2025 Allied Social Science Associations (ASSA) Annual Meeting

Francisca Antman:

Going to just begin by welcoming you. This is going to be an hour and a half session, so I want to start us on time. So I’m just going to start by welcoming you with telling you a little bit about myself. I’m Francisca Antman, I’m a member of the AA program committee and I organize the session. I have the privilege of welcoming you today to the session on monetary policy. As I said, this will be a one and a half hour session and I’m going to begin with introductions of our panelists and also our chair. And our chair, Ayşegül Şahin will be asking questions from the panelists and moderate discussions in a round table style format. And throughout the session, because we only have an hour and a half, I’m going to be circulating just papers and pen if you would like to ask questions.

So after I finish my remarks, I’ll go and circulate some pens and paper and you can sort of give those back to me and then I will kind of bring them back up to Ayşegül so that she can incorporate them into the discussion. We can use the time we have most efficiently. So I also want to thank the staffs of the Federal Reserve Bank of San Francisco and the Federal Reserve Board of Governors and the American Economic Associations for all of the logistical support for this session, as well as the San Francisco Fed that is live streaming this event. And of course, our chair and our panelists that I now have the privilege of introducing.

So I’ll begin with Governor Kugle, Dr. Adriana D. Kugler took office as a member of the Board of Governors of the Federal Reserve System in September of 2023, and she is filling an unexpired term that will end January 31st, 2026.

Prior to her appointment at the Board, Dr. Kugler served as the US executive director at the World Bank Group. She’s on leave from Georgetown University, where she’s a professor of public policy and economics and was vice provost for the faculty. And previously she served as chief economist at the US Department of Labor from 2011 to 2013. Dr. Kugler’s research includes contributions on the role of public policies including payroll, taxes, employment protections, occupational licensing, and unemployment insurance, and on the determinants of unemployment and earnings. Her contribution on the impact of policies and regulations have been published in top general interest journals as well as specialized journals in economics and public policy. And she received her BA in economics and political science from McGill University and a PhD in economics from the University of California Berkeley.

And President Mary Daly. Mary C. Daly is president and CEO of the Federal Reserve Bank of San Francisco, where she contributes to shaping US monetary policy as part of the Federal Open Market Committee. Daly is a labor and public policy economist by training. Her research advances understanding of the Federal Reserve maximum employment and inflation mandates. Most notably through her studies of wage rigidity and the natural rate of unemployment. She’s a frequent speaker across the US and internationally and also hosts an award-winning podcast, Zip Code Economics. Daly holds a bachelor’s degree from the University of Missouri, Kansas City, a master’s degree from the University of Illinois, Urbana Champaign and a PhD in economics from Syracuse University. And she also completed a postdoctoral fellowship at Northwestern and she has also served as visiting professor at Cornell and UC Davis and has been an advisor to the Congressional Budget Office, the Library of Congress and the Social Security Administration.

And now our other panelists, professor John Taylor. John B. Taylor is the Mary and Robert Raymond, professor of economics at Stanford University and the George P. Schultz Senior Fellow in economics at the Hoover Institution. He is director of the Stanford Introductory Center. He formerly served as director of the Stanford Institute for Economic Policy Research, where he’s now a senior fellow. He served as president of the Mont Pelerin Society and as a member of the Eminent Persons Group on global financial governance created by the G20. And he has served in many many roles in government, including the President’s Council of Economic Advisors and on the California Governor’s Council of Economic Advisors, as well as under Secretary of Treasury for International Affairs. He’s an expert on macroeconomics, monetary economics and international economics. Maybe you’ve heard of the Taylor Rule. And he’s very well known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial markets around the world. And he’s written or co-edited many books, dozens based on his experience and areas of expertise. Okay, and really we could be here for really days. These are the short bios as you probably already know.

Okay, and now Professor Karen Dynan. Karen Dynan is professor of the practice in the Harvard University Department of Economics and at the Harvard Kennedy School. She’s also a senior fellow at the Peterson Institute for International Economics. She previously served as Assistant Secretary for Economic Policy and Chief Economist at the US Department of the Treasury from 2014 to 2017, and she received the Alexander Hamilton Award for her service. She was also vice president, co-director of the economics studies program at the Brookings Institution. Prior to that and prior to that she spent a number of years on the staff of the Federal Reserve Board, where she did macroeconomic forecasting and help with the policy response to the global financial crisis. And her research agenda has focused on monetary policy as well as fiscal policy and consumer behavior. And she has also been active in issues related to economic measurement. And currently she’s on the AEA’s committee on economic statistics and also has taken over the NBER CRIW Conference on Research and Income and Wealth and our chair and moderator.

Ayşegül Şahin is a professor of economics and public affairs at Princeton University and a research associate of the NBER Economic fluctuations and Growth and Monetary Economics groups. She’s been serving as the editor of the American Economic Journal, macro economics since January, 2024, and she’s a member of the Panel of Economic Advisors for the Congressional Budget Office, the Bureau of Labor Statistics Technical Advisory Committee. She has worked as a research economist at the Federal Reserve Bank of New York. She also worked there for many years where she founded and led the team, which focused on the analysis of the US labor market. And she recently moved institutions from Texas. Yes, so she also has really experience in both sectors. Also, her research focuses on the analysis of macro labor issues such as maximum employment, unemployment and labor force participation dynamics, labor market mismatch, estimation of the natural rate of unemployment, gender disparities and unevenness in labor market outcomes, wage and price inflation and entrepreneurship.

And her papers have appeared in also very high journals, the American Economic Review, Econometrica, as well as in the media. Okay, so those were the short bios, but it is really my pleasure really to introduce this panel, really my privilege and thank you so much for being here. I’m really just amazed that everyone made time to make this happen. And thank you everyone for coming on behalf of the American Economic Association. And now I’m just going to turn it over to Ayşegül who’s going to start with questions. And I’m going to again just be circulating pieces of paper and pens if you would like to ask any question, of course you can use your own paper and just hand it to me as well. And then I’m just going to kind of pass them up here so we can use the time efficiently. So we’ll go until four. Okay.

Ayşegül Şahin:

First of all, thank you Francisca for putting this amazing panel together. It’s really a privilege to moderate this panel today. So I work at the Fed for many years. I want to start by setting the stage by first asking the panelists about the state of the US economy, what’s the state of the US economy and where are we headed? Do you see any particular headwinds or tailwinds? Lemme start with Governor Kugler.

Adriana D. Kugler:

Thank you so much. Thank you Francisca for organizing this panel and thank you for moderating the panel and thank you for that question. Happy year to everybody. So I would say the economy and then at a good place in 2024, what we saw is an economy that has been growing at a good pace for the past years at a solid pace. In fact, it grew over 3% in 2023. It’s projected to grow at 2.5% in 2024, and the economy is still, I think this is not on because I’m definitely very close to the mic. I think it is. Yeah. Let’s see. So here we go. Is that better? I think there’s something going on with the close.

Francisca Antman:

You have to turn ’em on. There you go. Yeah, go ahead, start again. Sorry. You don’t have to, but I think it is on now.

Adriana D. Kugler:

I will. Let’s start again. You’re on. Yes. Excellent. Happy New Year. Everybody answers this time. Yes, absolutely. So here we go. No hot mics. So that’s good. As I was saying, the economy ended at a good place in 2024. The economy has been growing at a solid pace in the past couple of years. It grew at over 3% in 2023, and it’s projected to grow at 2.5% in 2024. So the economy is growing at a healthy pace. The other thing that we saw towards the end of 2024 is that the labor market has cooled. It has cooled but remained resilient and it has remained resilient. We still see real wages growing at about 1.5, 1.6%. And at the same time though the unemployment rate has been stepping up a bit, it’s still at 4.2%, which is a historically low rate of unemployment. And lastly, and importantly for our mandate, we also know that there has been quite a bit of disinflation.

So inflation has been coming down from the peak in 2022, there was a peak of 7.2% in terms of the headline number that came down. Almost five percentage points is now at 2.4%. Likewise, our preferred measure core PC inflation has come down by almost a half from 5.6% to 2.8%. So there has been quite a bit of progress on different ends and on both sides of our mandate, we’ve stayed first, we’re moving towards our 2% target and we seem to be staying close to our maximum employment and staying at a good place in terms of the maximum employment side. So that’s all good news. How has this happened? I would say that two things have helped us. I gave a speech in Detroit in December where I pointed out two supplied side shocks that have been extremely helpful to us. One of them is the growth in population and the growth in the labor force helped largely by immigration, but also by the growth of prime age labor force participation, particularly for women which reach historic highs.

The second labor force shock that has been incredibly helpful during this time is productivity growth. And I have been a productivity optimist for some time now, probably for over a year since I arrived back in the fall of 2023 to the FYMC, I’ve been saying that productivity is likely growing at a higher rate. And in fact, in September, the BEA revised its NIPAs, the national accounts, national Income and product accounts, and they in fact project that productivity growth is higher than what we thought before. So why do I think that has happened? A big part of it has probably happened because there is quite a bit of business creation and new businesses to be more productive. They also create competition for existing businesses. They have also entered mainly in the tech sector and there has been quite a bit of sector reallocation, which helps in terms of getting better matches in the labor market.

And that happened earlier during the great resignation, but it has continued during the following period as well. So that has helped. And lastly, I think there’s a bit of a story about how maybe AI is helping. There’s some uncertainty yet about how AI is contributing to some of that productivity growth, but there is a potential, there’s quite a bit of adoption and we get to see how much of that adoption turns into actual productivity growth. So these two productivity growth and immigration labor shock have been incredibly helpful to get us to get this uncommon combination of a healthy economy together with a lot of disinflation. And that has allowed us and has allowed the FOMC to be able to tighten policies starting in March of 2022. Last hike happened in July of 2023, but as you remember, we held our rates steady up until September of this year of 2024.

So there has been a tightening of policy which has allowed us to cool demand while we had at the same time quite a bit of supply impetus coming from these two shocks and without calling the economy too much, but allowing us to achieve some disinflation that we needed in the economy. So that’s where we are now. I would say obviously our job is not done. We’re not at 2% yet. So we’re definitely aiming still to get there. And we know the job is not done, but we will be watching closely at two remaining categories of inflation, which still probably are not consistent with 2% inflation. One of them is housing inflation, which keeps coming down steadily but slowly. And the second one is non-market services, which is not measured very well. So we are paying attention to this, but we know that there is some measurement error when it comes to non-market services and that has created a little bit of a bump at the end of 2024.

We are going to be watching closely whether that’s indeed a bump or whether that’s a more steady and persistent pressure on inflation, but we suspect that it could be a bump given that it comes mostly from this non-market services inflation. And at the same time, you have heard me say this before, I am paying a lot of attention to unemployment. We thank unemployment is resilient, is stable, it’s at a good place, but we’re going to be paying attention that it doesn’t cool any farther. We want the unemployment rate to stay where it is. So we will be paying close attention to make sure that indeed those increases in unemployment or gradual as opposed to a more rapid increase in the way we saw pre-recession in the past. So those are things we’re going to be looking forward to in the future.

Ayşegül Şahin:

Thank you. Before I turn to Karen, can I, also, wanted to add to this question. Given your expertise, how do you see consumer spending holding up when you discuss the outlook? Can you please also elaborate a little bit on?

Karen Dynan:

Sure. I think my mic is working. Okay. So let me just say I think Governor Kugler laid that out really well that we are kind of on a solid footing going into next year and doesn’t mean the economy’s working for everyone, but in a macro sense, you know, things are looking really good. So I’ll just be more forward looking and talk about tailwinds and headwinds. There’s a mix. I would say tailwinds, you’re going to start with the solid underpinnings that Governor Kugler just kind of laid out. You’ve got rates, probably I could say this even if you can’t say it, you’ve got rates probably heading down this year. And related to that, we’ve seen the stock market go up quite a bit. So we’re going to get impetus from that wealth effect there. Confidence, a lot of debate about how we should measure confidence and whether our measures are good.

But if you just look at, and this is relevant to your question, Ayşegül, if you just look at the surveys that are asking about concrete spending plans on both the consumer side and on the business side, confidence looks at least as good as it did going into the pandemic. And in some cases we’ve seen a bump the last couple of months in confidence. So that’ll be a tailwind as well. Let me also just mention fiscal policy. So that’s going to be a big issue this coming year, the extension of the expiring 2017 tax cuts. I think it’s really likely, but I think the important thing for people to remember there is that’s just holding the level of fiscal support where it was. So it’s not really a tailwind, but if we get some more on top of that, that will be a tailwind as well.

You’ve got these tailwinds. I would say you also have headwinds as well. So Governor Kugler mentioned the important role of immigration. That’s going to be a headwind if we see more. So we don’t know exactly what’s going to happen, but if we see more restricted immigration, that’s going to be a headwind on both the demand side because immigrants of course consume and spend, but on the supply side as well. And I think that’s a really important issue for monetary policy because it could throw demand out of whack with supply again, and that could lead to inflationary pressures. I would also say the other tailwind, which is a policy issue and we don’t know the answer about yet, is just tariffs. We know they’re inflationary, they’ll cut into real incomes, they could be disruptive to firm supply as firms reorganize to deal with tariffs. So that’s another potential headwind. And I’ll just say, you know, then you want to think about how these things add up. I don’t have the answer there when you’ve got tailwinds and headwinds, I mean my own guess is there’s a good chance the economy is going to remain on track with kind of this solid path forward and continued disinflation, but there are worse outcomes that could occur as well. So I’ll leave it there.

Ayşegül Şahin:

Thank you. Professor Taylor?

John Taylor:

Well, thank you very much for coming and listening. I think I more disagree than I agree with what’s happening. We haven’t hit the targeted 2%, we’ve been far away from that.

Adriana Kugler:

Absolutely. I said that.

John Taylor:

I know.

Adriana Kugler:

I said we’re not there yet.

John Taylor:

I said it again.

Adriana Kugler:

Yes, agree fully. A hundred percent.

John Taylor:

Okay. And that’s an important thing.

Adriana Kugler:

Absolutely.

John Taylor:

Two percent has always been the goal has been there for the Fed for a long time and we’re not there and we’re way above it. And I think that deserves some consideration. The question is why we were so above it. I think that’s the question. And was it mistake? Was it because there was other things going on? What was it really that caused that episode, if you like, of inflation being very high. Now that’s not the only thing that’s gone wrong, so to speak. We have had, you’re right, the unemployment rate is better than it was, but we still have some problems and I think that my goal is to have not only a 2% inflation rate, but to have inflation at a level where it doesn’t interfere too much with everything else that’s going on. So I would say that you’re both pointing to the good things. That’s great. That’s fantastic. But there’s also some bad things. And I think—

Staff:

(Fixing microphone) Why don’t you go ahead and try it again? Sorry.

John Taylor:

Do it all again?

Mary C. Daly:

You don’t have to do that again.

John Taylor:

I forgot what I said.

Adriana Kugler:

Including the back and forth. We’ll just repeat it.

Mary C. Daly:

Yeah, you’re….

John Taylor:

Okay now I’m okay.

I think one thing that hasn’t come up too much, which is very important for me as an international oriented person is the rest of the world and the rest of the world is not doing all that great. We have problems in Russia, we have problems in China. Japan seems to be picking up, but I think that when I think about the rest of the world, I really think it’s important to keep those other things in mind. And don’t forget that, I mean, yes, it’s the Federal Reserve and the Federal Reserve is the biggest player so to speak, but it’s very important that there be a way that this is wrapped up. And I think a real question is what’s happening with China, what’s happening with Russia and what’s happening with Europe and even Africa. So I think that’s the next step. Get it in line for the U.S., 2% target is I think a good goal for inflation, but also think about what’s going to happen for the rest of the world. And I think do you need to have a mechanism by which the rest of the world plays the same game? Does the rest of the world have a 2% inflation target? Does the rest of the world do whatever they want? Anyway, I’ll leave it at that. Thank you.

Ayşegül Şahin:

President Daly. I want to add another question. Given your expertise on the labor market. So we typically think of monetary tightening episodes as negatively affecting the labor market, but we have seen the labor market doing pretty well as Governor Kugler discussed. What’s your interpretation of this resilience? Can you talk a little bit about this in light of your outlook and state of the economy?

Mary C. Daly:

Yeah, absolutely. And I think one of the, okay, I’m just checking. Everybody can hear me, okay? Yes, yes. Okay, turn it up. Okay. I’m going to do my best. I’ve got a fussy microphone. Is that better? Yeah, you good? Okay.

So when I think about the labor market and the economy more generally, and I’m going to try to square what I heard between John and our other participants, one of the things that has been true and surprising is how much monetary tightening we’ve been able to put into the system, how well inflation has responded so far, despite the fact that it remains, I think uncomfortably above our target. But we’re working on that, how well the economy’s done. And that’s consumer spending, that’s GDP growth and importantly, perhaps most importantly, because it’s our mandated goal, one of them the labor market.

Now when you unpack that and you ask, how can the labor market have possibly done this well, when we had all this monetary tightening, it really comes back to an old concept, the Beveridge Curve, older concept, the Beveridge Curve. And if you, many people did these studies, San Francisco fed researchers did them other groups across the Federal Reserve system and outside of it just have a simple observation. We were on the very steep portion of the Beveridge Curve where the V-U ratio, vacancies to unemployment was two to one, well outside of its historical norm. And so what that translates into is we can come down that vertical portion, eliminate vacancies without a huge impact on unemployment, which is a great thing for the economy and our full employment mandate. So we were able to slow the labor market with monetary policy tightening and the restriction of demand and get the labor market to achieve a better balance without the costly runup in unemployment.

Now my own view, and I should say that the views I’m reflecting here are my own and not, those are my colleagues. I’ll let Adriana speak for herself as others. Pat Harker is in the audience, so we’ve got lots of people here who could talk for themselves. But here’s how I think about it. I think of it as the labor market is now in rough balance. The V-U ratio is roughly one to one, depends on the month, but it’s roughly in balance. At this point, I would not want to see further slowing in the labor market, maybe gradually moving around in bumps and chunks on a given month, but certainly not additional slowing in the labor market because then we would slip below that balance, which has been so important. So while we do absolutely have to continue to get inflation down to our 2% target, we have to be resolute about that. We have to do it in a thoughtful manner so that we can also support the full employment that is really the other side of our mandated goals. So that’s how I think about it. We’ve been very fortunate. And so have all the Americans who didn’t lose jobs, we simply destroyed vacancies. And now firms and workers feel like the labor market is roughly in balance and wouldn’t want to see further slowing.

Ayşegül Şahin:

Thank you. Let ask the same question to Professor Taylor. What’s your interpretation of this disappearing tradeoff between unemployment and inflation that we have seen in the last couple of years?

John Taylor:

I don’t think it’s disappearing. It’s there. We have a tradeoff, if you like. It’s inflation and unemployment tradeoff. It’s always been there. And if we put on too much gas, inflation will pick up and unemployment will not go down. So I don’t think it’s disappeared, it’s changed. There’s no question it’s changed and have a different target, which I think the Fed has had for a while now, then it can cause some problems. But I don’t think it’s disappeared. I think it’s pretty much fundamental. And this goes back to my statement about other countries, other countries, the same thing.

Mary C. Daly:

I should go, may I add something to this just because, I did not mean to imply and didn’t, I don’t think implied that the trade-off has vanished, it just was temporarily muted. And if you go back to before the pandemic, I actually went to a conference titled Is the Philips Curve dead? And it’s obviously not. It just wasn’t appearing at the moment in time that we were looking at. So I think we have to be extremely cautious about thinking the trade off, everything’s free now. There is no trade-off just because we didn’t see it for the last two and a half years. And I think that’s a tension that I wouldn’t want to lose in this panel because now we’re facing something that looks more like the trade-off space.

Ayşegül Şahin:

Thank you. Karen?

Karen Dynan:

Yeah, sure. Actually, I take a kind of different view about the trade-off. I mean I would’ve said the last two and a half years demonstrates there can be a tradeoff between the tightness of labor markets and inflation. I mean, my interpretation, so there’s been a lot of discussion about what caused the inflation that we saw in 2021 and 2022, and surely supply shocks played a role. But I think if you look at kind the breadth of inflation, the timing of inflation, I just put out a paper on this actually, I think it’s a pretty good case that we saw a tightening of the economy that basically pushed us off this very flat part of the Phillip’s Curve, which President Daly, I mean I think you still believe in the Philips Curve.

Mary C. Daly:

I do,

Karen Dynan:

But, kind of pushed us, I think it pushed us onto a steeper part of the Phillip’s Curve. And then why did we see such rapid disinflation? Well, you back off that steep part and you can have in addition to supply shocks dissipating, you can have this kind of disinflation. So I think that trade off is very much still there. If I could just say a word about, I don’t actually, it’s interesting that you use the term monetary tightening. I struggle when I use that word because I will say I’ve decided instead I should just say higher interest rates because I’ve been struggling with how tight monetary policy actually is. And this goes to the kind of issue around is the neutral rate higher than it was than kind of a lot of people think it is. So if you have a higher neutral rate then you can have a big increase in interest rates. But it’s not, it’s tight as you would otherwise think. And I think for example, we’ve seen financial conditions more broadly not tighten in lockstep with interest rates. Stock market’s been up, but I’ll leave it there.

Ayşegül Şahin:

Thank you. Let me turn to Governor Kugler and ask the same question about the labor markets.

Adriana Kugler:

Yeah, I agree with Mary and also with Karen that we have kind of been moving on this steep part of the Philips curve and also the Beveridge Curve. And I think there are a few issues that afforded us that I think part of it is improved matching in labor markets that has allowed us to achieve disinflation without necessarily increasing unemployment. I think the other thing is that we had been on the steep part of the convex supply curve when we kind of reached limits on how much we could supply throughout the economy. And just as inflation went up very quickly, we moved down that. And also as I mentioned before, I do believe that these supply shocks, both immigration as well as productivity have definitely been very important to rebalance the labor market in the way we did and to get us to a point where we have real wage growth.

But this real wage growth is no longer generating inflationary pressures, especially for the services sector. We think we’re close, given the productivity growth we have seen, we think that that’s actually close to being consistent with not generating any additional inflationary pressure. So I think we’re at a good point, but I think we do have to watch, right, that we don’t move to that kink and we don’t move to the flatter part of the Philips curve and also a Beveridge Curve. So we’re certainly watching for that in that sense. John is completely right. It’s not that the tradeoff has gone away, it’s there. We’re just have been moving on a different part of those two curves and that has allowed us to achieve that great extent of disinflation that we have achieved. We’re not yet to our 2% target, certainly not we’re all committed to getting to the 2%. But you do have to remember that there has been, we have basically halved this core PC inflation from 5.6% to 2.8%. So we are fully aware that we’re not there yet. No one is popping champagne anywhere, not close to us and we are fully committed and working hard to make sure we get there.

Ayşegül Şahin:

Thank you. Let me move on to monetary policy, transmission mechanism. I mean we have all been watching the monetary tightening and the effects on the economy very closely and there was a lot of discussion about changing monetary parts, transmission, the lags, whether they changed, the economy is now responding differently to monetary policy tightening. What do you think about this? And again, I’m going to start with Governor Kugler.

Adriana Kugler:

Yeah, thank you. We know there are long and variable lags in monetary policy. This is known at least since back in Friedman. And we all understand that’s the case. In fact, estimates of these lags go all the way from one month to four years. I think the median is somewhere between four to six quarters, so one year to a year and a half. So we think it takes time for our monetary policy to filter through the economy and to have an impact on households and businesses, on consumption and investment decisions. So we are fully aware of that. I think what has probably been different this time around is that some things have worked somewhat differently. We know certainly contractionary monetary policy is usually more effective than expansionary monetary policy. That helps. But the excess savings that households had during the period of the pandemic, everybody was cooped up, staying in their house, not able to consume in the way they were consuming on a regular basis, certainly not in the services side.

And so there was an accumulation of excess savings and part of that was also the pandemic stimulus that contributed to that. The other thing that contributed was that labor markets were resilient and so people were really experiencing, especially at the lower end, real wage increases. And so they were able to spend more than usual. And like Karen mentioned in the past couple of years, we have also seen a wealth effect because the stock market has increased in the past two years by around 25%. So all those factors have contributed to much healthier levels of consumption than we had seen in the past. And that means that you may have contractionary policy, but people have the liquidity to go out and spend. So in that sense that has muted a little bit. The fact the monetary policy or at least has made it take a little longer for that tightness in monetary policy to make its way through the economy. In terms of housing markets, there is another factor, this lock-in effect on the supply side, which doesn’t play in other economies.

Speaker 3:

And John was mentioning the way monetary policy may work in other economies. We have these 30 year mortgage rates, these long-term mortgages that cause households to hold on to their existing homes and not put them in the market. That reduce the supply of housing and that has reduced our ability to bring down housing prices. So there are a couple of, I guess, unusual things that happened this time around that probably made monetary policy to work its way through the economy in a somewhat different way from past episodes. But overall, we know it has been effective. We have seen the restrictiveness. I would say we have moved since we started our cuts since September to a more moderate level of restrictiveness, but certainly it has been restrictive throughout this time.

Ayşegül Şahin:

Thank you. Professor Dine, same question, but could you also talk a little bit about excess savings and how you weave their role in the transmission mechanism? Thank you.

Karen Dynan:

Okay, so the excess saving has been important I believe. But I do feel like one of my frustrations both as a person who follows households so closely but also as a person who thinks a lot about monetary policy is that we just haven’t had a great grasp of how much excess saving is out there. And there’s been good work from the San Francisco Fed, from the Board, on this topic. It’s not only the amount of excess saving, which when I’ve tried to do my own calculations are extremely sensitive to the assumptions you feed in, it is the distribution. And we just don’t have a great grasp on all of that. But I would say when I look at the evidence collectively, it seems like the fact that we, I mean there was a lot of stimulus from the pandemic and a lot of it didn’t get spent in 2020 because people were home avoiding the pandemic and then the economy was hitting capacity constraints in 2021 and 2022, which I think also suppressed consumption.

So I think there still is a bunch of excess saving out there. If I can just say on the monetary policy transmission mechanism, I think the big issue is the one that Governor Kugler flagged last, which is the fixed rate mortgages. And I just want to put a little more nuance, three levels of nuance on the fixed rate mortgage point. I do think that has been an important obstacle to higher rates getting through to the economy. I guess the first thing I would say is past is not prologue, we had an unusual alignment of the stars in that we had very low rates and everybody refinanced into these low-rate mortgages and now they’re kind of stuck in these low-rate mortgages. And so they haven’t, which is bad for the housing market, but it’s been good for the fact they haven’t been hit by the higher rates in that way.

But the next time this happens, it’s not clear we will have all these people in very low rate mortgages. So we shouldn’t read too much into this episode. I guess the other thing I would just flag is there are really interesting distributional consequences to think about. This is not so much a macro story, but I feel like when we think about people being insulated from monetary policy shocks and we’re talking about these fixed rate mortgages, we’re talking about homeowners, the more affluent part of the population and the people that have been hit have been the people who are dealing with variable rate consumer loans. So it tends to be people in the lower part of the income distribution. In the business world, it tends to be the small businesses who rely on variable rate loans who’ve been hit. So there have been kind of some very interesting distributional things related to this issue. So I’ll leave it there.

Ayşegül Şahin:

Thank you. Professor Taylor, do you think these changes are only specific to this episode or should we think of these differences representing structural changes going forward for monetary policy implementation? What’s your view on that?

John Taylor:

My view is really old fashioned in a sense is why can’t we have a policy rule? A strategy? Why can’t we do that?

Mary Daly:

I’m shocked that you think that.

John Taylor:

They’re all shocked.

Ayşegül Şahin:

But wouldn’t the rule change when we have a lot of luck in terms of mortgages? Wouldn’t the rule change over time? Is it the time wearing rule or?

John Taylor:

The rules shouldn’t change. The rule is good. Why are we talking about rules? I don’t know. I think the thing is we have to think about policy as a rule, as a strategy, as a mechanism. And it’s not the same for every country, that’s for sure. Different countries are different, but the U.S. has sort of, has a model out there. It’s worked pretty well when on it, worked pretty well. We’re off of it, don’t work so well. So I think if you look at the experience of the last whatever you say, 10 years or eight years, you see this. And so I think that’s what I would stress.

Mary C. Daly:

You want me to? Okay, so let me start where John, you finish. So I’m not, just in case anybody wants to write this down, do not write it down. I am not saying that we should just go to a simple rule for monetary policymaking, but I am going to say that it has been remarkable how well monetary policy adjustment has worked in this cycle. We had a once in a hundred-year pandemic, we had a significant supply shock, we had demand that was far outpacing supply and there was a tremendous number of concerns that the monetary policy transmission mechanism was just going to be cloudy and not working as well as it had historically, but it actually has worked. And so I take the point about the various things that could get in the way, but think about monetary policy transmission as dividing it into two parts.

The first part is how quickly does fed intentions for guidance policy decisions, how quickly does that get into financial markets? And then the second part is how quickly do financial market changes in interest rates go through the economy. The first part was remarkably fast. If you think about back to November 2022 and all we said was that we were going to begin tapering asset purchases faster than we had said, faster than we thought. The mortgage interest rate went up immediately and within two months, refinancing all but stopped. And then by March of ‘23 when we started our interest rate campaign, our hiking campaign, the activity in housing had really slowed to a crawl. Now people didn’t, they were locked into those long-term fixed mortgages, but it just simply stopped and the housing market started slowing immediately–the housing—so the prices didn’t fall in most neighborhoods, although they did in Boise, Idaho, which was the poster child for the excessive growth in housing prices.

So that was really kind of a remarkable thing. But the economy’s complex, there was a lot of things that had to be worked through. We had to wait for supply chains to recover. And then the remarkable thing about the U.S. economy that I’m still, there’s a lot of people, all us are researchers and there’s probably graduate students in there, what we don’t really know is what are the distributional aspects of monetary policy transmission in these worlds where you’ve get these differences in whose interest rate sensitive, who isn’t? I don’t know that the average characterization is any longer going to really be as helpful as it once was. That’s something to study. I also think it’s useful to know what does the next 10 years look like, not just the past 10 years because as Karen said, the past isn’t prologue and we really have to rethink some of the basic questions that we felt, might’ve felt were answered in the great moderation. And maybe they’re not so well answered in the new world order that we face. I don’t actually know, I don’t have a crystal ball. But those are the types of things we really need academic research to help us with as we parse through. So that’s how I think of it. I actually think it’s been both remarkable that monetary policy worked as well as it did given the size of the shocks. But I also think there’s a lot more for us to learn as we navigate through the next 10 years or more.

Ayşegül Şahin:

Thank you. I want to follow up on the policy rules. There are a lot of changes happening in the U.S. economy. One is obviously demographic change, the other is the slope of the Phillips Curve. It varies from paper to paper, measure to measure. There are a lot of things that are affecting the economy. Plus we have seen that supply shocks can actually be pretty big. So in light of all these changes, how should think about policy rules and if a rule is time varying, it’s not a rule anymore as Professor Taylor just mentioned. So how should we think about this? Let me start with Professor Taylor on this and then ask President Daly and move this way. Thank you.

John Taylor:

Me?

Mary C. Daly:

When we talk about rules, we have to start with you John.

John Taylor:

You don’t have to.

Mary C. Daly:

I think it’s a rule.

Karen Dynan:

A new rule—A Daly Rule.

(Crosstalk – laughter)

John Taylor:

Rules have been around a long-time, way before me. Milton Friedman is a rule guy. So we’ve learned a lot about rules I think from experience and what different countries do. Don’t forget different countries. But I think that the message is keep it simple. It doesn’t have to be as complicated as you’re hearing it here. It could be you raise the interest rate when the inflation rate gets too high, you lower the interest rate when it gets too low. You look at the unemployment rate or some other measure of the state of the economy, you have a goal for the long-term interest rate and it’s pretty simple. And so that’s the idea is to keep it simple and work on it. And I think the Fed has made huge progress in keeping it simple and making it at least in their everyday operations.

So I think there’s a lot to be said for focusing on – that’s not to be as simple as so-called Taylor rule, but it could be simple like that. Also, it’s not just the U.S it’s other countries, it’s Europe, it is UK, it’s even Japan. We would have to work a little bit on some of the other countries. But I think that the more we are able to do that, the more the Fed is able to be the leading way on that, the better off we’ll be. So that’s what I would focus on is what kind of rule or strategy should you have? It doesn’t have to be simple, it doesn’t have to be perfect, but it could be there.

Ayşegül Şahin:

President Daly. Do you think structural changes affect the way you think about these rules when you discuss policy?

Mary C. Daly:

They don’t affect how I think about the rules, but I should share how I think about the rules in the first place perhaps, which is I think of them as a helpful benchmark. They take the big aggregates in the macro economy, the simple rules or you can have an inertial rule, but you can want to smooth out volatility, interest rate, volatility. But you can just have these things that everybody understands and you have answers from them and yet the world confronts you with things that don’t fit into those times. But if we try to think about making the rule ever more complicated, we are likely to get caught as a prisoner in our own past where we put the things in that just happened, but then we don’t see the things that are in front of us. And so one of the reasons I use the rules as a benchmark is because they’re a starting point and then you ask yourselves through lots of interrogation, this is why we talk about the slope of the Phillips curve and the Beveridge curve of where we are, is monetary policy really as tight as we think?

Because ultimately it gives us the framing and the discipline to have a rigorous debate about what we’re missing. And that’s where I think’s discretion comes in. But you don’t want to make it so complicated that you’re tied up in the past. I do think that’s a danger. The other thing I’ll say about structural, just to make sure I’m answering your actual posed question is this, that I have now worked in the Fed since 1996. What I heard was that the roaring ‘90s and all the people who came and productivity and all the people came into the labor force fundamentally changed everything we knew about the economy structurally and we couldn’t use our models. And then we got into the 2000s and they said the great moderation has, is blown up our models. And then the last decade, the longest expansion in our history, the Phillips curve was dead.

Lots of other things were dead. Our models, our hands were tied, we didn’t know what we were doing and ultimately we couldn’t see, it was dark. And ultimately none of that turns out to be true. What’s true is that the economy is dynamic, it evolves. You cannot use the same exact toolkit or playbook, rather playbook the next time that you used the pastime. But you definitely can be informed by those. And so I’d still keep your econ-101 textbook and just update it with some new boxes that talk about how the new world actually lives in the framing that is the simple one that we’ve been taught. And that doesn’t mean I’m old fashioned, it just means I do think there’s some underlying foundation for us.

Ayşegül Şahin:

I want to repeat the same question to Professor Dynan, but if you could, can you please focus on the broad based and inclusive employment target and how this interacts with simple rules? Thank you.

Karen Dynan:

Sure. And I just want to start by saying I love the rule. I couldn’t teach macro without the rule. I mean the example I always use is financial crisis and we had this terrible recession, and you’d cut rates to close to zero and you can look at the rule or the rules, cause you’ll look at a variety of specifications.

Mary C. Daly:

Absolutely.

Karen Dynan:

You can see very clearly rates needed to come down several more percentage points, which is just telling you we need unconventional monetary policy. So I always show that to my students. So I’ll say that said, I think in the last couple of years we’ve seen some real examples that show the limitations of rules. I think this isn’t a rule with the unemployment rate, but if you think of, I’ve seen people talk about the growth in the economy. You mentioned how strongly the economy had grown and people will say, well growth in 2024 was almost a percentage point higher than what the Fed thought it was going to be a year ago, how the heck can they think about lowering rates?

And in my view, I think that strong growth is explained by positive supply shocks, most importantly the strength and demand and supply coming from immigration. But it’s just an example of a case where you wouldn’t want to just stick to a mechanical relationship. And I think the other example of course is a supply shock, which is supply shock, if you think it’s transitory, I’ll use that word, I assume some of the other panelists won’t.

Mary C. Daly:

We’re getting a little bit uncomfortable.

(Crosstalk – laughter)

Karen Dynan:

If you think it’s transitory and you think there’s a case for looking through it, that’s not something you get. That’s not in the rule. I mean that’s, we’re going to normally stick to the rule, but that’s going to be deviation from the rule.

Ayşegül Şahin:

Thank you. Let me follow up on the supply shock and rephrase the question and ask Governor Kugler. So rules and supply shocks versus demand shocks. What’s your view on this? Thank you.

Adriana Kugler:

So fully agree, helpful benchmark. We use a number of rules, not only your Taylor rule, adjusted Taylor rule, but many others as well. Obviously they incorporate good principles on monetary policies. So they’re very helpful that way. They usually move us, they give recommendations in the same direction. The direction is clear. What is different about these rules is that they give a wide set of different results. So where do you land, which rule do you pick? That’s where things get very difficult. They’re pros and cons to different rules and then you have very different recommendations in terms of what the size of the hike should be or what the size of the cut should be. So that creates some problem for us, but we certainly look at them very carefully. I think as we think about these rules, we are relying on two concepts which are totally theoretical, the NROU, the natural rate of unemployment.

And we’re considering the neutral rate, the neutral interest rate. So again, there you have to make a number of assumptions. So they’re good, they give us a good rule of thumb about in which direction we should be moving and what should be happening in terms of monetary policy. But where it becomes very tricky is in terms of deciding on the size of those cuts and the timing of those cuts. And I think you’re right that that’s given what we’ve lived through, through the pandemic first, a huge negative supply shock not incorporated into these rules unless you think that somehow the neutral rate or somehow the NROU are also being affected by that. The same thing with these other positive supply shocks, which have been critical in the past few years. Immigration as well as productivity growth, well you would need to incorporate them in some way. So I think the idea that these rules can change over time is something that we need to be mindful of.

Ayşegül Şahin:

Thank you. Let me move on to do a mandate. I left the Fed at the end of 2018. I’m not claiming causality, but I felt like dual mandate was met when I left. So since…

(Crosstalk – laughter)

Mary C. Daly:

They’re clapping for you.

Ayşegül Şahin:

Obviously since then, a lot of shocks hit the U.S. economy and possibly there are long-term changes that will never reverse. And I agree with the President Daly that every recession we say this time is different, we need new tools. And then as we analyze, we realize that actually there’s a playbook for recessions. There are a lot of things that are common across recessions and that helps us a lot. Even when there are differences, the similarities are always going to be there. So what have been and will likely be the challenges of meeting the dual mandate in the post pandemic period. Are we going to feel as comfortable as I was in 2018 going forward? And I’m going to start with Governor Kugler.

Adriana Kugler:

Yeah, so going back, I want to remind everybody that not every time we have met this dual mandate so easily, right? I can think about the great recession. I was at the time in the Department of Labor and certainly I remember that the unemployment rate was close to double digits for a period and pretty high for a prolonged period of time. So it’s not as easy as to say, well, we’ve met it in the past and why are we meeting it now? Or why are we facing challenges now? So if you remember, you had to bring down rates to close to zero at the time to meet that maximum employment side of the mandate at the time. I think right now we’re heading towards our 2% target. We’re not there yet. Just to be clear, we are at a good place still in terms of the resilience of the labor market, I would say the labor market has cooled and rebalanced we’re back to pre-pandemic and pre pandemic was a good place too.

So on that side we’re okay. We still are working towards getting to our 2%. And I would say something that has been critical during this time is not only our policy rate but our communications and keeping inflation expectations well anchored. That has happened this time around and that will continue to help us. We know that businesses, for example, there is very good work by the Richmond Fed showing that businesses make decisions based on their inflation expectations in terms of where to set prices, households on other end considering inflation expectations in terms of what wages to demand from their employers. So these all will continue to help us. And I think in that sense that’s different from previous episodes where we had very high inflation and those inflation expectations were not well anchored and there is a strong commitment by all of us at the FOMC to certainly get to the 2% target and the public knows that there is that commitment and that will continue to help us to achieve a continuous disinflation even in the housing market to be honest.

That’s already happening. There is some secondhand inflation that it’s working its way through the housing prices. There are delays because of the way yearlong leases work. So people have not been able to catch up on their increases in costs before, are still raising prices in terms of their rents. The way owners’ prices are imputed based on these rents kind of fuels a little bit the price of housing in a way that maybe doesn’t reflect the reality. So there are a few things like that, but I think as a whole, the challenges are not that different from what we’ve seen in the past.

Ayşegül Şahin:

Thank you. Professor Dynan. I want to ask you a similar question, but if you could, can you also talk about, even though my feeling is we are closer to the mandate, consumers are not feeling that. So why do you think this is the case?

Karen Dynan:

I mean, I think that’s an unanswered question, but actually I do think for the researchers in the audience, it does kind of suggest things that we should be looking at. I guess part of it is that the kind of macro story is not the story at the individual level, but I do think one of the less, we’ve kind of, I think many people kind of forgotten just how costly inflation is, and I think one of the lessons of the last few years is that first of all, inflation causes real hardship. And I’m kind of embarrassed as a teacher, a few years ago I really wasn’t even teaching much material on the cost of inflation, but it can create real hardship for people as real incomes go down. More than that, there’s good evidence out there. For example, my colleague at Harvard, Stephanie Stantcheva, that people, they just dislike inflation, they dislike higher prices, it’s causing a higher cognitive load.

They’re not thinking about the fact that inflation’s down to 2%. They’re thinking about the fact that prices are 25% or whatever it is, 20% higher than they were a few years ago. So I suspect that some of what we see in terms of people not thinking the economy is working right, is related to kind of just a lagged effect of inflation. I’ll also just say, and this is an area I think for research, is that a lot of times you hear people say, well, but wages grew really strongly over this period. They’re usually citing the average wage. And I don’t think we know as much as we need to know about whose wages kept up with inflation who did better. I mean, we know a little bit about that. We know in the retail sector wages rose faster than prices, but we just don’t really know about who came out ahead and who came out behind. And I think we’re going to need to know the answer to that to kind of fully answer this question as to why the people think the economy isn’t working or seem to think the economy isn’t working as well as it looks like it’s working from a macro perspective. I’m not going to answer the rest of your question. I feel like I’ve talked it off. I’m going to just defer to my colleagues on this.

Ayşegül Şahin:

Thank you. Professor Taylor. Can you talk a little bit about challenges of meeting the dual mandate and whether it’s going to be more challenging or the same, or again, going back to the rules, should we think about meeting the dual mandate as modifications in the rules? Thank you.

John Taylor:

Let me say this. I think that there’s a lot of progress can be made globally about rules, not just the United States, but other countries. And the US has changed a lot. We didn’t pay attention to rules. Now rules are published, discussed. So it is quite a bit of change. And we have the Bank of Canada, we have the Bank of Japan, we have the ECB all looking at rules, now that they’re not exactly the same but they got 2%, which is a pretty significant thing. And maybe Russia needs to come down a little bit. China needs to come down a little bit. But if we could have a global, if you like, policy rule of 2%, that’s not so bad and the Fed deviated from it quite a bit and that’s too bad. But I think at this point, that’s what I would suggest. You and you’re in the room here can help on this, can this study, it can thought of a different way. Other countries, you’ve got lots of countries here. So I think that’s the way to look at it is you look at what works, what doesn’t work. You look at variants, you look at have other kinds of rules, other kinds of strategies. And that’s really where you should be going. Thank you.

Ayşegül Şahin:

Thank you. President Daly. Again, challenges of meeting the dual mandate, but also how do we know we’re there? I know that there’s a very specific inflation target, but as a labor economist, how do you view the employment mandate? How do you know you’re there? What’s your feeling about full employment? How do you know we’re there?

Mary C. Daly:

So let me start with the dual mandate and any challenges we have meeting it. I don’t know that there are challenges, but we certainly need to know what the world’s going to look like. So one question I have when I think about meeting the dual mandate is what’s the neutral rate of interest? And there was so much work being done in the decade preceding the pandemic about the falling neutral rate of interest. And will it be stuck constantly at the ZLB, and we’re worried about inflation persistently below target, significantly below target and it’s really hard for us to push it up. So those were the challenges we faced. Now one wonders whether with the neutral rate of interest, potentially higher, and I’d like to see some reasons for that, the fundamental factors that were often cited there, productivity, growth and aging of the population don’t seem that much different, but how should we think about that?

The second is, are we going to be fighting inflation from above our target trying to pull it down like we had done for decades or are we going to be pushing inflation up to our target like we did for a decade? If you think about the U.S., people seem to think we’re going to be pulling it down, but if you go globally, there’s a significant amount of global slowing and inflation. In Europe, for instance, which was often energy and food-based is coming down quite a bit. So these are all challenges I think we have to think about as we meet the dual mandate. The question I almost always get asked is full employment, how do I know it and what would we see when we see it? And ultimately what we learned when inflation was 1.8 and we struggled to get it to two, is that we don’t know what the settling rate of the economy is.

We know what it looks like when we have too much unemployment. We really struggle to know when we have too little and I don’t think we have any sophistication in deciding when we should stop. And so unless we put it through the context of how that might create frothy conditions, which limit allocation efficiency, allocate of efficiency, but also push up inflation. So ultimately that’s why I think the dual mandate is the right one because you can get a balance in the economy where you have price stability and full employment. And ultimately people want both. They want not to get up every morning thinking about inflation and they want to know that if they went out and searched for a job, if they could get the skills and things to get there, they would get one. Can I say one more thing about the vibe session? Which is what it’s been called by people who are actually feeling it?

I think we’ve failed to study as economists enough. I mean I was trained in the world where sentiment people would put it in a macro model and they would decide it didn’t really add a lot. And so sentiment indices, we could more or less look at them but discount them. Everything was sufficiently parameterized with the variables we measured; we thought well. But this episode of high inflation has reminded us that the sentiment indices are pointing to something when people say they don’t like what’s happening, it’s pointing to something. One thing that I think isn’t in many of our macro models is just the time. Think of inflation as a toxic tax, a tax, you can make it toxic. I think people feel it’s toxic, but it’s eroding purchasing power and that’s accumulated for those families. And so then it takes a persistent amount of growth, a durable expansion to reclaim what they lost. And so it’s not only the cross-sectional distribution of how people are feeling, but it’s also that time component to it. And we just need more research on that. And it is one of the reasons in surveys, people say they hate inflation more than they dislike unemployment because they don’t have a safety net and they don’t really feel like it just kind of drips you to a point where now you’ve really far behind. And for many American families they feel far behind.

Adriana Kugler:

Thank you. So I want to 200-hander on that.

Mary C. Daly:

Do you have to explain what a two-hander is?

Adriana Kugler:

I think it’s okay. Everybody knows, right? So I just pick up on something that Karen and also Mary just said about kind of the feeling that people have about prices and inflation. I fully agree that this is mainly about the level of prices versus inflation and the fact that there’s that accumulation. So if you look at prices of milk, the prices of bread, the prices of eggs, right? Things that we consume all the time, what we go and buy on a weekly basis, those are the things that have experienced the most increases some 40%, 70% in some cases. And it’s the frequency with which you purchase as opposed to even the share of what they are in your consumption basket that really counts. So there’s very good research done by (inaudible) and others that points in this direction. The other thing I wanted to point out is about the distribution. When I was at the Department of Labor, and luckily at the Board people are doing this too is they’re looking at CPI, PCE indices using different consumption baskets. And what you see is that it’s a less educated minority communities, low-income workers that face the higher inflation. And I talked about this in my speech that I gave at Harvard back in September. So you do see that. By the same token wages and the Atlanta fed, the Atlanta wage tracker from the Fed in Atlanta has done a really good job. They actually showed that wages and real wages have gone up for those at the lower end of the distribution the most and they have gone up throughout the post pandemic period. So we do know we have information and that

Karen Dynan:

On average for those at the lower.

Adriana Kugler:

For those at the lower end, yes.

Karen Dynan:

That’s not everybody.

Adriana D. Kugler:

The lower cortile, the lowest quintal not so for those at the higher end until the last two years. But those groups have benefited the most in the past four years or so, which has been more of an increase than they’ve seen in decades actually. So we know that has happened, but the average person doesn’t necessarily think, okay, has my real wage increase relative to the prices. Real wages have increased and continue to increase. And that’s the good news about this.

Ayşegül Şahin:

Thank you. Let me follow up on something that President Daly mentioned After the great recession, we had a very slow and painful recovery and my feeling was the Fed was leaning into the employment part of the mandate, inflation was always coming lower, and then we had a run of in inflation and we started seeing a focus shifting to the inflation mandate. Do you think we should be recalibrating policy stance depending on which mandate we are missing more? Thank you. I’m going to start with President Daly.

Mary C. Daly:

I always keep both sides of the dual mandate. Those are symmetric goals in my judgment, they’re balanced. The practical truth was when there was an inflation runup, we had a, if you talk to firms and even workers, a frothy labor market, it was extremely tight, right? Individuals were hopping jobs at a regular basis, even to the point they didn’t want to, but they were just chasing an extra 50 cents and inflation was, it’s 7%. So you’re completing one goal and you’re missing tremendously another goal, so the way I would always characterize it is we don’t have any trouble on the full side of our mandate, but we are definitely missing the inflation side of our mandate. So the focus on raising the interest rate is going to be there. But then as we slid down on inflation and the labor market slowed and came into balance, now both of those are in the frame, but I wouldn’t say, and so we did recalibrate policy to adjust to the fact that we had a much lower inflation rate and a balanced labor market.

But I don’t think of it as rebalancing our goals or our focus as much as you have two goals, they’re supposed to be in balance, you know what those goals are and one and you’re missing pretty aggressively on and the other one you’re either getting it right or overachieving depending on who you talk to. For the people who got lots of jobs, they felt like we were doing just right. But from the labor market standpoint, I think we saw that wage inflation was pretty high. So I guess I think of it as recalibrating our policy to adjust to both goals as opposed to recalibrating our goals to adjust the economy.

Ayşegül Şahin:

Thank you. Professor Taylor, if we stick to rules, what would be the ideal measure of slack in the labor market, which will tell us that we are implementing the rule correctly, in your view?

John Taylor:

Well, there’s various things you could do, but the unemployment rate works pretty well and you have to modify it by country. You have to make adjustments, but I think that works pretty well as a measure of slack and that’s what most people are using. And so I think that works pretty well. I mean, the real question, this is a very important question, what you do internationally is Europe, China, Russia, Japan, Latin America. There’s lots of things that are different and I think we would improve things a lot. If we had a similar thing in it, unemployment would be one of them, but it would be one of the minor ones I would say.

Ayşegül Şahin:

Thank you. Professor Dynan, what’s your interpretation of the dual mandate and how do you know it’s met?

Karen Dynan:

How do you know it’s met? So I don’t think it’s easy. So in terms of my interpretation, I’m largely where President Daly is, which is both sides of it are very important. And I think in my own mind, you shouldn’t think of inflation, it is true when you raise rates to fight inflation that that’s going to slow the economy weaken labor markets. But I am old enough to remember the late seventies, early eighties. My own father was unemployed at that point and he suffered long-term unemployment, but that was a period when the Fed didn’t act fast enough to contain inflation. And what happened was we ended up with a lot of pain and hardship related to, I mean the deterioration in the labor market was much worse than it had to be because they didn’t jump on inflation fast enough. So I want to put that one out there, but I do think it is, I think it is not easy to kind of know where you are in terms of the dual mandate. I will say right now I do think the collection of evidence suggests that things have moved back into much better balance. And I would agree with the sentiment that the FOMC, many FOMC members have expressed that kind of a further deterioration in the labor market would be kind of unwelcome. It’s in a good state right now, but thank you more than that would be not a good thing.

Ayşegül Şahin:

I know I’m asking the same question, but everybody asked me as a labor economist, but full employment and obviously Governor Kugler is also a prominent labor economist. So let me ask her, what do you look at to know we reach full employment? Thank you.

Adriana Kugler:

So let me go back to this issue about the dual mandate and which one we pay more attention to or not. We certainly pay attention to both sides of the mandate. We understand that both inflation and unemployment can be very, very painful, especially for the most disadvantaged. So I definitely like Karen, pay attention to the distributional implications of both sides of the mandate. And I think we need to address those fully. What happens is that one of them becomes more salient at one point than another and they actually interact with each other. So as President Daly said, what we saw a few years ago was an extremely tight labor market, a very high inflation rate. We saw excess retirements and a withdrawal of prime-age workers from the labor force, mainly because it was very difficult to work and also take care of children and child responsibilities and responsibilities of other family members when the economy was not supplying those services.

So that created an extremely tight labor market, which in turn generated inflation. So naturally that’s where the FOMC went, right? They were paying attention to how to bring down inflation and by the same token, even wage inflation. So that happened. There was rebalancing, immigration, the return of many prime-age workers, but even historically, high levels of participation of prime-age workers happened that we haven’t seen ever before. All of that caused us to rebalance the labor market. And where we are now is in a labor market that is less tight than what we had pre-pandemic. So what do we look at? We look at, for example, right, obviously we look at the aggregate measures, unemployment is key, but we look at flows as well, right? Who’s going in? One thing that we have noticed this time around, for example, which is comforting, is that much of the reduction in demand that we have seen is coming from a reduction in hiring and not from an increase in layoffs.

So that’s a good bit of news that if the unemployment is going up, that has come mainly from reduced hiring. The job finding rate has gone down. And sure enough, in over the past year we are paying attention to the fact that more people are coming into unemployment because they have been laid off from permanently on a permanent basis. So we’re paying attention to that. The V-U ratio, as Mary said, has come down. You used to have two vacancies per unemployed worker, now it’s one to one, which is even lower than what we had pre-pandemic. The quits rate, which is a good measure of the ability to find other jobs, has gone down below pre-pandemic levels. The job vacancy rate has gone down. So all those things that have rebalance, that is where we are. We are at a stable point.

We don’t see, for example, this rapid increase in unemployment that we saw in previous periods, pre-recession. So we feel comfortable at this point that that’s increasing gradually, that it’s not spiking and spiraling up, but we are paying close attention to that balance continuing and the fact that supply and demand continue to rebalance. Now in the second half of ‘24 there was a slowdown of immigration. So that’s going to generate some changes also on the supply side. And as Karen mentioned, it could be and we are uncertain about that, but there could be changes moving forward in that slowdown continuing or possibly becoming more rapid. So that’s something we will be paying attention to as well.

Ayşegül Şahin:

Thank you. So we have been collecting a lot of questions and let me use one of the questions to ask a question that’s related to what we learned after this episode. So as you know, after the great recession, we introduced new tools and we learned a lot about how to deal with financial crisis. And also we developed models to be able to understand the economy better. This time we have been here a massive supply shock. So what did we learn from this episode both in terms of policymaking, academically, measurement, et cetera. Thank you. Where should I start? Karen?

Karen Dynan:

Well, I think what we learned is we have a lot to learn about supply shocks. I actually do think we learned that supply shocks, we thought supply shocks, particularly in a country like the United States. I think we were very focused on demand and we hadn’t experienced a major supply shock for so long that we just didn’t really, they just weren’t part of our thinking. And I think we were reminded that supply shocks, they bring hard trade-offs because you don’t have that nice combination of high unemployment and low inflation. And so it’s obvious what to do with monetary policy, which is one of the reasons why rules can be useful. But I do think we need to learn more about supply shocks and about the optimal monetary policy response to supply shocks. When are they going to be transitory? When you should be looking through them.

Because I do think going forward, and you asked before about kind of challenges going forward, we may be living in a world that is more prone to supply shock than the world that we had prior to the pandemic. I think between deglobalization, between more geopolitical tensions, the green transition, not so much for the United States, but for other countries where they have closed down their energy source, the more traditional energy sources, and they’re ramping up with greener forms of energy. And so they have this more fragile supply of energy, they’re going to be more prone to supply shocks. So I do think supply shocks are just a kind major thing that we need to be studying.

Ayşegül Şahin:

Thank you. President Daly?

Mary C. Daly:

Yeah, I’ll just add something there because it goes exactly to what Karen just said, that ultimately you just have to know that you can’t put supply shock in the model. You have to have underlying it what is underlying the supply shock. So in the moment it was easy to look at CPI numbers or PCE numbers and say it’s in used cars, it’s in this thing. And talk yourself out of a lot of reasons that might be persistent. But as I have, because it’s just a good public policy is stepped back and done a postmortem, you think, oh well it was a hundred year pandemic. It was affecting some countries much more than others. There were different methods controlling it. China studying supply chains, if China shuts a port because people can’t get there, it backlogs it for our factory. It’s just a domino effect. And we could have done more in that moment to think through that.

But because we have been historically taught that you just look through supply shocks, we didn’t. So I think we’ll have a new discipline. The question is how are we going to put some facts around that discipline? Because you could easily overcorrect and not look through any supply shocks. And that’s a recipe for a lot of volatility and damage to the economy. But I just think that more study, this is why I love coming to a research conference. There’s lots of things to study about what monetary policy should do, but also how should we unpack supply shocks, supply chains, and how should we think about that? And I agree with you the just the global reordering of things and the trade tensions that emerged over the last five, six years between China and the U.S., all of those things are going to mean that we’re rebalancing.

Ayşegül Şahin:

Professor Taylor has been talking a lot about international monetary policy. So what’s your view on the supply shocks related to global tensions? Thank you.

John Taylor:

Well, I think globally it’s a real advantage to have a single goal for inflation. 2%, 4%, 3%, 2%. Is that what it is? I hear a lot of 2% from this panel, which is nice, but why can’t it be the same? It is the same in other countries. And if we did that, it would go a long way to having some more stability. Now that’s not the only thing. There’s been a lot of mention of unemployment, a lot of mention of other things as well. Unemployment is harder to measure. And so we have to think about that as well. But I don’t know, a simple rule, a simple strategy makes a lot of sense to me. You have to worry about what the instrument is, is that the interest rate, is the money supply, it’s for sure. But it looks like the interest rate for the Fed. And I think that’s really where we should be going. So what is the interest rate? What is the goals? What is the strategy? What is good, what is bad? And have a good discussion about that. Maybe we could all participate in that. Thank you.

Ayşegül Şahin:

Governor Kugler?

Adriana Kugler:

Yeah, I fully agree that one thing that happened on the way up in terms of inflation was that these global disruptions were critical and they fed from country to country. So an increasing inflation in one place ended up affecting because of trade and integration of markets ended up feeding into the rest of the world. So that was true on the way down, on the other hand, it was driven mainly by idiosyncratic factors and differences in policies across countries. So that has been quite a contrast. So I would say on the way up, taking account certainly of these integration across countries is very key in terms of understanding the buildup of inflation and spiraling inflation. But supply shocks have been different across the world too, and on the way down. As I said in the U.S., and this happens when I talk to colleagues from other central banks, they say, how did you guys do it with productivity growth?

How did that happen to you and not to us? And you can see the difference in Europe, you can see the difference in Canada, even in terms of immigration and absorption of immigrants and helping us to cool the labor market and generate wage growth moderation that was necessary to cool services inflation. That has been different. So I think there’s a lot to learn about some things that were done well. And when you contrast, when you make those international comparisons, you realize that yes, we’re not at 2%, but we have landed at a better place than many would have thought and better than other countries have been able to do because some policy tools have been used properly in the right measure. And most importantly, as I mentioned before, I think the anchoring of inflation expectations has been very firm and has helped us to make progress on that end too. So that’s a positive, I think, experience that we can definitely take forward.

Ayşegül Şahin:

Thank you so much. Thanks also for submitting questions. I try to incorporate the questions as much as I can. And my panelists, Governor Kugler, Professor Dynan, Professor Taylor, and President Daly. Thank you so much.

Francisca Antman:

Thank you. Yes. And I want to thank Professor Shaheen as well for really leading a very insightful discussion. Yes. And thank you to all of you also for coming. It was really an amazing session. Thank you. And is being live streamed. So thank you everyone who is watching online.