been through a significant credit
33:51event or significant of, uh, it's really grown since the pandemic. And so just for that reason
33:57and for how fast it's growing, we, we have a close eye on it. It doesn't have the same kind
34:01of prudential regulation though, that, uh, that the banking system has. So we're watching it carefully.
34:07And, you know, as I mentioned, it's, it's a more stable funding source to the extent its
34:10institutional investors signed up for a long period, but we're watching carefully.
34:15Right. Wearing my, uh, banking research hat, actually banks are also involved in
34:20one of these institutions in a big way. Yeah.
34:23Um, we do know the administration wants to relax regulations in many areas, one of which may well be
34:30banking. Um, what can you tell us about the, uh, Basel III endgame, so to speak, which is, you know,
34:38at this point primarily focused on additional capital for the large banks?
34:44The, the, the Fed view and my view is that we should proceed to complete the Basel III, uh,
34:50accord. And, and, uh, we would have to do that and would look forward to doing that with the,
34:55in conjunction with the FDIC and the OCC. But our view is, and I think the, the bank's view as well
35:01is we should complete that. You need international minimum standards. That's, that's kind of a common
35:06good. And, you know, we're not bound by them, uh, really, uh, nothing. The, the United States
35:12has plenty of input into what, into, and what to the, what those accords, uh, contain. So our view
35:18is strongly that we should complete those. And we could do it, I think, relatively quickly. We're,
35:22we're not so very far away from, uh, from what would be a, a good, I think, uh, outcome.
35:28Well, let me move to something which is more, uh, sort of, uh, uh, about technological change and new,
35:37new kinds of instruments, cryptocurrencies. Um, how do you see, um, the potential for more
35:44favorable regulations coming on them and potential risks from, from that for the system?
35:51You know, so we went through a wave of, um, failures and fraud and things like that,
35:57were the headlines for a couple of years. And, um, I think what you, what you see now is, um,
36:05and during that period, by the way, we were trying to work, we worked with Congress to try to get a,
36:09a framework, a legal framework for stable coins, which would have been a nice place to start.
36:13We were not successful. I think that the climate is changing and you're, you're moving into sort of
36:19more mainstreaming of, of, uh, of that whole sector. So Congress is again, looking at, at both,
36:25both the Senate and the House are looking at a framework, a legal framework for stable coins,
36:29you know, depending on what's in it, that's a good idea. We need that. There isn't one now.
36:34And stable coins are a product that, a digital product that could actually have fairly wide
36:38appeal and should contain consumer protections of, of the typical sorts and transparency. And
36:44that's what the Senate and the House are working on. So that's a positive thing.
36:47I also think some of the, um, you know, we took a pretty conservative and other,
36:51other bank regulators took an even more conservative perspective on, on how, on the guidance and rules
36:57we imposed on banks. I think there'll be some loosening of that. And I think we'll try to do
37:01it in a way that, that preserves safety and soundness, but that, you know, permits and fosters
37:06appropriate, um, appropriate, uh, innovation. And, but that, that does so in a way that, again,
37:12doesn't, doesn't put consumers at risk in ways they don't understand or, or make banks less safe and sound.
37:18You, you have a policy review underway. Um, now surveys, uh, recently tell us there seems to be a
37:29distinction between a rise in the level of prices, uh, which is what the public seems to worry a lot
37:36about and the rate of increase in prices, which certainly, uh, they worry about in passing, but
37:43the Fed worries much more about that is the rate of inflation. Um, so even though we're
37:48coming down to 2%, people remember that over the last few years, it's been over 20% increase in prices.
37:58So as you start thinking about the policy review, is there any thought about how you might want to
38:07address this, uh, sort of challenge that it's the path of prices as much as the rate of change, which matters?
38:15First of all, you're, I think you're right. And I think the public is right. What, you know, when,
38:20when we say inflation is back down to 2%, two and a half percent, uh, and we think that's a good thing,
38:26it is a good thing. But if you're, you know, if you're paying 20% more than you were paying in, in 2021,
38:35that doesn't help you much. You know, you're still paying a lot more than you used to be paying for
38:39the necessities of life. So it's just another way of saying people hate inflation and it's easy to
38:46understand why. You know, what we, all we can really control is, uh, a world in which the, in the world we
38:55were living in, prices don't go down in the aggregate except in extreme times that we don't want to court.
39:01So I don't think we could, we couldn't have a framework where we're going to bring prices down
39:06by 10% or something that that's not something we'll be looking at. You know, we're essentially
39:10looking at the best way to foster 2% inflation over time. And, you know, the things we did back in,
39:18the changes we made in 2020 were, were really innovations around what to do when you're stuck
39:24near zero. Now we're well above zero. And it, you know, it may be that we, we still need to have
39:30in our framework, a way to deal with that, but perhaps the, the main case is not one where you're
39:37dealing with the effect of lower bound. And that would be a framework that looks a lot more like
39:41the one that we had before 2020. Now, one of the tools you brought in to deal with the zero lower
39:48bound was quantitative easing, but you've also used quantitative easing to fix disruptions in the
39:55financial markets. Are you going to be more specific about what your objective is with quantitative
40:01easing as you go through this review? So in the beginning, it's, it almost, it's typically,
40:08we're using it for financial market function. That's, that, that was the case with the,
40:12with the global financial crisis and with the pandemic. And we, you know, we did, we did try to
40:19explain ourselves through the pandemic and our explanations did change, but I think it's fair,
40:24it's fair to say we might've done a better job of, of being clear about why we were doing. And that's,
40:29that's something that we're, we're aware of and looking at.
40:31Yeah. I mean, no discussion is complete without talking about AI. Yeah. With AI coming fast and
40:41furious, it could affect productivity. It could affect employment. There are some people who say
40:49we will see for the first time technological unemployment in a serious way with AI. What,
40:54what are your thoughts about it and how will it impact the Fed going forward? So like everyone who's
41:00been exposed to what it's capable of, it's just, it's beyond, um, I mean, I started about thinking
41:06about it as like a, a better version of Google, but it's not, it's like a better version of a person,
41:12you know? Uh, I mean, it can do amazing things. And so the question is it all through the 250 years of
41:21technological innovation, technology evolves and people worry that it's going to replace human labor
41:27and people will be unemployed. And that hasn't been the case. What, or it may be the case in the
41:31short run, but in the long run, what it's done is raise human productivity and therefore living
41:35standards. So is this going to be the case where it eliminates more jobs than it, than it, than it
41:41creates? And we just don't know. Uh, I mean, you come back in 20 years, will, will it be the case that just
41:49people are much more productive in their work because of AI, or will it be the case that AI has just
41:54replaced a lot of people? And I, I think it's very hard to, to say, but it, it truly is remarkable
42:00in what it's capable of. And it's, um, you know, we, we just, we had a pro, uh, we had a demonstration
42:07by a, a warden professor recently and he was, he speak, you speak to it like it's a person and it kind
42:12of responds like a person. And, and the things that it can do are, are, are really amazing. Uh, so, and
42:18by the way, this is early days. You know, they're talking about even the next couple of years will bring
42:23more dramatic breakthroughs. So I think it's, it's one of the two or three things
42:28most likely to bring dramatic change to the economy all around the world in the next 20 years. And
42:33I'd say very hard to say how it shakes out. Let me turn to your job. Uh, an important man
42:42once said of your job is the greatest job in government. You show up to office once a month
42:49and you say, let's see, flip a coin. And then everybody talks about you like you're a god.
42:57What is it that you normally do every day in the office?
43:04Is it fulfilling and dare I say enjoyable? And do you really feel like a god?
43:14So I, I would agree. I think it's, I think it's the best job in government. I would agree. I,
43:18and I, I really do enjoy it. Yes. Uh, I love the job. It's a great honor to serve. It's quite humbling
43:24because, you know, everybody makes mistakes. It's just the, the economy is just not very predictable.
43:30Um, so I, all of that is true. And I, you know, I do what everybody expects me to do. I read,
43:35we do a little more reading though, as part of our, uh, daily, my colleagues and I do part of our daily
43:41regime than a typical executive would do. In terms of being a god, I would say that we are,
43:47we are blessed with a, a large number of, uh, amply compensated critics who,
43:56who would kind of tend to undercut that. So we don't, we don't feel like a god.
44:02So, so let me go to the more mundane. In that office, uh, what do you, what do you,
44:09what are the key indicators you look for? What, what are the sources of data that you,
44:14you go to as you try and make up your mind? So, you know, I'd say start with labor. You know,
44:21there, there's more labor market data and more and better reliable labor market data than probably
44:26anywhere else. And, uh, it's just a lot of data and, you know, it's, it's new jobs, it's payroll,
44:31it's, it's, uh, wages, it's participation. You bring, you can break all of those down in different
44:36categories. It's a, it's a million different things. So there's a lot of labor market data. It's a great
44:41field if you're going into economics because there's just so much to do. So, and then we,
44:45we look at the inflation data. Also, I, you know, I keep track of, of global developments pretty
44:50carefully and I talk to my global counterparts pretty regularly just to stay aware of what's
44:56going on. Um, financial markets are really important and, you know, you can, and, and lately
45:01something that's, that we've, we're paying close attention to, as you would expect, what's going
45:05on around the world in currency markets, in fixed income markets, in equity markets, all of that.
45:11For me though, my, my background was more in the private sector and, and, you know,
45:15as an investor and for, for a significant part of my career. And I, I have to talk to outsiders
45:21about what they're seeing and what they're dealing with it for it to really kind of fit together for
45:25me. I, you know, I can look at only so much data and, you know, I, I, but to really get the story
45:31and the narrative, it's, it's more talking to outsiders and, and, you know, anecdotal data does help
45:38things kind of fit together for me, I would say. Yeah. You told us about speaking with business
45:43people last night and getting a sense of what was going on in the Midwest. Um, let me turn to
45:49Fed independence. You've reiterated that you intend to stand, stay in office until the end of your term.
45:55Uh, and that certainly reassured many in financial markets. What are the levers the government or the
46:01legislature have to pressure the Fed? And should one worry about threats to the Fed's independence
46:08once you're gone? So our, our independence is a matter of law. Um, Congress has, in, in our statute,
46:15we're not removable except for cause. We serve very long terms, seemingly endless terms.
46:23Um, so it's, we're protect, protected in the law. So, you know, Congress could change that law,
46:29but there's, I don't think there's any danger of that. Uh, Fed independence has pretty broad support,
46:33uh, across both political parties and in, in, um, both sides of the hill. So I think that's not a
46:40problem. Um, there's a Supreme Court case. People will have read probably in today's journal that,
46:45at which the Supreme Court may decide whether independent agencies generally, whether they're
46:52authorizing laws can contain a provision that prevents the president to fire, from firing members
46:57of a commission, uh, other than for cause. And that's, that's, that's a case that people are
47:03talking about a lot. I don't think that that decision will apply to the Fed, but I don't know.
47:06But it's, it's a situation that we're monitoring carefully. Generally speaking,
47:11Fed independence is, is very widely understood and supported in Washington, in Congress, where it
47:16really matters. And, uh, you know, the, the point is we can make our decisions and we will only
47:22make our decisions based on our best thinking, best based on our best analysis of the data about what,
47:28what is the way to serve our, to achieve our dual mandate goals as we can to best serve the American
47:34people. That's the only thing we're ever going to do. We're never going to be influenced by
47:37any political pressure. People can say whatever they want. That's fine. That's not a problem.
47:42But we will do what we do, uh, strictly without consideration of political or any other extraneous factors.
47:52Well, I have time for one more question. Uh, I know the question that's on all your minds. Uh,
48:08what are you going to do on interest rates next? Uh, but I'm not sure that, uh, uh, you know, and I'm
48:16not sure you would tell even if you knew. So, uh, uh, I'm not going to ask that question. The
48:22question I want to ask is, is a more personal one. Uh, what is it that you'd like to do most
48:28at home after an, an exhausting day flipping coins in the office?
48:35You know, I, I play my, uh, one of my guitars. I, uh, I do zoom calls with my, uh, my kids and my
48:42grandkids and I, uh, go to the gym a lot too, just to stay in shape. We need you healthy.
48:48We need you healthy. Thank you very much, Chair Powell. Thank you.
48:52All right. And please join me.
49:06On behalf of the Economic Club of Chicago, thank you, Chair Powell and Dr. Rajan for such a wonderful
49:14conversation. You are a national treasure and I hope all of us can see how important, uh,
49:20uh, Chair Powell's role is in our business and personal lives. And thank you for sharing your
49:26important insights with us. Um, I do want to thank David Snyder and Katie Esposito and the entire ECC
49:33team for pulling this down.