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r220714a_FOMC

united states

Monetary Policy in a World of Conflicting Data

waller

Thank you, Mike, and thank you to the Global Interdependence Center for the invitation to speak to you today. Let me start at the place that all remarks about U.S. monetary policy should start, which is with the Federal Reserve's dual mandate of maximum employment and price stability. As I discuss below, we have a very strong labor market, with an unemployment rate that is below the median of policymakers' expected longer-run level, and high inflation that is far above our target. We are achieving our mandate when it comes to maximum employment, but we are far from achieving our goal of stable prices. Consequently, while any monetary policy decision has implications for achieving maximum employment, and I will address those implications in a moment, the FOMC is now, and must be, utterly focused on moving inflation down toward our 2 percent target. We must be focused on reducing inflation because, despite a lot of talk about recession lately, the evidence from the labor market indicates the economy is on track, while inflation continues to be far too high . It must be our focus because high inflation is the biggest challenge to sustaining our employment goal, and the greatest burden for individuals and families, especially lower- and moderate-income households that dedicate a larger share of their spending to necessities. Inflation has to be our focus, every meeting and every day, because the spending and pricing decisions people and businesses make every day depend on their expectations of future inflation, which in turn depend on whether they believe the Fed is sufficiently committed to its inflation target. So let me be clear: I am going to vote to set policy in a manner that will reduce inflation and achieve our price stability goal, and today I will explain why I don't see that progress conflicting with our maximum-employment goal. Let me start with my view of the labor market and inflation, then turn to the implications for monetary policy, and conclude with where I think the economy is headed. As many economists are discussing, recent economic data have created a puzzle. The labor market continues to be very strong, but the real economy appears to be faltering. How might gross domestic product (GDP) fall in the first half of 2022 while the economy created 2.7 million jobs in the same time period? Is the labor market not as strong as it appears or is the economy doing better than the data suggests? To assess the strength of the labor market, there are numerous indicators of its health, and sometimes they point in different directions. Today isn't one of those times. Based on every major labor market indicator, the labor market is very strong and, in historical terms, very tight. The timeliest evidence for this strength was the jobs report that came out last Friday for the month of June, which found that the economy created 372,000 jobs. Now, I will admit my vision isn't what it used to be, but with revisions to May and April, it is hard to see any slowing in the pace of monthly job creation since economy has created 2.7 million jobs. That isn't a picture of a weakening job market. The unemployment rate in June was steady at 3.6 percent. It is often said that this is "close to a half-century low" and that is true, but you really have to go back 69 years, to 1953, to find the unemployment rate more than a couple tenths of a point lower than it was in June. This is about as good a job market as any worker has ever seen. The June job report is consistent with other labor market indicators. Job vacancies--an indicator I have highlighted in past speeches--are unprecedentedly high, with nearly two jobs for every person looking, and that hasn't changed very much this year. Job postings, measured by the Labor Department for May and by Indeed for June, have fallen a bit in recent months but are still at historically high levels, consistent with a very tight labor market. As a share of the labor force, weekly initial claims for unemployment insurance are near record lows and have been fairly steady all year. Businesses continue to report that jobs are plentiful and small business owners say that jobs are very hard to fill. Looking more broadly across 24 labor market metrics summarized by the Federal Reserve Bank of Kansas City, we see that activity is above its pre-pandemic level, and the Atlanta Fed's labor market distributions spider chart shows that the vast majority of labor market indicators are about as tight or tighter than just before the pandemic. The broad range of data showing a very strong labor market indicate that this isn't a mismeasurement issue. Turning to GDP, there are signs of slowing in economic activity. The Commerce Department estimates that there was a modest contraction in real GDP for the first quarter of the year, and "nowcasting" projections of economic activity, such as the Atlanta Fed's GDPNow tracker, foresee a similar contraction in the second quarter. There is also softness in recent spending data, which has been widespread across consumer spending, business investment, housing, and government purchases, as well as some weaker indicators for the manufacturing sector and a deterioration in consumer sentiment, which by some measures are at historically low levels. Some argue that a recession has already started. But I don't see how that squares with the job creation data, the low unemployment rate, and overall strong labor market that I described earlier. In addition to the contrasting evidence in the labor market, there are several other reasons why I am very cautious about acting on the GDP estimates and on projections of an output slowdown. One is that while first quarter real GDP is now estimated to have shrunk by 1.6 percent, according to another estimate, real gross domestic income (GDI) increased by 1.8 percent. GDP and GDI are basically measuring the same activity in different ways, and in the past when such wide gaps in the two numbers have appeared initially, they tend to move toward each other when the data are finalized. We know that there were some unusual trade-related reasons for the low GDP number in the first quarter that are unlikely to be repeated, and revisions in both GDP and GDI could largely erase that contraction in output. And, the data that point to some slowing don't convince me that it will damage the labor market. Measures of manufacturing activity and indicators of future activity, such as the purchasing manager's index, have moderated but are still in expansionary territory. Rather than a recession, the softening data seem consistent with the pandemic- related transition underway since last year among consumers from spending on goods to spending on services. And we should expect that as policy tightening feeds through the economy it will dampen household and business spending decisions--that is the objective of our policy tightening. Past experience has shown that job creation and the unemployment rate are timely indicators of a recession, more timely than quarterly GDP. I will watch all the data carefully, but the factors I just cited, along with the evident strength across different measures of the labor market, leave me feeling fairly confident that the U.S. economy did not enter a recession in the first half of 2022 and that the economic expansion will continue. Now let's talk about inflation. Yesterday's report on the consumer price index (CPI) for June was a major league disappointment. On a twelve-month basis, total inflation stood at 9.1 percent, the highest in 40 years. Core, which came down slightly in the last couple months, has averaged over 6 percent this year, and is too high as well. No matter how you look at the data, inflation is far too high and my job is to move it down toward our 2 percent target. We know that supply shortages and bottlenecks, including the tight labor market, have contributed to the high inflation readings we are observing. We also know that the surge in demand during the pandemic that was driven by excess saving, significant fiscal stimulus, and accommodative monetary policy also has contributed to the high inflation we are now experiencing. There is some research estimating how much of this inflation came from supply problems and how much from high demand. The main point is that both played a large part in driving the inflation that we have seen over the past year. But the causes of inflation don't affect my approach to policy because in writing the FOMC's mandate, Congress did not say "Your goal is price stability unless inflation is caused by supply shocks, in which case you are off the hook." We want to reduce excessive inflation, whatever the source, in part because whether it comes from supply or demand, high inflation can push up longer-run inflation expectations and thus affect spending and pricing decisions in the near term. These decisions can then push up prices even more and make inflation harder to get under control. I pay attention to both surveys of the public's inflation expectations and measures of inflation expectations derived from trading of inflation-indexed securities. I prefer the latter market-based measures, which are down from recent peaks but still elevated. The Board staff combines various surveys and market-based measures in our Index of Common Inflation Expectations, which has moved up slightly in recent months after being flat for a long time. We need to avoid expectations rising so much that they become a factor that drives inflation higher. So, based on persistently high inflation and the very tight labor market that I have described, let's talk about the implications for monetary policy. Since March, the FOMC has raised the federal funds rate three times for a cumulative 150 basis points. This is the fastest pace of tightening in close to 30 years. At our last meeting, we raised the policy rate by 75 basis points, which is a large move by historical standards. That size increase was not an over-reaction to one data point on inflation--it was primarily the response to a sequence of excessively high inflation readings since the beginning of the year. It was appropriate given the lack of progress on inflation and clearly signals the FOMC's commitment to get inflation under control as soon as possible. The response of financial markets to the FOMC's policy actions and communications indicate to me that the Committee retains the credibility and the public confidence that is needed to make monetary policy effective. Longer-term interest rates have moved up to levels not far from those reflected in Committee members' estimates of the final destination for the federal funds rate in this tightening cycle, effectively implementing policy ahead of time. The average rate for a 30-year conforming fixed rate home mortgage has increased by more than two percentage points since the end of 2021. While there is some slowdown in home sales, lenders and borrowers are still doing business at these rates, which indicates that they believe the FOMC's policy intentions are credible, as broadly reflected in the interest rate paths in the Summary of Economic As I have said before, with inflation so high, there is a virtue in front-loading tightening so that policy moves as soon as is practical to a setting that restricts demand. Getting there sooner will bolster the public's confidence that we can get inflation down and it will preserve options for adjusting the pace of tightening later if needed. With this view, it should not be surprising that looking toward the FOMC's next meeting July 26-27, and with the CPI data in hand, I support another 75-basis point increase, bringing the target range for the federal funds rate to 2-1/4 to 2-1/2 percent before August. I judge that level is close to neutral, by which I mean a level that neither stimulates nor restricts demand, assuming that the economy is growing moderately (at its potential) and unemployment is roughly where it is now. However, my base case for July depends on incoming data. We have important data releases on retail sales and housing coming in before the July meeting. If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down. Based on what we know about inflation today, I expect that further increases in the target range will be needed to make monetary policy restrictive, but that will depend on economic data in the coming weeks and months. Between the end of July and the FOMC's September meeting, we will get two employment and CPI reports with data for July and August. I will be looking for signs that inflation has started its move down toward our 2 percent target on a sustained basis. I anticipate a decline in inflation will come as actual and anticipated hikes by the FOMC cool demand for products and labor, which will help demand and supply come into a better balance. The decline in the rate of inflation will also be assisted by continued improvement in goods supply bottlenecks, which is occurring in some sectors, and an increase in labor force participation, which is still significantly lower than it was before the pandemic. I hope these supply recoveries happen, but my expectations for policy don't rely on it. I expect rate increases will continue after July at a pace that is dependent on the incoming data. After the July meeting, further increases will be restricting demand. Looking further in the future, I will need to see how the tightening this year is affecting the economy and bringing inflation down toward our 2 percent target. Based on my forecast for the economy, I expect monetary policy to be restrictive until there has been a sustained reduction in core personal consumption expenditure (PCE) inflation, which excludes food and energy. Food and energy prices tend to be volatile, so focusing on core PCE inflation is a good guide to inflation pressures in the near and medium term. Importantly, as futures prices for commodities--food, energy, raw materials--have declined recently, I am expecting total PCE inflation to decline in coming months. But until I see a significant moderation in core prices, I support further rate hikes. In talking about where monetary policy is headed, it is helpful to get a fix on where it is right now. I mentioned the concept of a "neutral" interest rate, and the belief that the federal funds rate will be close to neutral after another 75-basis point increase at the end of this month. But some would argue that monetary policy is actually further away from neutral, based on the fact that current inflation is so much higher than the federal funds rate. In my view, that rests on a flawed idea of how monetary policy affects spending decisions. That's because spending decisions that require borrowing are based on an outlook that extends several years. This means taking into consideration longer-term real rates, which are tied to the expected path of policy and inflation over the next several years. As a result, I think that estimates of the real federal funds rate should be based on the expected policy rate one to one and a half years in the future. Based on trading in inflation-indexed Treasury securities of different maturities (compared to nominal Treasury securities), investors see federal funds rates above expected inflation starting about six months from now and steepening thereafter. Primary securities dealers surveyed by the New York Fed likewise estimate the real federal funds rate will be a positive 0.7 percent in mid-2023 and 1 percent by mid-2024. This gives me some confidence that tightening now anticipated by markets and expected by FOMC participants will be sufficient to reduce demand and inflation. Evolution of the Economy The FOMC's plan for getting inflation under control depends on a view of the economic outlook. As I have noted in past speeches, accurate economic forecasting is very hard, especially when unusual factors, like a war, and unprecedented factors, like a pandemic, buffet the global economy. FOMC participants record their individual outlooks that are presented every three months in the SEP. At our June meeting, the latest SEP shows that there is some expectation among participants for what is often referred to as a soft landing. With a policy path like what I described for this year and a bit more tightening next year, the median SEP respondent projected that total PCE inflation is expected to fall from its current elevated level today to 2.2 percent in the fourth quarter of 2024. At the same time, the unemployment rate is projected to rise to 3.7 percent at the end of this year and to 4.1 percent by the end of 2024, while GDP would grow below its long-run trend for the next two years. Of course, we can't be very certain about the path of the economy more than a few months in the future, but this medium-term view of a soft landing is very plausible. I say this based on the optimistic view I expressed earlier about the strength of the labor market and on my analysis of the relationship between job vacancies and the unemployment rate. In a recent speech, I noted that we have an historically high number of job vacancies compared to the number of unemployed people. Some people have argued that past experience indicates we cannot reduce this large number of vacancies without a big increase in the unemployment rate. But I have showed that past experience actually indicates that a reduction in vacancies can take place without a big loss of employment, and this is the kind of soft landing anticipated by FOMC participants. So, while some data measures suggest the chances of recession have increased, I believe it can be avoided. Uncertainty over how the pandemic could afflict the economy in the future, and global economic risks related to the war in Ukraine are considerable. These factors could make future policy decisions more difficult than they are today. However, for the reasons I have laid out, and considering the evidence on the state of the economy and the outlook, I don't find it difficult to reaffirm my strong conviction that continued policy tightening will be appropriate to move inflation down toward our 2 percent target. I think we need to move swiftly and decisively to get inflation falling in a sustained way, and then consider what further tightening will be needed to achieve our dual mandate

r220719a_FOMC

united states

Strengthening the CRA: A Conversation with Representatives of Native Communities

brainard

Good afternoon. I am happy to join you today for the National Native Coalition listening session to discuss the Community Reinvestment Act (CRA). I want to thank the National Congress of American Indians and its many tribal partners, as well as Casey Lozar and his team at the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis. I am pleased to be joined by Acting Comptroller of the Currency In May, the Federal Reserve, the OCC, and the FDIC issued a unified proposal to modernize the CRA regulations. This is a once-in-a-generation opportunity to strengthen the CRA to bring greater credit, investment, and banking services to the communities that have faced the greatest challenges. For the first time, the CRA will provide powerful incentives for banks to make investments in communities that do not have access to branches, such as in Native lands. As representatives of Native communities, you know all too well the challenges faced by Native communities in getting access to financial services--challenges that were made worse by the pandemic. I have visited with Native communities in South Dakota and Oklahoma and seen firsthand the resiliency and innovation of these communities in the face of numerous challenges. Even with the implementation of the CRA and other complementary laws, tribal economic inclusion is hindered by a lack of banking and credit access. As of the most recent 2019 data, over 16 percent of Native Americans are unbanked--three times higher than the rate for all U.S. households. part, the large share that is unbanked reflects low access to a bank branch. As of 2021, majority-Native American counties have an average of only two and a half bank branches--less than one-tenth the 26-branch overall average for all counties nationwide. Native small businesses often struggle to access capital: CRA small business and small farm lending per capita in majority-Native American census tracts is only about a quarter of that in majority-White-non-Hispanic tracts. As representatives of Native communities, you bring valuable insights to CRA reform because of your extensive knowledge of the investment and credit needs of Native communities, citizens, and businesses. The interagency CRA proposal was informed by consultation with Native representatives through roundtables, listening sessions, meetings, and comment letters. Indeed, we took much of your feedback from comment letters to develop the Native Land Areas sections of this proposal. As a result of this valuable feedback, the interagency CRA proposal would provide additional scope for bank loans, investments, and services in Native communities. Today, I want to focus on several aspects of the proposal that are beneficial for Native communities. First, the proposal provides greater incentives for community investments in Native Land Areas by providing enhanced clarity and specificity about what activities qualify for CRA credit. The proposed activities in Native Land Areas cover four specific place-based categories: revitalization; essential community facilities; essential community infrastructure; and disaster preparedness and climate resiliency. The proposal also incorporates a new definition of Native Land Areas based on the political status and government recognition of tribes and tribal areas that would enable the qualification of place-based activities in Native Land Areas. The proposal also provides clarity for Native community development financial Native CDFIs and MDIs are critical players in supporting credit access and investment in Native communities, the proposal provides additional certainty that activities with Treasury-certified CDFIs will qualify for CRA consideration and provides greater clarity to banks on receiving credit for activities with MDIs. The agencies also propose maintaining a publicly available illustrative list of eligible community development activities, which provides an opportunity to highlight qualifying activities particularly responsive to the needs of Native communities. In another important change, the proposal would result in greater CRA activity outside of where banks have branches and physical locations in order to address unmet needs in communities that have more limited access to bank branches. To this end, we also propose evaluating the impact and responsiveness of a bank's community development activities through a series of specific qualitative factors, with activities benefitting Native communities as one of those specific factors. In addition, now that many banks conduct significant lending and investments outside of their branch networks, it is important to ensure CRA accounts for these different business models. For example, we propose establishing retail lending assessment areas where a large bank has a concentration of either 100 mortgage loans or 250 small business loans for two years in a row. Finally, the proposal would continue to emphasize a bank's performance in the local communities where it maintains branches, regardless of their performance in other areas. In addition to assessing a large bank's retail lending and community development activities in each facility-based assessment area, we also propose to evaluate whether banks have branches in low-income and moderate-income census tracts. In particular, the agencies propose providing positive qualitative consideration if banks operate branches In closing, your feedback is key to ensuring that we get CRA reform right. I strongly encourage you to submit a comment letter by the August 5th deadline. We look forward to reading each comment letter and deeply appreciate your insight and participation with us through the rulemaking process. Thank you.

r220806a_FOMC

united states

Fighting Inflation in Challenging Times

bowman

Thanks to the Kansas Bankers Association for the invitation to share my perspective on the economy and bank regulation. It is always a pleasure to be here with you for this annual gathering. I am especially looking forward to hearing what is on your minds about supervision and regulation, how you are navigating current economic conditions, and your expectations going forward. I'll start with a recap of the decision from July's Federal Open Market Committee meeting and then move on to my thoughts about the current economic uncertainty and challenges that lie ahead. The number one challenge, of course, is inflation, which continues to be much too high, and a heavy burden for households and businesses. As I'm sure you all already know, the Federal Open Market Committee decided last week to raise the federal funds rate by 75 basis points, to a range of 2 1/4 to 2 1/2 percent. I will share my reasoning for supporting this increase and why I support continued increases until inflation is on a consistent path to significantly decline. I will then touch on the current federal regulatory climate and the Fed's agenda for supervision. Inflation continued to climb in June, reaching 9.1 percent as measured by the consumer price index. This is yet another concerningly high reading, and it set another 40-year record high despite the expectation of many forecasters that inflation had peaked earlier in the year. I have seen few, if any, concrete indications that support this expectation, and I will need to see unambiguous evidence of this decline before I incorporate an easing of inflation pressures into my outlook. Many of the underlying causes of excessive inflation are the same as they have been over the past year or so--supply chain issues, including those related to China's COVID containment policies, constrained housing supply, the ongoing conflict in Ukraine, fiscal stimulus, and limitations on domestic energy production. Regardless of the source of the inflationary pressure, the Federal Reserve has a duty to bring inflation down to our 2 percent target. This duty is mandated by Congress to carry out monetary policy that results in price stability--meaning low and stable inflation. We all understand why this is a critically important responsibility, especially in times of extreme inflation. Rising prices for food, housing, and energy negatively impact affordability for all Americans, but especially those with low or moderate incomes. For those workers who drive long distances to get to work, high inflation is especially concerning, requiring some to make tradeoffs between feeding their families and buying fuel to fill gas tanks. Some workers have seen their wages grow significantly over the past two years, but most have seen any gains in wages far outpaced by higher prices. Therefore, in my mind, it is absolutely critical that we continue to use our monetary policy tools until we are successful in returning inflation to our 2 percent goal. Businesses are also suffering from elevated inflation through rising and volatile prices for inputs and the need to price their own goods and services to cover costs without losing customers. This dynamic is evident in agriculture and what we are hearing directly from farmers and ranchers, who are dealing with added weather challenges and on-going drought. Prices for commodities have declined lately but are still at historically high levels. In contrast, prices for fertilizer and many crop inputs continue to rise. In some areas, high input costs and drought conditions are contributing to record early season cattle auction sales, as many ranchers choose to sell herds early to limit further outlays for input expenses. I see a significant risk of high inflation into next year for necessities including food, housing, fuel, and vehicles. Rents have grown dramatically, and while home sales have slowed, the continued increasing price of single-family homes indicates to me that rents won't decline anytime in the near future. Recently, gasoline prices have moderated but are still roughly 80 percent higher than pre-pandemic levels due to constrained domestic supply and the disruption of world markets. And I see continued inflation risk from motor vehicle prices, as auto manufacturers struggle with supply chain problems that haven't improved significantly. Demand for cars continues to exceed supply, and retail used car prices are still very high, about 50 percent more than before the pandemic. The supply problems pushing up inflation seem likely to persist. Indications are that the conflict in Ukraine will continue, and that the effects of shipping disruptions of agriculture products and limits on energy supplies from Russia will continue to be a significant problem. Even with the recent agreement intended to facilitate Ukrainian grain exports, it is unclear whether supply pressures on global markets will ease as a result. An announced reduction in Russian natural gas supplies to Western Europe has driven European prices even higher, causing ripple effects on world energy markets and raising concerns about shortages this winter. China has eased some of its most stringent COVID containment measures but recently revived travel restrictions in some areas, and its approach to the pandemic remains an upside risk for inflation. Despite a slowdown in sales of new and existing homes, inventories of homes for sale and rental vacancies remain low, supporting ongoing increases in housing costs. On the other side of our dual mandate, maximum employment, we continue to see a tight labor market, though there are some emerging signs that would support expectations of loosening. Yesterday's job report showed continued significant growth in hiring with the unemployment rate finally returning to the pre-pandemic level of 3.5 percent. As I am sure you all know, the job market in Kansas is even stronger, with an unemployment rate of 2.4 percent in June. In our state, finding workers is a bigger problem in most communities than finding a job. One aspect of the job market that has not recovered is labor force participation. Based on the pre-pandemic trend, there are nearly four million people who are still sitting out of a strong labor market. In contrast to this labor market strength in Kansas and nationwide, output growth has slowed this year. Real gross domestic product, GDP, edged lower in the second quarter, following a larger decline in the first quarter. My base case is for a pickup in growth during the second half of this year and for moderate growth in 2023. As we learned during the summer and fall of 2021, both GDP and jobs numbers are subject to significant revision, both in subsequent months and then again the next year. From my perspective, had we known at the time about the eventual large upward revisions in last year's employment data, we likely would have significantly accelerated our monetary policy actions. Going forward, we have to consider the possibility of these kinds of revisions when making real-time judgments as policymakers, which includes looking at other kinds of indicators instead of relying too heavily on the data. Taking all of that on board, while the data on economic activity are indeed lower and the view is murky, the evidence on inflation is absolutely clear, which brings me to the implications for monetary policy. Based on current economic conditions and the outlook I just described, I supported the FOMC's decision last week to raise the federal funds rate another 75 basis points. I also support the Committee's view that "ongoing increases" would be appropriate at coming meetings. My view is that similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way. On the subject of forward guidance, I am pleased to see that following the July meeting, the FOMC ended the practice of providing specific forward guidance in our post-meeting communications. I believe that the overly specific forward guidance implemented at the December 2020 FOMC meeting requiring "substantial further progress" unnecessarily limited the Committee's actions in beginning the removal of accommodation later in 2021. In my view, that, combined with data revisions that were directly relevant to our decision making, led to a delay in taking action to address rising inflation. It is helpful that the FOMC provided clear direction earlier this year that it was prepared to act quickly to tighten monetary policy. Since we have now taken actions to raise rates and finally reduce the Fed's balance sheet, we are following through on that commitment. Looking ahead, the FOMC will be getting two months of data on inflation and another month on employment before our next meeting in September, and while I expect that ongoing rate increases will be appropriate, given the uncertainty in how those data and conditions will evolve, I will allow that information to guide my judgment on how big the increases will need to be. I do expect that the labor market will remain strong as we continue to increase interest rates and allow the balance sheet to run off, but there is a risk that our actions will slow job gains, or even reduce employment. Growth has softened, and perhaps this is an indication that our actions to tighten monetary policy are having the desired effect, with the ultimate goal of bringing demand and supply into greater balance. When considering the risks to the labor market, these risks must be viewed in the context of its current strength and with the understanding that our primary challenge is to get inflation under control. In fact, the larger threat to the strong labor market is excessive inflation, which if allowed to continue could lead to a further economic softening, risking a prolonged period of economic weakness coupled with high inflation, like we experienced in the 1970s. In any case, we must fulfill our commitment to lowering inflation, and I will remain steadfastly focused on this task. With my outlook out of the way, let me turn to another of my responsibilities at the Fed, which is bank regulation and supervision. I am sure that we will have the opportunity to discuss many issues of interest to you during our discussion, but I'd like to mention a pending rulemaking that would update the Community Reinvestment Act. I understand that the draft rule was intended to provide greater clarity to banks regarding community development activities and their consideration for CRA. While I am a strong supporter of the fundamentals behind CRA, and I support community development activities, I am concerned that the proposal does not adequately account for the costs and benefits of certain provisions, and that no attempt has even been made to either ensure that or to analyze whether the benefits exceed the costs, which is a fundamental element of effective regulation. The comment period for the proposal ended on August 5, and I will repeat what I have said in the past: if this proposal affects you or your business, I hope that you made your voice heard by submitting a comment to the more than 600- page proposal within the short 90-day comment period. Public comments really do matter when considering the content of proposed rulemakings. Of course, my comments about the benefits of public participation in rulemaking apply beyond the CRA proposal, and there are other regulatory topics on the horizon that would benefit from robust engagement. One that comes to mind is the regulatory framework for analyzing bank mergers. Earlier this year, the Justice Department requested comment on whether to revise their 1995 Bank Merger Competitive Review guidelines, seeking input on a wide range of issues. The FDIC also issued a request for information on the Bank Merger Act framework. I expect this review will be a focus across the banking agencies, and I will be very interested to see how the framework for small and regional banks is affected by any proposed change. I would be concerned about any changes that would result in making mergers among these institutions more difficult or would not address some of the longstanding issues with the existing framework. Among those are that the framework doesn't account for new technologies or overwhelming competition posed by credit unions, internet based financial services, and non-bank financial companies. Another concern is that overly strict criteria for mergers could have the unintended consequence of depriving consumers in some areas of access to any banking services. "Banking deserts" in rural and underserved areas are a real problem and regulators should guard against this outcome when proposing or evaluating rules. I should also briefly mention three other regulatory topics of interest to all banks, including those here today. First, the Fed's LIBOR proposal is currently out for comment on a short timeline. That proposal implements the recently passed LIBOR Act by providing default rules for certain contracts that use the soon to be discontinued reference rate. Second, comments are currently under review for the third-party risk management guidance jointly proposed by the Fed with the other banking agencies. Banks and third parties will benefit from clear guidance that helps banks navigate the challenging issues and risks raised by third party engagement. Finally, another area that could benefit from more regulatory clarity is digital assets, including stablecoins and crypto assets. Some banks are considering expanding into a range of crypto activities, including custody, lending backed by crypto collateral, and facilitating the purchase and sale of these assets for their customers. In the absence of clear guidance, banks should consult with their primary regulator and exercise caution when engaging with customers in these types of activities. I will conclude with a brief comment on supervision. While the trend of returning to on-site bank examination is continuing, progress has been somewhat slow. This may be driven in part by the varied pace of employees returning to the office. That said, the Fed intends to return to some form of on-site supervision. We find substantial value in those in-person interactions during bank examinations. In closing, thank you again for the opportunity to speak to you today. I look forward to hearing how high inflation is affecting you and your communities and your thoughts on the regulatory agenda.

r220817a_FOMC

united states

Working Women in the Pandemic Era

bowman

It's a pleasure to be with you today to talk about a subject that I experience directly--women's labor force participation. I come to this issue with a similar perspective to this Commission, being from a heavily rural state and a small farming and ranching community deep in the Flint Hills of Kansas. But I also have roots here in Arkansas, my husband's family is from Hardy, and my father's mother was from Little Rock. It's really nice to be back in an area where I spent a lot of time growing up. My husband and I returned home to Kansas with our two children under three in late 2009, just as the impacts of the last financial crisis were making their way to rural areas. At the time, I was a community banker, which means I was also a very active member of the community. As I am sure many of you did then, I saw firsthand the economic impacts of the recession and the increased drug and opioid use that devastated many rural communities across the Midwest. At that time, many in the community received benefits from well-intended programs created to provide assistance, which often made it very difficult for small employers to find employees. This was often because, as I learned when trying to hire employees at our local chamber of commerce, the benefit from taking a job was much less than the benefit one could receive from the government at that time while not working. This is one major similarity between the current experience and the last recession, except that in this episode, the benefits many received were far in excess of what they could earn from working. So much so that the benefits provided to a large number of Americans resulted in a significant increase in savings, which is only recently beginning to decline and likely leading many who had not yet decided to re-enter the workforce to find work. These labor supply problems, as I will explain, are a large part of women's experience in the workforce since the pandemic, and the lesson from this and other recessions is that policymakers need to carefully weigh all of the consequences of their decisions. It is fair to say that the majority of the economic conditions we are experiencing today, like inflation, are different from those of the last financial crisis. But as I just noted, there are some similarities in the impacts on the labor force. Turning to the subject of my remarks today, I will discuss the role of women in the U.S. economy, focusing on the period since the onset of COVID-19. You may already know that women suffered disproportionately more job losses than men during the pandemic. This was the opposite of what happened in past recessions, when men lost jobs at a higher rate than women. The difference this time has led some to call the 2020 downturn a "she-cession." Most of the differences between how men and women fared in the labor market during that time had reversed by 2021, but their different experiences highlight how participation by men and women can sometimes be driven by different forces. The backdrop for recent events is the long history, starting after World War II, of women gradually entering the labor market. Of course, women have always significantly contributed to and played a large role in the U.S. economy, but initially in ways that don't show up in most government statistics. The rise of industrialization and the shift away from an agrarian economy provided opportunities for men to work outside the home and women took on more responsibility for cooking, sewing, child-rearing and other domestic tasks. We heard an echo of that history during the pandemic, because when schools closed and other childcare was disrupted, women assumed the majority of those caregiving responsibilities, which led many to quit their jobs and drop out of the labor force. This magnified the effect by eliminating jobs in childcare resulting in even more unemployment. But that wasn't the only reason why women were impacted during this episode. Let me start with the big picture on the differences between men and women in the labor market. Before 1950, few women worked outside the home and the majority of those who did were unmarried. From 1950 to 1970, more women entered the workforce, but many did not plan to work for the long term, and their investment in education and training was often limited. By the mid-1970s, barriers that limited opportunities for women in many workplaces began to fall, and by 1990 the education gap between men and women narrowed significantly. Women's participation steadily increased from there until the gains leveled off in the 1990s, but then rose again from 2015 to 2020, just before the pandemic. The narrowing of educational attainment for men and women had a lot to do with the narrowing of participation rates over the decades, and today women are more likely than men to hold a bachelor's degree. Even so, before the pandemic, overall participation remained lower for women than men regardless of education level. The response to the COVID-19 pandemic caused the most abrupt decline in employment in the history of this nation. The lockdowns and other government restrictions on businesses severely limited work, education, and travel. In February 2020, over 60 percent of working-age people had a job or were looking for work, but by April it was closer to half that amount. The pandemic hit all sectors of the economy, but the toll was especially heavy on in-person, close-contact service industries--restaurants, hotels, airline travel, and retail businesses other than big box stores, grocery stores and pharmacies. These in-person service-industry jobs were considered more conducive to spreading COVID-19, they were more affected by government-mandated shutdowns and social distancing, and teleworking was generally not possible. Unlike any previous recession, the downturn in employment fell more heavily on women than men. The unemployment rates for men and women were essentially the same before the pandemic but ended up much higher for women. That was very different from past recessions. For example, after the recession following the housing crisis, unemployment for prime working age men rose to 11 percent, compared to only 9 percent for prime age women. The women's labor force participation rate is another way to measure their presence in the workforce. Women have made significant progress in closing the gap with men since the 1960s, including in the five years before the pandemic, but that gap reopened after the onset of COVID-19. The number of both prime working age men and women in the labor force plunged, but the drop was half a million larger for women. From what we know now, there appear to be two main reasons why the pandemic downturn affected women more than men. First, even after the dramatic employment gains over the past 50 years, women are still most often the primary caregivers to children and other family members. They shouldered most of the childcare burden from the COVID school closures. Second, a higher proportion of women worked in and continue to be employed in positions in the high-contact service sectors that were hit hardest by the pandemic. Caregiving burdens in the United States have always fallen more heavily on women. In the 20 years before the pandemic, roughly one-fourth of prime-age women with children didn't participate in the workforce. An even larger share of women with children under five were primarily engaged in childcare. Many women with children tend to cycle in and out of employment based on their family's childcare demands. Women are significantly affected by the summer childcare burdens of families with children. Each year between May and July, when schools close for the summer, the employment-to-population ratio for prime age women declines by more than a percentage point and then rebounds when schools reopen in the fall. That difference is one-third of the total drop that prime-age women experienced following a very bad recession, the one following the housing crisis. Today, working women still carry out most childcare responsibilities. One study conducted before the pandemic found that when both parents work, women spend 50 percent more time on childcare than men. And when the pandemic closed many schools, it was largely women who stayed home. Women with children saw their labor force participation rate and employment-to-population ratio fall more than for women without children, while men were much less affected regardless of whether they had children. According to one Federal Reserve study, increased caregiving burdens for mothers with school aged children accounted for about three-fourths of the decline in women in the labor force from February 2020 to August 2021 but only about one-third of the decline for fathers. Even after most children returned to in-person schooling, caregiving continues to weigh on female participation in the labor force, likely because of increased care for elderly or ill family members. The other major factor affecting women during the pandemic was the larger number of female employees in high-contact service-sector jobs, where demand dropped sharply during the pandemic and the government-imposed restrictions in response to During past recessions, women experienced fewer job losses because service- sector jobs were more stable in downturns. Historically, goods-producing industries were harder hit, and men, who tended to hold these roles, were more likely to lose their jobs. But during the pandemic, it was service jobs that were more likely to be lost. Before the pandemic, more than 75 percent of these workers were women. Between February and April 2020, service sector employment fell 40 percent. Job losses in other industries with greater proportions of male workers, like manufacturing, were much smaller. We have also seen recovery in service-sector jobs lag behind other sectors. Employment in industries that tend to have larger shares of female workers, such as leisure and hospitality, education, and health services, is still below pre-pandemic levels. The losses for women are even larger when considering how fast these industries were growing before the pandemic. The shift to remote work may have been a mitigating factor for employment for women without college degrees. Overall, workers without college degrees were hit particularly hard by the pandemic recession because remote work was much more common for those with a degree. However, women without degrees were affected less than men, probably because the jobs they held were more likely to be able to be performed remotely than those of men without college degrees. We have seen a substantial recovery in the labor market for both genders since the worst of the pandemic. By the end of 2020, unemployment rates had equalized, and the gap between gender participation rates had returned to pre-pandemic levels in 2021. However, because that gap had been narrowing in the five years prior to the onset of COVID, we can assume that the participation gap would have continued to decrease over that time. So, based on what we know about the history and recent experience of women in the labor market, what does the future hold for working women? On the demand side, the labor market continues to be strong and there are abundant job opportunities for workers of all education and skill levels. With about four million fewer people participating in the workforce today, there are still plenty of jobs available even if we see the number of job openings reduced. We are also seeing a larger number of women graduating from college than men, a development that is likely to help insulate women from job losses in future recessions. One complication is that the future of labor supply is uncertain, and it is difficult to predict how labor force participation will evolve. Factors like generational aging were already weighing on labor supply before the pandemic, and we saw millions of workers accelerate retirement during the pandemic, effectively retiring early. Even the strong labor market has not yet lured many of these early retirees back, and some believe that as time passes it becomes less likely that they will return. Over time, those who chose to leave the workforce early will move into a normal retirement age. We really don't know if gender will be a factor here as this is the first generation to retire that had large numbers of women in the workforce, but workforce aging is an important consideration when it comes to labor supply. We also don't know how the influence of inflation will affect decision making about returning to the workforce, but some may feel compelled to return to work. Another consideration is caregiving demands and how those responsibilities will be shared within households. While I hope that we never see a public health emergency like the one we've just been through, I hope that if we do, we can avoid the governmental decisions to intentionally disrupt foundational education and the unnecessary forced isolation of children. These policies have left a significant impact on this generation of children, on families and their decision making about many things including participation in the labor force. One ongoing labor supply issue relates to the lingering effects of COVID that can interfere with the ability to work or impose additional caregiving needs for family members. By one account, nearly a fifth of adults who contracted COVID reported ongoing symptoms of "long COVID," affecting significantly more women than men. At the same time, the number of working-age people with disabilities has increased significantly. While the number of Americans reporting a disability had been rising gradually over the past decade, the increase picked up in mid-2020, and about 2 million more people reported they had a disability in July 2022 than at the outset of the pandemic. Disability has been a major drag on the work force in rural areas in the past. Living in rural Kansas following the last recession, as I mentioned earlier, I am very familiar with the challenges that disability presents for many aspects of the community-- beyond just economic conditions. Disability is also a significant challenge in Arkansas. Women's labor force attachment in Arkansas is below the national average. In the five years before the pandemic, about 72 percent of prime-age women here were either working or looking for work, compared with 75 percent nationally. This difference in labor force participation is primarily explained by illness or disability and existed long before the onset of COVID. There is no magic wand that will draw workers back into the labor force, especially when generous government benefits programs are provided for those who are capable of working. But as challenging as these issues are to address, there are some lessons to draw from experience and research regarding approaches that encourage people to work. Research suggests that assistance programs including job search assistance, training programs, and private-sector employment subsidies increase the likelihood of employment by up to 10 percent for those who utilize the programs. benefits of this assistance are not always immediately realized, but women were more likely to benefit from job training and private-sector employment programs. In conclusion, although we still have about 4 million people out of the pre- pandemic workforce, we continue to see strong employment gains and low unemployment rates--the kind of labor market that historically has pulled in more workers. As the service sector continues to recover and as schools and childcare establishments open more fully, I see potential for greater employment opportunities for women in the future. Obviously, economic conditions will influence job opportunities going forward. Today's high inflation and strong employment will likely create some pressure on labor and employment.

r220826a_FOMC

united states

Monetary Policy and Price Stability

powell

Thank you for the opportunity to speak here today. At past Jackson Hole conferences, I have discussed broad topics such as the ever- changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct. to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them. Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection's (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause. July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases. Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting. Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons. The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period. Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job. The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time. If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, "Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations." One useful insight into how actual inflation may affect expectations about its future path is based in the concept of "rational inattention." When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions." Of course, inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched. That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now. These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

r220829a_FOMC

united states

Progress on Fast Payments for All: An Update on FedNow

brainard

With the technical particularly thank the early adopters for the important investments they are making to prepare for the day when the FedNow Service goes live next year. Together with our partners, we will be ready to launch the FedNow Service between May and July of 2023, bringing this innovative core instant payment infrastructure to financial institutions of every size across America. We have been working hard to deliver on time, but ultimately the number of American businesses and households that are able to access instant payments will depend on financial services providers making the necessary investments to upgrade our payments infrastructure. Together, we can ensure that all Americans have access to a modern and reliable instant payment system. The payment system is a critical part of America's infrastructure that touches everyone. Americans rely on the payment system all day every day to make purchases, pay bills, and get paid--without ever needing to consider the complex infrastructure that is operating under the hood. American households and businesses want and deserve payment transactions that work seamlessly, reliably, and efficiently. Fostering a safe, efficient, and widely accessible payments infrastructure has been a central part of the Fed's mission since the very beginning. The Federal Reserve Banks all around the country have provided payment and settlement services alongside the private sector for more than 100 years. Over that period, we have repeatedly innovated and invested in collaboration with the private sector to transform the payment system, using the latest technology to better meet the needs of businesses and households. after extensive industry engagement and planning, the Federal Reserve is on track to The FedNow Service will transform the way everyday payments are made throughout the economy, bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently. Immediate availability of funds could be especially important for households managing their finances paycheck to paycheck or small businesses with cash flow constraints. Having the capacity to manage money in real time could help households avoid costly late payment fees or free up working capital for small businesses to finance growth. Indeed, during the pandemic, we witnessed how essential rapid access to funds can be, as many households started spending emergency relief payments on the day they were received. To deliver on the promise of a payment system for the future, the Federal Reserve has made a substantial commitment to the FedNow platform, which has benefited from the innovative technologies and approaches proven by global technology companies that are vital for today's always on digital economy. Our cloud-first design, unique among central bank instant payment services, positions us for the future by enabling not only the throughput and scalability required for high-volume retail transactions but also broad geographic points of resiliency to ensure continuous service. Cloud-first design affords other key technology components such as self-healing processes and automation, which add to operational resiliency. And our development processes are agile, allowing us to deliver new features faster to financial institutions of all sizes as they are ready to adopt them based on their priorities. We have also invested heavily in stakeholder engagement to ensure readiness for service adoption through efforts like the pilot program, the FedNow Explorer resource, To advance the goal of nationwide reach for instant payments, we have worked closely with the private-sector RTP instant payment service on message specifications to ensure alignment in support of routing interoperability. Just as the Federal Reserve has made a substantial commitment to our new instant payment infrastructure, we are calling on industry stakeholders to do the same. The shift to real-time payment infrastructure requires a focused effort, but the shift is inevitable. The time is now for all key stakeholders--financial institutions, core service providers, software companies, and application developers--to devote the resources necessary to support instant payments. This means upgrading back-office processes, evaluating accounting procedures to accommodate a seven-business-day week, arranging liquidity providers, deploying a new customer-facing application, and promoting instant payments for key use cases to customers. As the service providers featured at this event will demonstrate in the coming days, parts of the industry have already seized on the opportunity to build new services and capabilities that support instant payments. These efforts will increase competition in the market for end-user services and promote innovation--key benefits from providing the FedNow Service as a neutral platform, accessible to financial institutions of all sizes nationwide. I would like to personally thank our early adopters. The input that you have provided has been instrumental for our team as they have designed and built the service, and the time and energy that you have committed to this effort is important for a successful launch. I want to call on additional banks and core service providers to join your commitment to prepare for adoption of the FedNow Service. This time next year, I hope we can all have a great sense of accomplishment in our shared effort to transform America's payment system for the digital era.

r220907a_FOMC

united states

Making the Financial System Safer and Fairer

barr

Thank you, David, and thank you to the Brookings Institution for the invitation to speak to you today. On July 19, I had the honor of being sworn in as the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System. This job was created after the Global Financial Crisis to lead the Fed's work overseeing the safety and soundness of banks and in support of its financial stability mandate. In the 12 years since then, great progress has been made in strengthening the banking system, and in strengthening oversight. I look forward to building on that work by helping to make the financial system safer and fairer, in support of an economy that serves the needs of households and businesses. On behalf of those who may wonder what "building on that work" means, I will speak about some of my near-term goals and how I will approach achieving them. Starting with that word "building," which to me means more than just "maintaining." Success in financial regulation and supervision does not mean standing still because finance does not stand still. The regulatory and supervisory framework adopted after the crisis recognizes that innovation and change are constant in finance, that our understanding of existing and emerging risks can and should deepen over time, and that regulation and supervision must evolve to be effective. Many issues at the forefront of banking regulation today were not prominent five years ago, and some of them scarcely even existed. "Building" means staying ahead of changes, evaluating how banks are managing risks, and making the financial system safer and fairer for households and businesses. When I say that one of my top goals is to make the financial system safer, it is because keeping it safe involves an active and never-ending effort to analyze risks and make necessary adjustments. There is no responsible alternative to this approach because the stakes are far too high to do otherwise. The Global Financial Crisis caused a terrible recession and brought the United States to the brink of an economic collapse that could have been worse than the Great Depression of the 1930s. A significant cause was excessive risk-taking by banks and inadequate regulation and supervision by the Fed and other bank regulators. A hard-won lesson from the crisis is that the savings of every retiree, the job of every worker, the payroll of every business, and the well-being of every individual depend on a safe and stable financial system. In addition to making the financial system safer, I am also committed to making it fairer. Fairness is fundamental to financial oversight, and I am committed to using the tools of regulation, supervision, and enforcement so that businesses and households have access to the services they need, the information necessary to make their financial decisions, and protection from unfair treatment. Safety and fairness may seem like distinct goals, but they are intertwined. Financial instability unfairly harms those who are economically vulnerable, so making the financial system safer is making it fairer. Nothing is more basic to the safety and soundness of banks and the stability of the financial system than capital. Capital enables firms to serve as a source of strength to the economy by continuing to lend through good times and bad. To continue to perform these functions, banks must have a sufficient level of capital to ensure that they can absorb losses and continue operations during times of stress in the financial system when losses may be significant. An important principle of the capital framework is that it must evolve through a continuous process of incorporating new risks that may emerge. While history is a guide to identifying the range of stresses that a bank may face, capital policy must also be forward- looking and responsive to changes in macroeconomic conditions, market structure, and financial activities. A second principle is that the capital framework should be risk focused. Different activities pose different potential for loss, and the capital regime should calibrate requirements to account for the risks of specific activities. At the same time, simpler, non-risk-based approaches can serve as important backstops, given the complexity of risk-based approaches and evidence that these approaches can be gamed. As such, leverage ratios also serve an important role in this framework. A third principle is that requirements should be tiered. As firms increase in systemic importance, the social cost of their failure grows. Regulations should be designed to require firms to internalize the costs that their potential failure would impose on the broader financial system and thus on businesses and households. This means that firms face higher costs through more stringent regulations as they grow in complexity, size, and interconnectedness. And rightly, that community banks face simpler regulations. We are looking holistically at our capital tools to understand how they are supporting the resilience of the financial system, individually and in combination. When calibrating requirements, we will work to minimize unintended consequences, limit opportunities for gaming, and avoid excess compliance costs that do not result in risk reduction. Taking a holistic view will help us consider adjustments, if any, to the supplementary leverage ratio, countercyclical capital buffer, and stress testing. Within this context, I am also committed to implementing enhanced regulatory capital requirements that align with the final set of "Basel III" standards or the so-called the "Basel endgame." This process will involve working with other federal banking agencies and soliciting public input, and I'll have more to say about this later this fall. Sufficient capital in the financial system helps support the resiliency of individual banks, but it is still important to ensure that, if a large firm gets into trouble, it can be resolved without a costly bailout. The Dodd-Frank Act established the framework necessary to end bank bailouts. firm whose failure would pose substantial risks to our financial system, in a way that will protect the economy while ensuring that large financial firms--not taxpayers--bear any costs. In addition, the Fed and FDIC require large banks to develop living wills to demonstrate that they can be resolved in an orderly way. Many gains have been made from this process. While recognizing these gains, we need to continue to analyze whether firms are taking all appropriate steps to limit the costs to society of their potential failure. As such, we will continue to work with the FDIC to rigorously review firms' plans, making clear when firms do not meet our expectations and when remediation is necessary. In addition, beyond globally systemically important banks, or G-SIBs, we will be looking at the resolvability of some of the other largest banks as they grow and as their significance in the financial system increases. As we consider future policy actions in this area, the Fed will work with our colleagues at other banking regulatory agencies and seek public comment. Mergers are a feature of vibrant industries, but the advantages that firms seek to gain through mergers must be weighed against the risks that mergers can pose to competition, consumers, and financial stability. Another priority of mine is to evaluate our approach to reviewing banks' proposed acquisitions. The Board is required to consider a range of factors when reviewing proposed mergers. A merged institution may be able to provide more competitive products and services, but it could also have the potential to reduce competition and access to financial services in a geographic area by raising prices, narrowing the range of services offered, and reducing the supply of small business or community development loans that rely on local knowledge. Assessing these risks is a crucial component of reviewing proposed mergers. In addition, we review the potential effects on the convenience and needs of the communities to be served by the merged entity, particularly low-income communities. the Dodd-Frank Act, we are also required to consider financial stability risks. These risks may be difficult to assess, but this consideration is critical. I am working with Federal Reserve staff to assess how we are performing merger analysis and where we can do better. Another priority for me as Vice Chair is the regulation and oversight of new forms of private money created through stablecoins. Stablecoins, like other unregulated private money, could pose financial stability risks. History shows that in the absence of appropriate regulation, private money is subject to destabilizing runs, financial instability, and the potential for widespread economic harm. In the nineteenth and early twentieth centuries, before the advent of prudential bank regulation and deposit insurance and before action was taken to ensure private money creation by banks was appropriately regulated, repeated crises did substantial damage to the U.S. economy. I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter. I look forward to continued partnership with other regulatory agencies and Congress to address the risks of stablecoins. Before I move away from the discussion of making banks safer, let me say a few words about the potential risks to banks posed by climate change. As our nation, and the world, grapple with how to respond to climate change, banks are increasingly focused on the risks that climate change brings to their balance sheets. The Federal Reserve is working to understand how climate change may pose risks to individual banks and to the financial system. The Federal Reserve's mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system. In the near-term, we intend to work with the Office of the Comptroller of the Currency (OCC) and the FDIC to provide guidance to large banks on how we expect them to identify, measure, monitor, and manage the financial risks of climate change. In addition, we are considering how to develop and implement climate risk scenario analyses. In that regard, next year we plan to launch a pilot micro-prudential scenario analysis exercise to better assess the long-term, climate-related financial risks facing the largest institutions. These are a few of my near-term priorities to help make the financial system safer. I'll have more to say about these, and other priorities for safety and soundness, in the coming weeks and months. Let me turn now more directly to my other major objective as Vice Chair, which is to make the financial system fairer. In the past, I have described the three essential elements of fairness in the financial system as a three-legged stool because all three are necessary for any aspect of fairness to work. The three are (1) financial capability, (2) financial access, and (3) consumer protection. In terms of financial capability, an important component is transparency in the cost of services, which means making sure consumers have the information they need to make good decisions. Along with other bank regulatory agencies, the Federal Reserve has a role to play in ensuring banks disclose the costs and explain the conditions on the services they provide. More broadly, though, it means basing policy on a deeper understanding of human decision-making, and the contexts in which households and businesses make those choices. Under financial inclusion, one example would be promoting access to low-cost and safe banking services for low- and moderate-income (LMI) consumers, such as through local Bank On initiatives. And consumer protection involves using supervision and regulation to fully implement laws to promote fair lending, consumer protection, and transparency in the consumer financial services marketplace. Let me say a bit about where innovation fits into this goal of making the financial system fairer. We should welcome financial innovation as a positive force that can increase access and lower costs for individuals and businesses. That said, innovation can also introduce new risks for consumers. We have already seen occasions when uses of new technologies and data can raise serious concerns about violations of fair lending laws. As innovative financial products develop and grow rapidly, excitement can outrun the proper assessment of risk. As we have seen with the growth of crypto assets, in a rapidly rising and volatile market, participants may come to believe that they understand new products only to learn that they don't, and then suffer significant losses. Crypto-asset related activity, both outside and inside supervised banks, requires oversight so that people are fully aware of the risks they face. We plan to work with other bank regulatory agencies to ensure that crypto activity inside banks is well regulated, based on the principle of same risk, same activity, same regulation, regardless of the technology used for the activity. I plan to make sure that the crypto activity of banks that we supervise is subject to the necessary safeguards that protect the safety of the banking system as well as bank customers. Banks engaged in crypto-related activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering. At a more basic level, we need to focus on access to fast, efficient digital payments. This is a matter both of efficiency and of fairness. Low-income households can ill afford to wait days for their income checks to clear, nor can small businesses. A three-day payment delay is an annoyance to someone with savings and ample credit, but it is a costly burden, and sometimes a serious problem for others. And overdraft and insufficient funds fees hit LMI households hard. I have been working on issues of financial inclusion for a significant portion of my career as a public official and as an academic. I am so pleased with the progress made toward instant payments under the leadership of Vice Chair Brainard and Chair Powell, and I am looking forward to doing whatever I can to support this work, including the launch of the FedNow Service. The Federal Reserve has a responsibility to facilitate payments that work well for everyone, and we are committed to doing so. Rounding out my discussion of access to financial services, I will end my remarks today passed in 1977, encourages insured depository institutions to meet the credit needs of the communities in which they are chartered, including LMI neighborhoods, consistent with the safe and sound operation of such institutions. The CRA was designed to address past abuses of financial institutions, such as redlining. The CRA sends the unequivocal message that there is no place for discrimination in the financial system, and that every community and every borrower deserve to be treated fairly. Earlier this year the OCC, the Fed, and the FDIC jointly invited comment on a proposal designed to strengthen and modernize CRA regulations to achieve the objectives of the law. I strongly support the goals of the proposal and look forward to contributing to the important work underway, again led by Vice Chair Brainard. So, to wrap up, I have tried to lay out my approach and a bit of my near-term agenda, as Vice Chair for Supervision, for making the financial system safer and fairer for households and businesses. As I said at the outset, I believe these goals are related and mutually reinforcing, so that progress in one area will advance efforts in the other. I have discussed a number of specific issues to illustrate these principles, but I'll have more to say about these ideas, and other important reforms, in the coming weeks and months. Thank you.

r220907b_FOMC

united states

Bringing Inflation Down

brainard

Over the past year, inflation has been very high in the United States and around the world (figure 1). High inflation imposes costs on all households, and especially low- income households. The multiple waves of the pandemic, combined with Russia's war against Ukraine, unleashed a series of supply shocks hitting goods, labor, and commodities that, in combination with strong demand, have contributed to ongoing high inflation. With a series of inflationary supply shocks, it is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2 percent in the longer run, which would make it much more challenging to bring inflation back down to our target. The Federal Reserve is taking action to keep inflation expectations anchored and bring inflation back to 2 percent over time. While last year's rapid pace of economic growth was boosted by accommodative fiscal and monetary policy as well as reopening, demand has moderated this year as those tailwinds have abated. A sizable fiscal drag on output growth alongside a sharp tightening in financial conditions has contributed to a slowing in activity. In the first half of 2022, real gross domestic product (GDP) declined outright, overall real consumer spending grew at just one-fourth of its 2021 pace, and residential investment, a particularly interest-sensitive sector, declined by 8 percent (figure 2). The concentration of strong consumer spending in supply-constrained sectors has contributed to high inflation. Consumer spending is in the midst of an ongoing but still incomplete rotation back toward pre-pandemic patterns. Real spending on goods has declined modestly in each of the past two quarters, while real spending on services has expanded at about half its 2021 growth rate. Even so, the level of goods spending remains 5 percent above the level implied by its pre-pandemic trend, while services spending remains 4 percent below its trend (figure 3). In addition to the fiscal drag and tighter financial conditions, high inflation-- particularly in food and gas prices--has restrained consumer spending by reducing real purchasing power. While price increases in food and energy are weighing on discretionary spending by all Americans, they are especially hard on low-income families, who spend three-fourths of their income on necessities such as food, gas, and shelter--more than double the 31 percent for high-income households. Since the very elevated prices at the pump in June, the nationwide average price of a gallon of regular unleaded gasoline has declined every day throughout July and August, most recently falling below $4 a gallon, according to the American Automobile The rise and fall of gasoline prices played a major role in the dynamics of inflation over the summer, contributing 0.4 percentage point to month-over-month percentage point in July. This 0.6 percentage point swing in the contribution of gasoline prices was an important driver of the decline in month-over-month PCE inflation from 1 percent in June to negative 0.1 percent in July. In contrast, food price pressures continue to worsen, reflecting Russia's continuing war against Ukraine, as well as extreme weather events in the United States, The PCE index for food and beverages has increased each month this year by an average of 1.2 percent, resulting in an 8 1/2 percent cumulative increase in the index year-to-date through July. For context, the net change in the food and beverages price index over the entire four-year period before the pandemic was only 0.5 percent. Core inflation--inflation excluding volatile food and energy prices--also moderated in July. Core goods PCE inflation decelerated to 0.1 percent month-over- month in July after averaging 0.5 percent in May and June. While the moderation in monthly inflation is welcome, it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent. How long it takes to move inflation back down to 2 percent will depend on a combination of continued easing in supply constraints, slower demand growth, and lower markups, against the backdrop of anchored expectations. With regard to supply constraints, a variety of indicators are showing signs of improvement on delivery times and supplies of some goods. In addition, labor force participation showed a welcome increase in the August employment data, particularly in the boost in participation among women in the core working years of 25 to 54 years of age. Even with this improvement, the participation rate is still 1 percentage point below its pre-pandemic level, well in excess of the decline in the participation rate that would have been expected due to retirements in the absence of the pandemic. Reductions in markups could also make an important contribution to reduced pricing pressures. Last year's rapid demand growth in the face of supply constraints led to product shortages in some areas of the economy and high margins for many firms. Although we are hearing some reports of large retailers planning markdowns due to excess inventories, we do not have hard data at an aggregate level suggesting that businesses are reducing margins in response to more price sensitivity among customers. At an aggregate level, in the second quarter, measures of profits in the nonfinancial sector relative to GDP remained near the postwar peak reached last year. Using the available macroeconomic data, it is challenging to measure directly how much firms mark up their prices relative to their costs. That said, there is evidence at the sectoral level that margins remain high in areas such as motor vehicles and retail. After moving together closely for several years, starting early last year, the new motor vehicle consumer price index (CPI), which measures the price dealers charge to customers, diverged from the equivalent producer price index (PPI), which measures the price dealers paid to manufacturers. Since then, the CPI has increased three times faster than the PPI (figure 4). This divergence between retail and wholesale prices suggests an unusually large retail auto margin. With production now increasing, and interest- sensitive demand cooling, there may soon be pressures to reduce vehicle margins and prices in order to move the higher volume of cars being produced off dealer lots. Similarly, overall retail margins--the difference between the price retailers charge for a good and the price retailers paid for that good--have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins. With gross retail margins amounting to about 30 percent of sales, a reduction in currently elevated margins could make an important contribution to reduced inflation pressures in consumer goods. Labor demand continues to exhibit considerable strength, which is hard to reconcile with the more downbeat tone of activity. Year-to-date through August, payroll employment has increased by about 3 1/2 million jobs, a surprisingly strong increase given the decelerating spending and declining GDP over the first half of the year. The unemployment rate has fallen, on net, from 4 percent in January to 3.7 percent in August. Possibly the strongest indications that the labor market is tight were the first- and second- quarter readings of the employment cost index (ECI), which point to strong and broad- based growth in total hourly compensation. The 6.3 percent reading for the ECI in the second quarter was the largest annualized quarterly growth in compensation under this metric since 1982. The most recent reading of average hourly earnings suggested some possible cooling, decelerating from a gain of 0.5 percent in July to 0.3 percent in August, although it will be important to see additional data. The deceleration in economic activity thus far this year has coincided with only a slight easing in job openings, on net, since their peak in March. The current high level of job openings relative to job seekers remains close to the largest in postwar history, consistent with a tight labor market (figure 5). Businesses that experienced unprecedented challenges restoring or expanding their workforces following the pandemic may be more inclined to make greater efforts to retain their employees than they normally would when facing a slowdown in economic activity. This may mean that slowing aggregate demand will lead to a smaller increase in unemployment than we have seen in previous recessions, but it is too early to draw any definitive conclusions, and I will be monitoring a variety of labor market indicators closely. As we follow through on our plan to move monetary policy to an appropriately restrictive stance, the effect of the increased policy rate and pace of balance sheet shrinkage should put downward pressure on aggregate demand, particularly in interest- sensitive sectors like housing. Continued improvements in supply conditions and a further rotation of consumption away from goods and into services should also help by reducing price pressures in goods. With regard to non-housing services, the magnitude of price pressure over the next several quarters will depend on an overall slowing in spending as well as the extent to which labor supply improves in these sectors. Since pivoting last year, our actions and communications have tightened financial conditions significantly and at a much more rapid speed than earlier cycles. So far during 2022, real 2-year yields have risen more than 350 basis points to about 1.2 percent, and 10-year real yields have risen almost 200 basis points and now stand at 0.85 percent--in the range of values for 10-year real yields from 2014 to 2018. The rapid tightening in monetary policy is also reflected in a significant increase in the projected real short rate: The Blue Chip Financial Forecasts has the expected short rate moving above 0.5 percent in real terms to a significantly higher level than pre-pandemic within the next 12 months It may take some time for the full effect of these tighter financial conditions to work their way through the economy. The disinflationary process here at home should be reinforced by weaker demand and tightening in many other countries. This is particularly the case as Europe contends with downside risks to activity and a severe energy shortage caused by Russia's war against Ukraine, and as China maintains its zero-COVID approach against a backdrop of weaker consumption. At some point in the tightening cycle, the risks will become more two-sided. The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening. And if history is any guide, it is important to avoid the risk of pulling back too soon. Following a lengthy sequence of adverse supply shocks to goods, labor, and commodities that, in combination with strong demand, drove inflation to multidecade highs, we must maintain a risk- management posture to defend the inflation expectations anchor. While we have no control over the supply shocks to food, energy, labor, or semiconductors, we have both the capacity and the responsibility to maintain anchored inflation expectations and price stability. We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further. As of this month, the maximum monthly reduction in the balance sheet will be nearly double the level of the previous cycle. Together, the increase in the policy rate and the reduction in the balance sheet should help bring demand into alignment with supply. Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target. The economic environment is highly uncertain, and the path of policy will be data dependent. While the precise course of action will depend on the evolution of the outlook, I am confident we will achieve a return to 2 percent inflation. Our resolve is firm, our goals are clear, and our tools are up to the task.

r220909a_FOMC

united states

The Economic Outlook: Time to Let the Data Do the Talking

waller

Thank you, Klaus, and thank you for the invitation to speak at this workshop, which I have been attending since its very beginning in 2004. Something that I love about this conference that has kept me coming back almost every year is its tradition of open inquiry and even some fun, on the one hand, combined with rigorous, critical analysis, on the other. I am a supporter, and I guess a practitioner, of rigorous criticism, because, as you may have heard, the conference award given each year for "outstanding critic" was named for me. Based on the standard I set, the person who wins the award is also known as the "most annoying participant." I suppose it was only karma that a guy like me who likes to dish out the criticism would end up in a job that receives plenty of it. Kidding aside, I do consider being the namesake for this award a great honor, and just to make sure I don't get too much of a swelled head, by tradition the conference organizers purposefully misspell my name. My subject today is the outlook for the U.S. economy and the Federal Reserve's ongoing campaign to bring down inflation and achieve our 2 percent objective. are three takeaways from my speech today. First, inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward. The inflation back down to our 2 percent target. This is a fight we cannot, and will not, walk away from. The second takeaway is that the fears of a recession starting in the first half of this year have faded away and the robust U.S. labor market is giving us the flexibility to be aggressive in our fight against inflation. For that reason, I support continued increases in the FOMC's policy rate and, based on what I know today, I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand. The final takeaway is that I believe forward guidance is becoming less useful at this stage of the tightening cycle. Future decisions on the size of additional rate increases and the destination for the policy rate in this cycle should be solely determined by the incoming data and their implications for economic activity, employment, and inflation. Based on all of the data that we have received since the FOMC's last meeting, I believe the policy decision at our next meeting will be straightforward. Because of the strong labor market, right now there is no tradeoff between the Fed's employment and inflation objectives, so we will continue to aggressively fight inflation. Inflation is widespread, driven by strong demand that has only begun to moderate, by an ongoing lag in labor force participation, and by supply chain problems that may be improving in some areas but are still considerable. For these reasons, I expect it will take some time before inflation moves back to our 2 percent goal, and that the FOMC will be tightening policy into 2023. But the answers to questions of "how high?" and "for how long?" will depend solely on incoming data. Since I last spoke in July, I think the argument that we entered a recession in the first half of 2022 has pretty much ended--we didn't. With each passing week, the absence of any indication of a recession in spending or employment data buries that recession argument a little deeper. We understand some of the factors that lowered the gross domestic product (GDP) numbers in the first half, and a debate continues about other possible factors, such as mismeasurement, potentially underreporting GDP. What we can say is that after the Fed telegraphed its policy pivot to tightening in the latter months of 2021 and began raising rates in the first quarter of this year, demand and economic activity slowed in the first half of 2022 from the strong pace of 2021. Data suggest an uptick in consumption growth in the third quarter. Meanwhile, the Atlanta Fed's GDPNow model forecasts real GDP will grow 2.6 percent this quarter, though other estimates are a touch below this prediction. Spending data are supportive of continued expansion. Nominal retail sales overall were flat in July, but that is mainly because falling gasoline and auto prices--which is good news--held back sales in those sectors. Excluding that, retail sales rose 0.7 percent, suggesting that discretionary spending grew solidly. Businesses also continued to expand production and spending. Total industrial production increased 0.6 percent in July, standing 3.9 percent above its level a year ago. Forward-looking indicators of manufacturing activity, such as new orders indexes in various manufacturing surveys, are softer than earlier in the year, but most (and in particular the positive August reading from the ISM) are not suggestive of a material pullback in manufacturing activity. Meanwhile, the non- manufacturing ISM report suggests continuing growth, with its new orders index rising to a solid level last month. But there are signs of moderation in economic activity, which is what the FOMC is trying to achieve by tightening monetary policy. Not surprisingly, higher interest rates this year are slowing activity in the housing market. There have been declines in construction of single-family homes for a number of months, with permits and home starts both decreasing in July. Sales of existing and new single-family homes have also slowed. Existing home sales fell by 5.9 percent to a seasonally adjusted annual rate of 4.8 million homes in July. While the imbalance between housing supply and demand remains significant, it has meaningfully improved. The inventory of unsold new and existing homes has more than doubled since January. While the three months supply of existing home is still below levels before the pandemic, the eleven months of new home inventory is the highest since the spring of 2009. This latter statistic has raised concerns by some about a significant downturn looming in the housing market, but an important caveat is that much of the current elevated inventory reflects the recent low rate of housing completion due to continued supply constraints. Many of these new homes for sale are still under construction, and as supply constraints ease, builders will be able deliver more completed homes to a market where the supply of existing homes remains tight. All that said, the housing market is a significant channel for monetary policy, and I will be watching this sector carefully. The FOMC's goal is that the tightening in monetary policy slows aggregate demand so that it is in better alignment with supply across all sectors of the economy. My expectation is that strong household savings, the tight labor market, and additional availability of manufactured goods as supply chains constraints continue to resolve will allow households to make long-awaited purchases, which will provide a partial offset to tighter policy. That will support a slowing, rather than a contraction, in demand. Turning to the very strong labor market, private payroll employment has been increasing at an average of nearly 400,000 a month over the last several months. Unemployment rose two tenths of a percent in August to 3.7 percent, in part reflecting an increase in the labor force participation rate, but still stands at a very low level. The increase in participation was welcome news, but this rate is still far below that achieved before the pandemic, when unemployment was roughly as low as today. We are facing worker shortages in many sectors of the economy. Job openings have started to decline a bit but remain very elevated. These data confirm that the Fed is hitting its full employment mandate, so all my attention is on bringing inflation down. Inflation slowed in July, which was a very encouraging development. Headline inflation for both the consumer price index and the index derived from personal consumption expenditures (PCE)--the Fed's preferred measure--slowed, largely due to continuing declines in prices for gasoline and other petroleum products. Excluding volatile energy and food prices, core inflation for these two indexes also stepped down from the rapid increases of earlier this year, but it is still too early to say that inflation is moving meaningfully and persistently downward. Inflation is still widespread. For both headline and core inflation, at least 60 percent of the underlying categories of different goods and services increased by 3 percent or more. Prices for housing services are elevated and still rising. Core goods inflation continues to run well above its pre-pandemic level. Inflation for services excluding housing has moved up this past year in part due to consumers shifting back to more normal activities outside the household as social distancing has eased. Looking ahead, I will be focusing on a number of factors that will influence inflation. On housing services--rent and the so-called owners' equivalent rent --I expect to see sizable increases in this component of inflation for a while as the recent rise in new rentals makes its way into aggregate price measures. In a speech in March, I noted that, based on various measures of asking rents, some analysts were predicting that the rate of rent inflation in the consumer price index could double in 2022, and so far it is on pace to more than double. Owners-equivalent rent is similarly on pace to nearly double this year. Sometime early next year, though, I expect to see the upward pressure on inflation from these forces to ease as future increases in new or renewed leases moderate and the full effects of monetary policy tightening make their way to housing services prices. Beyond housing, I expect goods price inflation to continue to moderate as monetary policy now and going forward slows the pace of increase in aggregate demand, supply problems ease, and supply and demand come into better balance. There is some evidence that goods supply production and delivery problems tied to the pandemic are improving, with supplier delivery times and reports of items in short supply continuing to drop. In terms of service price inflation, we saw a step-down in airfares and other travel-related services last month, but I am uncertain about how these services, as well as food services, and nonmarket services prices will evolve going forward. Nominal wages have been growing quickly, and I'll be watching closely to see how wage growth evolves and feeds into inflation. The Atlanta Fed's Wage Growth Tracker hit another record in July for its 24 years of data, a 12-month rate of 6.7 percent wage growth. I don't expect wage increases to ease up much unless and until there is a significant softening in the labor market. One way to anticipate future wage growth is through quit rates. Most people who quit their jobs are moving to others that pay significantly better, so I take quits as one signal about where wages are headed in the near term. Quits are near their highest level over the 22 years that the government has tracked them, but they have come down from the start of this year, and further decreases would bring them closer to the level they were at immediately before the pandemic, when wages were growing much more slowly than today. Another factor that I will be watching closely is longer-term inflation expectations, which I believe significantly influence inflation. As inflation moved higher over the past year and a half, measures of short-term inflation expectations moved up notably, but measures of longer-term expectations rose only a little and generally stand near levels seen in the years before the pandemic, when inflation was low. In fact, several measures of longer-term expectations have edged lower over the past couple of months. To me, this means that the public retains confidence that the Fed will be able to rein in inflation in the medium term. To sum up, while I welcome promising news about inflation, I don't yet see convincing evidence that it is moving meaningfully and persistently down along a trajectory to reach our 2 percent target. I keep in mind that a year ago we saw similarly promising evidence of inflation moderating for several months before it jumped up to a high and then very high level. Those earlier inflation readings probably delayed our pivot to tightening monetary policy by a few months. The consequences of being fooled by a temporary softening in inflation could be even greater now if another misjudgment damages the Fed's credibility. So, until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy. Now let me lay out the implications of this outlook for monetary policy. Since March, the FOMC has raised our policy target range from near zero to between 2 1/4 and 2 1/2 percent. That puts the upper bound of the current target range at the median of FOMC participants' longer-run projection for the policy rate, as recorded in the June participants think the policy rate would settle when the economy is growing at its potential and inflation is at our 2 percent target. This is a good definition of success when employment and inflation are near our goals and no help is needed from monetary policy. But that isn't the case now; inflation is far from our goal, so more action is needed. The policy rate will have to move meaningfully above this neutral level to further restrain aggregate demand and put more downward pressure on prices. Looking ahead to our next meeting, I support another significant increase in the policy rate. But, looking further out, I can't tell you about the appropriate path of policy. The peak range and how fast we will move there will depend on data we will receive about the economy. Earlier this year, when we were ending asset purchases, inflation was quite elevated, and we were lifting the target range off the effective lower bound, so it made sense to provide forward guidance to help convey the urgency the FOMC felt about tightening monetary policy. Forward guidance was useful in helping the public understand how quickly we expected to tighten, and we saw longer-term interest rates move up quite rapidly as a result of these communications. And additional hikes should lead to further restraint in aggregate demand. As we continue to raise rates, we need to see, month by month, how households and businesses are adjusting to the tighter financial conditions, and how that adjustment is affecting inflation. We shouldn't be estimating what the peak level of the target range will be and how quickly we will get there, because those details are much more dependent on what new economic data tell us than was the case when the only direction for the federal funds rate to go was up--and up by a lot. This is not to suggest that I anticipate rate increases stopping very soon. I expect that getting inflation to fall meaningfully and persistently toward our 2 percent target will require increases in the target range for the federal funds rate until at least early next year. But don't ask me about the policy path because I truly don't know--it will depend on the data. Six months ago, I would not have thought that we would be where we are today, with inflation so far from our target, after significantly tightening policy with a series of large rate increases and by shrinking the balance sheet. There are a range of possibilities for how the economy will perform, however, and we can talk about the implications of that range. Say, for example, that inflation follows the path laid out in the June SEP, which has core PCE inflation falling to 4.3 percent in the fourth quarter of 2022 and then moving toward 2 percent over 2023 and 2024. In that case, I would support our policy rate peaking near 4 percent. But based on the experience of the past year and half, it would be foolish to express great confidence that this plausible path will come to pass. Instead, it is important to consider the range of possibilities and the appropriate policy responses. For example, if inflation does not moderate or rises further this year, then, in my view, the policy rate will probably need to move well above 4 percent. Alternatively, if inflation suddenly decelerates, then, in my view, the policy rate might peak at less than 4 percent. One thing that is more predictable and has a significant effect on tightening policy over time is the shrinking of the Fed's holdings of assets as maturing securities run off our balance sheet. Starting this month, the Fed is shedding $60 billion a month in Treasury securities and up to $35 billion a month in agency mortgage-backed securities. This action effectively increases the supply of securities in the hands of private investors and will thus put upward pressure on interest rates, as private investors must now be enticed to hold these assets. All told, the FOMC has taken unprecedented and decisive policy actions this year to quickly increase the policy rate in response to high inflation. But where we stand now is not good enough. Though the labor market is strong, inflation is too elevated. So I support another significant hike in two weeks. After that, the tightening path will continue until we see clear and convincing evidence that inflation is moving meaningfully and persistently down to our 2 percent target. The pace of tightening is uncertain; it will depend on the data. No matter what, I am ready and willing to do what it takes to bring inflation down.

r220928a_FOMC

united states

The New Landscape for Banking Competition

bowman

Good morning and thank you, Jim, it's great to be back here in St. Louis for this year's research conference. While the Federal Reserve learned a lot about how to operate virtually during these past two-and-a-half years of the pandemic, there are certain interactions and discussions that are just better face to face. For me, this conference is one of them. It's also significant that we're able to be here in person to commemorate the 10th year of these proceedings. I'd like to share a few thoughts on how we got here. Back in 2013, in the wake of the financial crisis and the passage of the Dodd- understanding that research plays a vital role in shaping our nation's supervisory and regulatory policy. Simply put, good research leads to good policy, and the decision was made to create a conference that could attract high-caliber research on community banking from all over the world. The conference was also designed to be a forum for multiple stakeholders-- researchers, policymakers, and community bankers--to come together annually to share insights and perspectives, all in the interest of better informing current and future research. In my view, this gathering has certainly delivered on, and expanded upon, these promises. Sadly, two of the pioneers of this conference are no longer with us to celebrate this important 10-year milestone: John Ryan, president and CEO of the Conference of State Bank Supervisors, and Rich Brown, chief economist at the FDIC, both have passed away since the last time we were able to be here together in person. John created the vision for this conference and oversaw its success to this point, while Rich served for many years on the conference research committee, and even served as an academic discussant. Both have shaped this conference in important ways, and both will be deeply missed. In 2014, CSBS, under John Ryan's leadership, identified a need for more forward-looking data and information on community banks and the banking industry. This led to the creation of the CSBS National Survey of Community Banks. The survey gathered data and insights that were previously unavailable on this scale directly from community bankers. As a former state bank commissioner, I know how much effort community banks put in each year to provide accurate and detailed responses to the survey. We have all benefitted from and appreciate the insights they share. The survey has enhanced our understanding of how much the banking industry has changed. It has also provided data that have been used in academic research, policy papers, and official government reports. Among its many contributions, the survey provides data on the costs of regulatory compliance and trend data on products and services being offered, and in some cases, discontinued, by community banks. The CSBS survey also shows how competition has changed community banking in recent years. It is this topic of competition that I will focus on for the remainder of my remarks today. One of the more interesting findings from the CSBS survey has been how community banks have reported changes in competition for both deposits and loans. Although the majority of community banks report that other community banks are still their primary competitors, that majority has steadily declined in each year of the survey as credit unions and larger banks have become the dominant competitors for deposits in an increasing number of markets. The situation is even more interesting for loan competition. Each year, a larger percentage of community banks report fintech firms as their primary competitors for consumer loans, the Farm Credit System as their primary competitor for agricultural loans, and nonbanks as their primary competitor for mortgage loans. While not necessarily surprising, these and other data underscore that there is a new and evolving competitive landscape for banking services in the United States. As the nature of competition changes, it creates an opportunity for us to rethink how we evaluate bank mergers, how we define banking markets, and how we develop a more comprehensive understanding of the ways consumers and businesses access financial products and services today and how they might do so in the future. So how has the competitive landscape for banking services changed in the United One of the most obvious changes has been in the number of commercial bank charters. In just 10 years, the number of bank charters has declined by approximately 20 percent. At the end of 2012, there were about 5,900 commercial banks in the United States. The current number of charters today stands at just below 4,800. This decline in charters has been concentrated among banks with less than $250 million in total assets. Up until 2009, the number of bank branches increased, despite the decline in the number of bank charters. However, since the 2009 financial crisis, the number of branches has declined each year. This decline was particularly pronounced during the pandemic when, between 2020 and 2021, the number of bank branches declined by almost 4 percent as more than 3,200 branches were closed. Before discussing how declines in bank charters and bank branches influence how we think about the competitive impact of mergers in certain markets, it should be noted that how we measure competition today largely springs from a 1963 Supreme Court decision where the court held that the relevant product market for the purposes of analyzing a bank merger is the "cluster of products . . . and services" that constitute "commercial banking" in each banking market. This means that to evaluate banking competition, we essentially require two key inputs: The geographical definition of the banking market, and An understanding of the bank products and services that are provided to most households and small businesses by the banks in those markets. The geographic definition of banking markets is a Federal Reserve responsibility, and the Fed has currently defined more than 1,400 banking markets nationwide. This geographic definition requires constant analysis and regular updating. One only needs to think of how the growth of the suburbs has increased the distances residents are willing to travel for their jobs and other important services, including banking services, to appreciate how banking markets have changed and will continue to change. As communities change, so do their banking markets. The second part of this evaluation is more daunting because there is currently no way to comprehensively measure the full "cluster" of commercial banking products and services in a given market. This challenge is compounded by the fact that the products and services banks offer also frequently change to meet evolving customer and business demand. Historically, we've used a bank's share of deposits in a market as a proxy for market power for the broader cluster of commercial banking products and services. The idea is that both consumers and small businesses often access commercial banking products through their deposit relationship institution. This approach also has the advantage of being measurable since banks are required to report deposits at the branch To better reflect competition from thrift institutions, for many years the calculation of local deposit and market share data has also included a weighted consideration of their account deposits. In 1995, to "speed [the] competitive review [process] and reduce regulatory burden on the banking industry" the Department of Justice and the federal banking agencies developed several initial "screens" to identify mergers that would not have adverse effects on competition and would therefore not require significant review. These screens were part of a broader set of Competitive Review Guidelines that also presented additional information that could be considered in the analysis of a merger transaction. The initial screens are based on deposit market share using the Herfindahl- Hirschman index, or HHI. Under this scale, a perfect monopoly would report an HHI of 10,000, while a perfectly competitive market would be close to zero. Under these screens, any merger that does not result in the HHI exceeding 1,800, post-merger, or increases the market HHI by less than 200, would likely not require further review. Of note, some argue that these guidelines are uniquely strict because the 1,800 HHI level for banking is lower than the 2,500 level set in the Horizontal Merger Guidelines used to evaluate transactions in other industries. In this context, evaluating how a decline in bank charters and bank branches affects how we understand competition is a simple math problem: as banks merge or close branches in a market, the market becomes more concentrated and the HHI increases. In fact, more than 60 percent of the currently defined geographic banking markets in the United States are above the 1,800 threshold. To some, these data are evidence that the marketplace for banking products and services is increasingly anticompetitive, warranting tougher scrutiny of mergers or even a moratorium on any deals. To others, these numbers illustrate a narrow view of bank services in a diverse and complex marketplace. Therefore, they also highlight the importance of including the full "cluster of commercial banking products and services" provided to customers in a banking market, since these numbers only provide information on banks. As any quick scan of the marketplace for financial products and services will tell you, in recent decades, the number of competitors to banks, if anything, has significantly increased, rather than decreased. With that in mind, I'd like to discuss what I see as some of the key changes in the competitive landscape for banking products and services. I will also offer some ideas on how I think we can modernize our analysis of competition while still preserving a vibrant and competitive marketplace that promotes innovation and enhances consumer choice. Let's start with the changes that have been taking place in the credit union industry. Historically, credit unions were not seen as competitors to banks because they offered fewer small business and commercial lending products and were limited in their customer base because of field of membership restrictions. For this reason, credit union deposits were not factored into the initial competitive screens at all under the 1995 Bank However, in the past few decades, we've seen credit unions expand their fields of membership. Many credit unions now go well beyond the traditional "common bond" requirements for membership and increasingly allow membership based on geography. We've also seen an increase in the percentage of credit unions offering small business loans. The National Credit Union Administration has reported that 94 percent of credit unions with $500 million or more in assets offer business loans. Total business loans at federally insured credit unions grew at an annualized rate of 14 percent from 2004 through 2015. Underscoring just how much credit unions are competing directly with banks, particularly community banks, is the recent increase in acquisitions of community banks by credit unions. Credit unions today are much more likely to compete directly with traditional banks offering the full "cluster" of banking products and services than they did in 1995, which supports the argument that our analysis needs to give more weight to competition from credit unions. Another development impacting the competitive landscape for banking services is the ability of all banks, regardless of size, to gather deposits across markets and across geographies. Although we've known that online banking gives customers an opportunity to open accounts and establish deposit relationships with any bank in the United States, we've only recently been able to measure how many deposits are gathered via the internet. The FDIC recently began collecting data on deposits through accounts opened online. The data show that online deposits increased by more than 62 percent from 2019 to 2020. Over that same time, deposits at brick-and-mortar branches grew by slightly more than 21 percent. Online deposits increased by another 42 percent from 2020 to 2021, while brick-and-mortar deposits grew by around 10 percent. Online deposits now account for more than 5 percent of all deposits at U.S. commercial banks, and that percentage is expected to increase. Since we know that deposit relationships generally lead customers to develop other types of banking relationships, a comprehensive analysis of competition needs to account for the ubiquity of out-of-market banks with a strong national presence. On the lending side, we've seen nonbanks compete directly with banks for traditional lines of business, including for agricultural loans, one-to-four family mortgage loans, small business loans, and consumer loans. For years, we've seen finance companies compete with banks for consumer and small business loans and the Farm Credit System compete for agricultural loans. Today we're seeing mortgage companies not only compete, but dominate, the market for residential mortgage loans. Nonbank fintech firms have become viable competitors for nearly all types of loan products, but most prominently consumer loans, small business loans, and student loans. One challenge is that we don't have the same consistent set of data from nonbank entities that we do for banks. Nonbanks are generally not subject to the same types of reporting requirements as banks, and analysts have to get creative when trying to measure how these entities impact competition. A few years ago, research presented at this conference by economists at the Kansas City Fed outlined a process to measure the effects of Farm Credit System lending on market competition. The authors concluded that including Farm Credit lending in competitive analysis of a market "significantly reduces measures of concentration." The authors found that "excluding [Farm Credit] from market structure analyses may understate market competitiveness in rural markets where agriculture is an important part of the local economy." The authors also state that similar results would likely apply if other significant product lines offered by nonbank competitors were analyzed. With the proliferation of new competitors to traditional banks, it's imperative that we modernize our evaluation of competition to more consistently and comprehensively factor in all competitors in a market and consider how to address markets where deposits are a poor proxy for the full cluster of products and services offered to consumers and small businesses. Getting this right is particularly important for community banks. The Federal Reserve has long recognized the important public benefits that community banks provide to their communities. Not fully accounting for all competitors in a market limits the options available to banks that need to achieve scale to offer the products and services that customers want while managing the high overhead costs that come with being a regulated depository institution. The consequences of getting this wrong will be felt acutely in rural communities--especially in markets where populations have declined to such an extent that local institutions have trouble achieving the scale they need to compete with out-of- market banks or nonbanks operating on a national or regional scale. As noted in the CSBS National Survey, 30 percent of respondents reported that depopulation was either important or very important to a rural bank's ability to attract and retain deposits. Banks in rural areas may also struggle with succession planning. Attracting and retaining qualified management and staff can be very difficult, and in some cases may force a bank to close its doors, to the detriment of its customers. For banks in these types of communities, the best option might be to merge with another local bank to continue to provide banking services for residents and small businesses. In markets already designated as concentrated or uncompetitive, however, the current guidelines limit prospective merger partners to out-of-market institutions--and acquisition offers from out-of-market banks in areas of declining population are exceedingly rare. Fortunately, I think we have a unique opportunity today to address these issues. For example, the federal banking agencies and the Department of Justice have acknowledged in recent months that significant changes in the banking industry and in the competitive landscape for banking services will require us to rethink banking competition and mergers. Last year, the President issued an Executive Order on competition encouraging the Attorney General, in consultation with the heads of the federal banking agencies, to review current bank merger review practices and adopt a While my remarks today and these following recommendations highlight issues for community banks, the framework for analyzing bank mergers for large banks also needs to be updated. The goal should be to apply a transparent, dynamic framework that allows the industry to evolve with market conditions and apply sensible regulatory oversight. Size should not be the controlling factor. A review and examination of a merger application should be based on a careful analysis of risks. I believe any review of banking merger oversight should ensure that the framework that is used is known and understood by the public and by the banks, that it reflects actual market conditions, and that it factors in the broader range of competitors to banks for financial products and services. I will outline a few specific areas that, in my view, should be included as part of any modernization proposal for competitive analysis: More systematically include credit unions in all competitive analyses. noted earlier, credit unions were historically not considered competitors to banks, but changes to their business models and membership criteria now make them direct competitors in many markets. Credit unions whose field of membership includes all, or almost all, of the market populations, whose branches are easily accessible to the public, who engage in a significant amount of commercial lending and who have staff available for small business services, or who have acquired a community bank should be part of any initial competitive screen. It's also important that the National Credit Union Administration collect more granular deposit information from credit unions so we can better understand their local market power. Similar activity should be subject to similar data collection and regulation. Factor in deposits at digital banks. Since online deposits are not reportable at the branch level, it's important that we account for deposits and loans offered by banks that have established a national digital presence. As mentioned earlier, recent data suggest that more than 5 percent of all deposits in the banking system were collected through online means. In the absence of specific data about a digital bank's presence in a market, those deposits should be weighed in pro rata in each banking market at the percentage reported annually in the Summary of Deposits in any competitive analysis. Consider nonbank financial firms in all competitive analyses. nonbank financial firms do not generally provide the full range of banking products and services to consumers, they do exert competitive pressures in banking markets across the United States. Since 1995, nonbanks have increasingly become important competitors for banks, capable of exerting substantial market pressure in some product markets. We need to capture these granular competitive effects across different geographic and product markets. One way to do this is by relaxing the deposit-market-based HHI thresholds in the current bank merger guidelines to reflect the increased competitive influence banks face from nonbanks today. This is also an area where I think our research partners can help us better understand how to factor in competition from nonbank entities. In my view, in order to support increased transparency, the Federal Reserve should review its approach to defining banking markets to ensure they are updated consistently and reflect the changes in how consumers in a community access banking products and services. factors analysis through its development and maintenance of the Competitive Analysis The tool gives the public direct insights into the currently defined banking markets in the United States and allows for the pro forma evaluation of the competitive effects of actual and even hypothetical mergers. The initial screens that are currently used in competitive analysis are built into the tool and can be updated as things change. As we work to develop a more comprehensive process for evaluating competition, the CASSIDI team should add data and even new functionality to the tool to ensure that we are working from a common set of rules in our analysis. To wrap up, competition is vital to ensuring that we continue to have a vibrant and innovative banking industry. In the 10 years of this research conference, we've seen how competition has led to the adoption of a suite of digital products and services by banks of all sizes. From remote deposit capture, online account openings, and automated underwriting, to interactive teller machines, banks with more than $1 trillion in assets and those with less than $100 million in assets are both able to quickly onboard new technology to meet consumer demand. This has further led to a proliferation of tailored products and services that meet the unique needs of bank customers. We've seen how competition from new, tech-savvy, core service providers has led legacy providers to enhance their product offerings and capabilities. At the same time, we've seen how these same technologies that enhance the banking experience can also be used by nonbanks to compete directly with banks. While banks have adjusted their business models to address new competitive threats and changing customer demand, the framework for evaluating competition has not changed significantly since 1995. As these new competitors increasingly provide consumers with alternative delivery channels for the cluster of banking products and services they desire, we need to make sure we take appropriate steps to understand the competitive pressure they exert and modernize our approaches to measuring competition. Our current framework is meant to promote a competitive marketplace for banking products and services. But if that framework does not account for the full range of competitors, we're only restricting banks from making strategic merger choices, while allowing those outside the framework to proliferate. Competition is at the foundation of our financial and economic system. As the banking industry changes, we need to change how we think about competition for banking products and services and modernize our approach to competitive analysis that promotes a healthy banking and financial system, supports consumer choice, and creates the right incentives for continued innovation.

r220928b_FOMC

united states

Welcoming Remarks

powell

For release on delivery by at the Good morning, and welcome to the 10th annual Community Banking Research Conference. I have attended this conference twice before, including the first one back in 2013, and I can attest to the quality of the research and discussions. While I am coming to you virtually today, many of you are gathering in person for the first time in three years. I am sure it will make an excellent event even more enjoyable. regulators, policymakers, and community bankers to discuss the unique and important role community banks play in our economy. The conference was launched in the years following the financial crisis, in a collaboration by the Federal Reserve, the Conference (FDIC). The conference was developed to deepen our understanding of the community bank business model and to provide a forum to discuss research with academics, policymakers, regulators, and community bankers. The research presented over the years has informed supervisory and regulatory policy debates and continues to challenge our thinking. It has highlighted the vital links between community banks and small businesses, the availability of credit in low- and moderate-income communities, how community banks support their local communities in times of crisis, and the impact of technology. A critical feature of the research sessions is that community bankers join academic moderators to provide feedback from a practitioner's perspective. The challenges facing community banks have changed significantly over the past 10 years. Community banks have demonstrated remarkable resilience, and conferences like this have helped regulators and supervisors to better understand those changes. I want to congratulate the Federal Reserve Bank of St. Louis for a decade of hosting an important and informative conference. And I want to thank our colleagues at the Fed, the FDIC, and the Conference of State Bank Supervisors. On a sadder note, I want to recognize the passing of John Ryan, who was president of the CSBS, this past May. John's impact on the CSBS and his contributions to the financial services sector overall were significant, and he is missed by all who knew and worked with him. Thanks also to the researchers and all the community banking professionals for their insight and contributions over the years. Thank you all, and have a great conference.

r220930a_FOMC

united states

Large Bank Supervision and Regulation

bowman

Today, I would like to talk about the future of supervision and regulation of the largest banks, which changed significantly after the financial crisis 14 years ago and has evolved more gradually over the past 5 years. As the backdrop for this look into the future, it is important to recognize that this recent past for supervision and regulation has been a success, resulting in a banking system that is safer, stronger, better capitalized, and more resilient. This is particularly true for oversight of the largest banks, including global systemically important banks (GSIBs), and their central role in the financial system. As supervision and regulation have been refined in recent years, the largest banks have maintained high levels of capital, and their resilience has been repeatedly confirmed by both supervisory and real-life stress tests. Most notably, the U.S. financial system faced the onset of the pandemic in the spring of 2020, which disrupted financial markets and raised fears of a severe crisis. During this time, banks performed very well, continuing to keep credit flowing throughout the financial system as governments and central banks responded to the crisis, setting the stage for a rapid recovery from the sharpest economic contraction that the U.S. economy has ever experienced. This outcome is a recognition, in my view, of the gradual and experiential approach to changing large bank supervision and regulation over the past several years. After the rush of regulation and the supervisory overhaul of large banks in the wake of the financial crisis, the Board of Governors took time to observe how the changes were working, and how things might be improved. Input was solicited from the public, and the changes made were incremental and carefully calibrated. I think the evidence is very clear that these changes have preserved and, in many cases, strengthened supervision and regulation, and that our gradual and evolutionary approach was wise. As I look ahead, that record of success is a testament to the progress we have made to date and argues for the same incremental approach to ongoing refinements in supervision and regulation. I am looking forward to working with Michael Barr, the Board's Vice Chair for Supervision, on the dual goals of making the financial system safer and fairer, two objectives that I strongly support. In doing so, I am not opposed to changes that make sense, based on the experience we have gained from applying existing rules and approaches, or prompted by new and emerging issues. As always, we should ensure that any further changes yield significant improvement to safety and soundness at reasonable cost and seek to avoid approaches that fail to consider the tradeoffs between cost and safety. In forming my judgments about whether proposed changes in regulation meet the standard I have just laid out, I will be guided by the four principles I described in 2021, outlining my perspective on bank regulation and supervision. I would like to briefly discuss these four principles, and then talk about how they have guided and will guide my thinking on a number of issues important to large bank supervision and regulation. The first principle is that bank regulation and supervision should be transparent, consistent, and fair. Combined, these three elements, which we can think of collectively as due process, build respect for supervisory practices, and in doing so, make supervision more effective and encourage open communication between banks and supervisors. This principle applies equally to regulation. Supervision cannot replace--and should never supersede--rulemaking. Published regulations that have gone through the rulemaking process, with solicitation of public comment and bona fide engagement with the issues raised, are the best and clearest way for banks to understand the rules of the road and for the bank regulatory agencies to ensure banks satisfy safety-and-soundness objectives. This brings me to the second fundamental principle for regulation and supervision: striking the right balance between ensuring safety and soundness, on the one hand, and promoting acceptable and manageable risk-taking, including encouraging responsible innovation. To put it simply, this means matching regulatory and supervisory requirements to the risks presented. For the largest banks, this naturally includes an increased focus on financial stability risks. There are obvious risks from under-regulation, and it is those risks that were addressed in the wake of the financial crisis 14 years ago. But we sometimes overlook the significant costs to our economy, and risks to safety and soundness, from over- regulation, where rules are not designed and calibrated to address the actual risks. In a time of rising interest rates that could constrain credit, it is especially important to ensure that regulation and supervision not add costs and burdens for banks with little or no benefits to safety and soundness. My third principle is that effective regulation and supervision needs to be efficient. Efficiency is key to effective regulation. In the design of a regulatory framework, there is flexibility in how to achieve a desired outcome, and there are often multiple approaches that would be effective in doing so. Once a decision has been made to regulate an activity, the next objective should be to ensure that the regulation achieves its intended purpose and that there are not more efficient alternatives that can yield those benefits at a lower cost. My fourth and final principle is that regulation and supervision should serve a legitimate prudential purpose, like promoting safety and soundness, or reducing financial stability risk. After the last financial crisis, there was strong public support for enhancing regulation and supervision over the banking system, with a particular focus on the largest banks. And many of the steps taken after the last financial crisis have improved the resiliency of the U.S. financial system. While the need for robust regulation and supervision remains as true today as it was after the last financial crisis, regulation and supervision must also allow banks to continue providing credit and other financial products and services. Collectively, these principles guide my thinking about the future of supervision and regulation. With that framework in mind, I would like to turn to some critical issues that are relevant to large banks. As I just discussed, a critical element of due process is that rules and supervision should be consistent among firms, and over time. This can be a challenge because of the variability in the business models of banks, especially among the largest banks. Each bank is different in terms of its balance sheet, business lines, and risk profile, so regulators must be vigilant that both regulations and supervisory practices are being applied consistently. One area where this need for consistency is clear is in the Board's stress testing framework. Since 2013, stress testing has been used to assess banks' capital positions and determine whether they have sufficient capital to both absorb losses and continue lending during stressed conditions. This process has evolved considerably since its inception, and that evolution is important to ensure that stress testing continues to be relevant and effective. Much of the stress testing framework is designed to encourage consistency--we have a common scenario design for firms, and similarly situated firms are subject to stress testing on the same frequency. However, the stress tests produce results that vary considerably from year to year due to how a specific scenario interacts with a specific firm's business model, and this volatility flows through to the stress capital buffers that apply to the largest firms. Although the stress scenarios are approved by the Board and change in some ways that are predictable over time or relate to changes in the underlying economy, how a scenario will affect a particular firm is not always predictable. These year-to-year variations are often not based in underlying changes to banks' business models and can create short-term challenges for capital management. There are likely many ways to limit this volatility while maintaining the value of the Board's stress tests, including by averaging results over multiple years. As the stress testing framework continues to evolve over time, we should take into account what we learn from past tests, feedback from the public and the banks themselves, and ensure that the test evolves in a way that improves consistency and fairness over time. Next, let's consider capital regulation. This is an area where requirements were quickly bolstered without extensive analysis in response to the 2008 financial crisis, resulting, in some cases, in redundant methods of calculating capital and demands that firms of all sizes and risk profiles comply with the highest requirements. The goal of efficiency dictates that over time this needs to be addressed. This is indeed what has happened over the past five years. In addition, the principle of balancing safety and soundness with the need for appropriate risk-taking is reflected in the extensive tailoring framework that the Board adopted over this time period, which carefully and deliberately matched regulation and supervision to the actual risks presented by different institutions. Often, the rules adopted immediately after the financial crisis applied a one-size-fits-all approach framed around the largest banks whose activities presented the most significant risks. This approach ignores the importance of bank size and business model. Obviously, expectations for the smallest banks with simple business models should not be equivalent to the expectations for large regional banks, or for large and complex bank holding companies engaged in significant securities or cross-border activities beyond taking deposits and retail lending. As we look into the future to potential changes to the capital framework, including those expected under the Basel III endgame rulemaking, capital is a topic that is helpful to approach holistically. From my perspective, capital requirements should strike an appropriate balance for each relevant tier of firm, with requirements that appropriately address risks, including financial stability risks, while recognizing the costs of over-regulation. Calibrating capital requirements is not a zero-sum game, where more capital is necessarily always better. Regulation is not cost-free. Over-regulation can restrain bank lending, which becomes a burden for individual borrowers and a potential threat to economic growth. Thinking about capital holistically also provides an opportunity to consider adjustments to the components of the capital requirements for the largest institutions, including the supplementary leverage ratio, the countercyclical capital buffer (CCyB), and, as I already discussed, the stress capital buffer, particularly where specific actions may have unintended consequences. Since the onset of the pandemic, the banking system has seen a significant inflow of reserves due to the Federal Reserve's asset purchases in support of the economic recovery. For some firms, the influx of reserves resulted in leverage ratios becoming binding capital constraints, rather than serving as backstops to risk-based capital requirements. While these firms' leverage ratios may become less binding as the Federal Reserve reduces the size of its balance sheet and reserves are drained from the banking system, leverage ratios that discourage banks from intermediation in the Treasury market, or from holding ultra-safe assets such as Treasuries and reserves, can distort incentives and disrupt markets. Addressing these issues could improve market functioning and financial stability. The CCyB is another component of the capital stack that deserves careful thought. In theory, the CCyB is a tool that could raise capital requirements in boom times to build resiliency and reduce capital requirements during times of stress to facilitate lending. In practice, the Board has not yet utilized the CCyB. While having releasable capital buffers shouldn't necessarily be ruled out, in my view, after a decade of stress testing and recent real-life stress experience, we have seen that the existing level of capital requirements has proven to be adequate for banks to deal with significant stress. Balancing safety and soundness with the need for appropriate risk-taking means that we should not simply assume that the further layering on of capital requirements, including through the application of the CCyB, would be beneficial. The key is to strike an appropriate balance over time that addresses risks, including financial stability risks, without impeding the ability of the banking industry to extend credit and provide other financial services that are critical to our economy. The capital structure must also be predictable, to facilitate banks' longer-term capital planning, while preserving capital to allow firms to respond to unforeseen circumstances. I now want to turn to the review of bank mergers and acquisitions, specifically to discuss how the need for transparency, and to pursue legitimate prudential purposes, should guide our analysis of banking transactions under the established statutory framework. The regulatory consideration of mergers is guided by the statutory factors prescribed by Congress--all of which are grounded in legitimate prudential purposes. The factors considered generally include the competitive effects of the proposed merger, financial and managerial resources, future prospects of the merged institutions, convenience and needs of the communities to be served, compliance with money laundering laws, and the effect of the transaction on the stability of the U.S. banking or financial system. This analytical merger framework works best when it is accompanied by transparency, both in timelines and expectations, that allows firms to know and understand what is expected of them, and what they can fairly expect during the merger application process. The rules of the road should not change during the application process. We should be vigilant to be sure that other factors, like the idea that mergers are harmful or that increased bank size is inherently problematic, do not infiltrate that statutory analytical framework. The analysis and approval of mergers and acquisitions should be based on the reality of how customers and the financial system would be affected. For larger banks in particular, the evolution of the merger review framework should also factor in the evolution of markets, industry, and customer preferences. A merger can have a significant impact on local communities, in terms of the quality and availability of products and services. The effects of a merger can be beneficial to communities, enhancing the safety and soundness of a firm, and leading to significant public benefits. The consequences of getting these policies wrong can significantly harm communities, in some instances creating banking "deserts," especially in rural and underserved markets. Next, I would like to discuss resolution planning, or so-called living wills. large banking organization is required to periodically submit a resolution plan to the Board of Governors and the FDIC, describing the organization's plan for an orderly resolution in the event of material financial distress or failure. The requirements for these plans are established by statute and regulation, with additional guidance published to give firms appropriate notice of regulatory expectations. For the U.S.-based GSIBs, resolution plans are also informed by other regulatory requirements, including the requirement that such firms issue a minimum amount of total loss-absorbing capacity, which includes both equity and long-term debt. The requirements that establish and support the orderly resolution of firms are important to supporting the financial stability of the United States. Of course, these requirements have evolved over time, most recently with a proposal intended to increase the efficiency of living wills by alternating between data- intensive full plans and risk-focused targeted plans. I expect that further evolution will be considered in response to ongoing changes in the financial landscape and the risks facing the largest firms. In doing so, I believe that fairness dictates that broad supervisory powers should not displace rulemaking. In my view, the need for fairness and due process in resolution planning is particularly critical when it comes to considering whether and how to address concerns about the resolvability of regional banks. This question of fairness and due process is important, and it involves, among other things, a debate about the merits of a single point of entry resolution strategy on the one hand (more common among the GSIBs), and on the other hand, established bankruptcy and FDIC bank resolution procedures. This issue transcends particular firms, and particular transactions. It is an issue that affects a broad range of institutions of similar size. And policy actions in this area will require working with colleagues at other bank regulatory agencies and seeking public comment. Fairness dictates that this debate occurs in the arena of regulation, with all the appropriate due process protections that this entails, and not on an ad hoc basis for a single firm that chooses to make an acquisition subject to regulatory approval. If the regulatory framework for resolution needs to be improved, we should look at the framework, and identify and remediate any areas of concern. It is hard to understand why banks that choose to grow through acquisition should be subject to different resolution expectations than banks that grow organically. This strikes me as a clear example where requirements and expectations should only evolve through appropriate rulemaking processes, consistent with underlying law, in order to promote a level playing field. There are a number of other areas where I think these principles can help frame a productive conversation about the future of regulation and supervision, including around banks engaging in crypto-asset-related activities, and improving the transparency of supervisory standards. Another area where regulation and supervision continues to evolve is around banks engaging in crypto-asset activities. These activities raise a number of significant issues. When I think about the evolution of supervision and regulation of these activities, I ask myself whether the rules are clear in the current rapidly evolving environment, and whether the rules as they evolve are serving a legitimate prudential purpose. Banks seek to understand and comply with rules because, above all, they value predictability and consistency. When a bank understands the legitimacy of a rule and establishes internal incentives to comply with it, the bank itself becomes the strongest supervisory tool that there is. But sometimes, rules are difficult to apply. This can be due to quickly evolving technologies, particularly when it comes to digital assets, but it can also be due to a lack of experience with new rules, or when the rules are not that clear in a particular context. Banks should be able to know what the supervisory expectations are with respect to these new technologies in order to responsibly take advantage of them. The adoption and use of new technologies may present novel supervisory concerns, but the best way to address these concerns and encourage innovation is dialogue between bankers and supervisors before and during the development and implementation of those technologies. I believe the goal with digital assets should be to match oversight to risk, and to provide clarity in supervisory expectations for banks seeking to engage in the crypto- asset ecosystem. As fluctuations in crypto-asset prices have shown, there clearly are material risks associated with these assets. However, it is also an area where there has been and continues to be intense consumer demand, and we should consider whether there is a stabilizing role for banks to play in intermediation, or ensure that the competitive landscape does not create a financial stability risk by pushing activities outside the banking system, as we have seen with the mortgage industry. To be effective in this space, any clarity regulators provide will need to recognize that this is not a risk- free activity, but I believe we should allow banks to participate as long as the risks can be identified and managed appropriately and responsibly. Another way to promote consistency is to continue improving the disclosures around supervisory standards. While doing so improves transparency, it also improves fairness, another of my core principles. Like the due process protections enshrined in the U.S. Constitution and embedded in regulatory law, fairness is fundamental to the legitimacy and effectiveness of financial oversight, including supervision. In the context of bank regulation and supervision, fairness means being transparent about expectations, which should be clearly laid out in advance (and I want to emphasize that "in advance" part). Supervision should not be adjusted in specific situations to displace or alter regulations, or without appropriate notice and opportunity for public comment, and should be accompanied by clear communication with regulated firms. Where we have established precedents, we should respect them. Banks rely on our precedents in making their business decisions, so not respecting precedents can interfere with the ability of firms to plan and to fairly compete. If changes to precedents are appropriate, we should explain those intentions and employ a transparent and accountable administrative process to ensure fairness and appropriately implement the change. Take, for example, the supervision criteria implemented by the Large Institution not public. Making these materials public would not only improve transparency, doing so would also provide some assurance to the banks subject to them that they are being held to the same supervisory expectations as their peers over time. Without this clarity, it is far more challenging to build trust in this aspect of the supervisory process. Improving transparency around supervisory standards promotes safety and soundness, both encouraging compliance, and limiting the role of formal and informal enforcement actions and penalties in addressing serious issues. In my view, success should not be measured by penalties or enforcement, but by how well banks are following the rules. The principles I've articulated today reflect my approach to considering whether and how the regulation and supervision of the largest banks should evolve in response to changing economic and financial conditions. The regulation and supervision of financial institutions must be nimble to address new risks to safety and soundness and financial stability, but should always consider tradeoffs and potential unintended consequences, like increasing the cost of lending or pushing financial activities outside of the regulatory perimeter into the shadow banking system. I look forward to working with Vice Chair Barr, my fellow Board members, and colleagues at the other bank regulatory agencies, as we consider the evolution of supervision and regulation for the largest financial institutions.

r220930b_FOMC

united states

Global Financial Stability Considerations for Monetary Policy in a High-Inflation Environment

brainard

I want to start by thanking Anna Kovner, Rochelle Edge, and Bill Bassett for organizing this conference. The current global environment highlights the importance of having strong analytic and empirical foundations to understand financial stability considerations for monetary policy, and the research presented today will help strengthen those foundations. The global environment of high inflation and rising interest rates highlights the importance of paying attention to financial stability considerations for monetary policy. As monetary policy tightens globally to combat high inflation, it is important to consider how cross-border spillovers and spillbacks might interact with financial vulnerabilities. Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out. In August, CPI (consumer price index) inflation on a Central banks facing high inflation are tightening monetary policy rapidly to damp demand and bring it into alignment with supply, which is constrained in a variety of sectors. The process of resolving imbalances will be easier the more supply improves in markets for commodities, labor, and key intermediate inputs, as is generally expected, but there is a risk that supply disruptions could be prolonged or aggravated by Russia's war against Ukraine, COVID-19 lockdowns in China, or weather disruptions. Russia's war against Ukraine has generated spikes in prices for energy, food, and agricultural inputs. Most recently, inflation in Europe was pushed higher by Russia's cessation of natural gas deliveries through the Nord Stream 1 pipeline, creating hardships for households and risking disruptions for some industries in the affected countries. China's COVID lockdown policy could also lead to supply disruptions if cases again increase. Separately, weather conditions in several areas, including China, Europe, and the United States, are exacerbating price pressures through disruptions to agriculture, shipping, and utilities. Many central banks around the world have pivoted monetary policy strongly in order to maintain anchored expectations and forestall second-round effects from high inflation becoming embedded in wage and price setting. In the United States, the Federal Reserve has increased the federal funds rate target range by 300 basis points in the past seven months--a rapid pace by historical standards--and the Federal Open Market Committee's most recent Summary of Economic Projections indicates additional increases through the end of this year and into next year. In addition, beginning this month, balance sheet shrinkage accelerated to its maximum rate of up to $60 billion in Treasury securities per month, and up to $35 billion in agency mortgage- backed securities per month. Broader U.S. financial conditions have tightened rapidly: The 10- year Treasury yield has risen more than 200 basis points since the beginning of the year and is near its highest level in over a decade at 3.8 percent. At a global level, monetary policy tightening is also proceeding at a rapid pace by historical standards. Including the Federal Reserve, nine central banks in advanced economies accounting for half of global GDP have raised rates by 125 basis points or more in the past six months. Global financial conditions have likewise tightened. Yields on 10-year sovereign debt in the United States, Canada, the United Kingdom, and the largest euro area economies are higher year to date between 170 and 350 basis points. It will take some time for the global tightening to have its full effect in many sectors. While the effect on financial conditions tends to be immediate or even anticipatory, the effects on activity and price setting in different sectors may occur with a lag, with highly interest- sensitive sectors such as housing adjusting quickly and less rate-sensitive sectors such as consumer spending on services adjusting more slowly. In addition to the domestic effects from domestic tightening, there are cross-border effects of tightening through both trade and financial channels. U.S. monetary policy tightening reduces U.S. demand for foreign products, thus amplifying the effects of monetary tightening by foreign central banks. The same is true in reverse: Tightening in large jurisdictions abroad amplifies U.S. tightening by damping foreign demand for U.S. products. Tightening in financial conditions similarly spills over to financial conditions elsewhere, which amplifies the tightening effects. These spillovers across jurisdictions are present for decreases in the size of the central bank balance sheet as well as for increases in the policy rate. Some estimates suggest that the spillovers of monetary policy surprises between more tightly linked advanced economies such as the United States and Europe could be about half the size of the own-country effect when measured in terms of relative changes in local currency bond yields. In contrast, spillovers through exchange rate channels tend to go in opposite directions. The Federal Reserve's broad nominal U.S. dollar index has appreciated over 10 percent year to date. On balance, dollar appreciation tends to reduce import prices in the United States. But in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require additional tightening to offset. We are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks. For instance, in countries where sovereign or corporate debt levels are high, higher interest rates could increase debt-servicing burdens and concerns about debt sustainability, which could be exacerbated by currency depreciation. An increase in risk premiums could kick off deleveraging dynamics as financial intermediaries de-risk. And shallow liquidity in some markets could become an amplification channel in the event of further adverse shocks. For some emerging economies, high interest rates in combination with weaker demand in advanced economies could increase capital outflow pressures, particularly commodity importers facing higher commodity prices and weaker exchange rates. And these pressures would be particularly challenging for borrowers with currency mismatches between their assets and liabilities. This is especially true at times when fiscal, macroprudential, and monetary buffers are more limited. Fiscal and monetary policy were both supportive in response to the pandemic, and both were naturally expected to reverse course as the recovery gathered steam. But the advent of the war has led to a significant hit to real incomes from large price increases in energy and other commodities in some of the most severely affected economies. With respect to macroprudential buffers, nearly all of the jurisdictions that built countercyclical capital buffers before the pandemic released those buffers at the outset of the pandemic, and the buffers have not been fully replenished so far. A European Central Bank analysis concluded that the release of capital buffers increased headroom for banks relative to not only their regulatory thresholds, but also their internal risk controls, and enabled banks to continue providing credit to households and businesses. And of course, monetary policy is focused on restoring price stability in a high-inflation environment. As the program's first research paper illustrates, in circumstances in which macroprudential policy cannot on its own eliminate the amplification of shocks through financial vulnerabilities, in a low-inflation environment, monetary policy has been relatively more accommodative than would be prescribed by a conventional monetary policy rule in order to reduce the likelihood of adverse output and employment outcomes. But in a high-inflation environment, monetary policy is restrictive to restore price stability and maintain anchored inflation expectations. The Federal Reserve's policy deliberations are informed by analysis of how U.S. developments may affect the global financial system and how foreign developments in turn affect the U.S. economic outlook and risks to the financial system. We engage in frequent and transparent communications with monetary policy officials from other countries about the evolution of the outlook in each economy and the implications for policy. We meet regularly not only with monetary policy officials from different countries, but also with fiscal and financial stability officials in a variety of international settings, which helps us to take into account cross- border spillovers and financial vulnerabilities in our respective forecasts, risk scenarios, and policy deliberations. High inflation imposes significant hardships by eroding purchasing power, especially for those households that spend the greatest share of their incomes on essentials like food, housing, and transportation. Following a period where a combination of high demand and a lengthy sequence of adverse supply shocks to goods, labor, and commodities drove inflation to multidecade highs, monetary policymakers are taking a risk-management posture to guard against risks of longer-term inflation expectations moving above target, which would make it more difficult to bring inflation down. In the modal outlook, monetary policy tightening to temper demand, in combination with improvements in supply, is expected to reduce demand-supply imbalances and reduce inflation over time. The real yield curve is now in solidly positive territory at all but the very shortest maturities, and with the additional tightening and deceleration in inflation that is expected over coming quarters, the entire real curve will soon move into positive territory. It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down. Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely. We also recognize that risks may become more two sided at some point. Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle. Proceeding deliberately and in a data- dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening and to update our assessments of the level of the policy rate that will need to be maintained for some time to bring inflation back to 2 percent.

r221004a_FOMC

united states

Technology’s Impact on the Post-Pandemic Economy

jefferson

Good morning, and thank you. It is a pleasure to be here today. I am happy to be giving my first speech as a member of the Board of Governors at the Federal Reserve Bank of Atlanta. I would like to thank the Atlanta, Dallas, and Richmond Feds for inviting me today and for bringing together this collection of expertise and research. Today I would like to continue the discussion you have been having about tech- enabled responses to the pandemic. Then I would like to delve a bit further into what those pandemic-related disruptions have meant for economic activity at the microlevel and how the changes of the past few years affect how I view the outlook for the macroeconomy. This may be my first speech as a Fed Governor, but I am well aware of one practice associated with these occasions. That practice requires me to say that I am speaking for myself alone. My views do not necessarily reflect those of anyone else at the Board of Governors or in the Federal Reserve System. Turning to the subject of this conference, there is no question that technology helped households and businesses to adapt and adjust in many ways to the disruption brought about by the pandemic. Those adaptations--from enabling people to keep working to helping businesses stay open--undoubtedly prevented worse outcomes. They also likely changed the economic landscape for good and, in many cases, for the better-- from hybrid working and how businesses approach distribution, investment, and inventories to the way consumers shop and pay for goods and services. Those changes are evident across broad categories, each of which this conference has discussed in some detail. Supply chain and business investment underwent, and are still experiencing, significant change. Large increases in computers and peripherals investment enabled remote work and helped to automate processes at physical establishments while simultaneously minimizing in-person contact. Likewise, the labor market showed great adaptability in the rapidity and relative ease that many sectors showed in shifting to remote working. Of course, that did not translate to all areas of employment, such as those jobs that require person-to-person interaction. Nevertheless, technology allowed many employees to continue working during a pandemic. Also, it likely had an indelible effect on current and future ways of working, including encapsulating hybrid work and greater flexibility for employees as fixtures. The shift to remote and hybrid learning, however, was difficult, but without technology, learning during lockdown might have ceased entirely. In some cases, schools were closed for only a few weeks or months, and the entire in-person learning apparatus was replaced with technology-enabled remote learning. The teachers and administrators--and I was one at the time--adapted remarkably quickly to a dramatically different set of tools and techniques. Teachers, students, and parents made a rapid shift to an entirely new dynamic, often on entirely new platforms. We are still learning the lessons of that interlude, and they can influence how schools at all levels think about future planning. My colleagues and I recently heard from a community college administrator about the challenges she faced. Training programs that fill worker demand in local industries require hands-on experience, which meant retooling the curriculum for a hybrid environment. Student services also had to change to accommodate the increased need for childcare and other pandemic-related hurdles, or her school risked a drop in enrollment. The payments system has also seen an acceleration in alternative online and mobile payment methods as well as contactless payment options. We all remember the onset of the pandemic, when social distancing became imperative and delivery and curbside pickup became the norm for many. Remote card payments naturally rose as in- person use fell. As stores reopened while the fear factor was still considerable, the contactless payment options that were available on cards and mobile devices received more attention. Such changes, coupled with the growing prominence of person-to-person money transfer apps, provided consumers with remote and touchless cash substitutes in their daily lives. The expanded use of those various payment options rested on the foundation of an intricate, robust payments ecosystem. That system supported a migration from in-person payment options to no-contact alternatives, helping restart the economy during a time of deep stress. These are just a few of the examples you have been discussing, and there are many more. The pandemic, and the tech-enabled responses to it, changed the economy in fundamental ways that will likely not revert. It is vital to understand those changes and the effects they will have going forward. As an economist looking at these issues on a microlevel, I appreciate the expertise on display at this conference. From my new perch as a Fed Governor taking the macro view, the research presented gives more context to the wider economic playing field. From either perspective, the technology-enabled responses and the changes brought about by the pandemic itself are important issues for policymakers to understand. They affect how we look at the economy overall. As I look ahead, I am considering how those changes affect the outlook, and I would like to speak a bit about how I see the economy evolving as we move forward. The labor market remains strong, as can be seen across a variety of measures, from the low unemployment rate to the high quits rate, which illustrates the confidence of workers who are willing to leave their jobs in pursuit of better ones. Labor force participation remains lower than it was prior to the pandemic, reflecting several factors, including people who left the workforce for early retirement and some remaining parents and other caregivers who stayed home through the pandemic. These are not factors that reverse on a dime. With still-strong labor demand and sluggish labor supply, the job market remains very tight. Workers are moving between jobs more rapidly than in the past, putting upward pressure on wages. In a market with more job openings than workers, the competition to fill vacancies is leading to rapid wage gains now, and the resulting salary compression may lead to further upward wage pressures in the future. As growth has slowed this year, supply-demand conditions in the labor market--and the overall economy--seem likely to ease some. We have already seen some indications from survey data, information from transportation hubs, and producer prices that supply bottlenecks have, at long last, begun to resolve. Nonetheless, inflation remains elevated, and this is the problem that concerns me most. Inflation creates economic burdens for households and businesses, and everyone feels its effects. It can also change people's expectations about how long lasting price rises will be. Those inflation expectations can become entrenched and, in doing so, increase the likelihood that high inflation will persist. While oil and gasoline prices have come down in recent months, I am concerned that fluctuations in prices of the goods to which people pay the most attention, like food and housing, will affect expectations of future inflation. Thankfully, longer-term inflation expectations appear to remain well anchored, consistent with our 2 percent target. I will be watching those expectations closely. An important outcome of the shifts you have been discussing, from firms' production patterns and distribution mechanisms to consumers' purchasing decisions, is that inflation dynamics likely changed also. How and why prices change require careful study and analysis, and a data-driven approach is more essential than ever. Restoring price stability may take some time and will likely entail a period of below-trend growth. However, I want to assure you that my colleagues and I are resolute that we will bring inflation back down to 2 percent. The full effects of monetary policy take time, but in my brief time on the Federal Open Market Committee, we have acted boldly to address rising inflation, and we are committed to taking the further steps necessary. The fundamental shifts at the core of the economy shape my approach to policy. As we are assessing the dynamics of the macroeconomy amid rapid changes, we will be watching the data closely and applying rigorous analysis. My focus is on progress toward our goal. It is too soon to say whether the pandemic and the changes it brought--many of which this conference has covered--are going to be permanent or ebb as time goes by. My guess is that it is likely to be a combination of the two, with some features becoming embedded, such as new approaches to working and contactless payments, and others returning to something like they were before, like the preference for in-person education. Either way, it will take time for these changes to prove themselves to be either permanent fixtures or temporary features. Research will play a key role as we try to answer important questions. New data will help us analyze the changes to the economy, and research will assemble the pieces of the puzzle that show the bigger picture. As we watch and assess developments in the U.S. economy, we will have to take into consideration a multitude of factors, including those rooted in technology-enabled disruption, and the strength and the staying power of the many forces that are shaping the economy. Thank you for your time, and I look forward to your questions.

r221006b_FOMC

united states

Economic Outlook

cook

Thank you, Adam, and thank you to the Peterson Institute for inviting me to speak today. This is my first speech as a Fed Governor, and I am delighted to deliver it here, joining friends and colleagues from across my career, from academia to policymaking. I would like to start with a discussion of the U.S. economy, including the implications of international developments, and then talk about my approach as a policymaker and how I view the current stance of monetary policy. I will begin with the labor market, which is very strong. Employment rebounded much more swiftly post-pandemic than it did during previous recoveries and has continued to grow at a rapid pace of about 440,000 jobs a month so far this year. The unemployment rate, at 3.7 percent, remains very low. Other indicators also point to labor market strength: Despite a large drop in the number of job openings in August, which may suggest that labor demand is moderating, there is still an unusually high 1.7 job openings per unemployed job seeker. Meanwhile, layoffs are near historical lows, and the quits rate is well above pre-pandemic levels even as it has moderated somewhat, indicating that workers still feel confident they can find another job. On the supply side, labor force participation has recovered more slowly than expected and has largely moved sideways this year even after a welcome rise to 62.4 percent in August. Early retirements prompted by the pandemic have not yet reversed. Some of these are likely due to fear of exposure to COVID-19. And COVID continues to weigh on a full recovery in labor supply in other ways as well, as people with long-haul cases and caring responsibilities stay home and others lose hours to short- term illness. If the health impact of COVID-19 continues to diminish, I am optimistic that more workers will reenter the labor force, but there is a risk that labor supply remains below its pre-pandemic trend. On the price stability side of the Fed's mandate, inflation remains stubbornly and unacceptably high, and data over the past few months show that inflationary pressures remain broad based. My focus, therefore, is on bringing inflation back down to our 2 percent target. I am heartened to see measures of medium- to long-term inflation expectations falling in the surveys from the New York Fed and the University of Michigan. Although those declines may partly reflect falling gasoline prices, they provide some evidence that inflation expectations are well anchored. The data on actual inflation, however, have showed a slower decline than I had anticipated, and I am seeking to better understand the reasons. I am focused on the lag between signs of easing price pressures and actual inflation coming down from its very high levels. Much of the surge in inflation over the past year was rooted in the incomplete recovery of aggregate supply from pandemic-related shutdowns. Global supply chain disruptions had especially wide-reaching effects. This year, Russia's invasion of Ukraine sparked a surge in energy prices and affected global food markets both directly, by reducing shipments of commodities such as grain, and indirectly, by, for example, curtailing fertilizer production. In recent months, some of the upward pressure from those forces has begun to wane. Supply bottlenecks appear to be easing, and global oil and commodity prices have declined. This largely reflects worsening global growth prospects, notably in Europe, which is suffering from the reduced flow of Russian natural gas, and in China, with its zero-COVID policy and property-sector difficulties. U.S. gasoline prices have fallen more than $1 per gallon since June, reflecting the fall in oil prices and refinery margins and helping to slow the monthly increases in headline consumer prices. However, core prices--those excluding food and energy-- have continued to rise rapidly. In particular, inflation in core goods prices has been surprisingly strong, in part because the elevated demand for goods we saw during the height of the pandemic has taken longer to abate than previously anticipated. Still, there are reasons to expect core goods inflation to slow in coming months. Wholesale used vehicle prices have declined considerably, but there is some uncertainty about how long it will take for that decline to show up in consumer prices. Similarly, new car prices should moderate over time as production of new vehicles continues to ramp up. Overall, a broad range of goods have seen declines in supplier delivery times and freight prices. And core import prices have fallen in each of the past four months, driven by lower commodity prices and an appreciating dollar. Although supply constraints in goods appear to be easing, we cannot assume that improvement will be steady. Globally, at least one potential snag is the possible reduction in Russian oil supply later this year when European sanctions come into full force. As we saw with drought in Europe and China and the floods in Pakistan, extreme weather conditions may also disrupt global supplies of food and other commodities. Domestically, the recent threat of a rail strike, though averted, highlights the existence of latent risks that could result in further negative supply shocks. Consumer prices continue to rise rapidly over a broad range of services as demand for services recovers. Continued strong wage increases will likely put further upward pressure on service price inflation. Housing services inflation will likely boost overall inflation well into next year. Although rent increases on new leases are starting to slow, that moderation also is likely to have a substantial and uncertain lag before it measures of inflation. The widespread nature of the inflation pressures suggests that the overall economy is very tight, with constrained supply continuing to fall short of demand. The Fed cannot act directly on supply, but it can moderate demand by tightening monetary policy. The rate hikes so far this year, coupled with expectations of further hikes and ongoing balance sheet runoff, have led to a sharp tightening of U.S. financial conditions. This has helped soften interest-sensitive components of private demand, including business investment and--most notably--housing. Indications of cooling in the housing market include declines in single-family starts and permits, existing home sales, and homebuyer and homebuilder sentiment. While there is heterogeneity across countries, high inflation is a global phenomenon. And financial conditions also have tightened abroad, as foreign central banks have raised policy rates. Some observers have raised concerns that central banks around the world, which are tightening policy to contain domestic inflation, may not be accounting for the cross-border spillovers of their policies. My role is to focus on the Fed's dual mandate to promote maximum employment and stable prices for the American people, which is a domestic mandate. My colleagues and I on the Federal Open Market Committee (FOMC), however, are very attuned to foreign developments, including monetary policy abroad, and their effect on domestic conditions through trade and financial market channels. Sharp slowdowns in foreign economies, along with dollar appreciation, are reducing demand for U.S. exports, and financial market spillovers between the United States and abroad are a two-way street. As with almost everything else in these times, there is substantial uncertainty about the size of these spillovers. These international dimensions are among those that I consider in my risk- management approach, which I will describe in a moment. I will also address how data drive my understanding of the inflation dynamics I have outlined. The role of policymaker robs economists of one of the profession's great joys, which is to simply ruminate or expound on the vagaries of economics. In my new role, I must make judgments on the economy, weighing new information against existing theories, and translate those judgments into appropriate policy action. To a large extent, my own research and experiences shape my views on policy. My research on economic growth has given me an appreciation for the dual mandate and the importance of economic and financial stability for fostering innovation and growth. My experience working at the Council of Economic Advisers during the eurozone crisis and with emerging economies--particularly Russia and some African economies--has taught me how difficult it can be to forecast in highly uncertain environments. I also saw firsthand that it is often a mistake to rely on standard models for nonstandard situations. Paying close attention to the data is key, which, of course, includes readings on inflation and the labor market. But we must be humble about our ability to draw firm conclusions and prepare for inevitable surprises. We also need to consider timely high- frequency data that more quickly capture evolving economic developments than do traditional data sources. Examples include wholesale used car prices, rental rates on new leases, and survey responses on supplier delivery times or prices paid. There is also nontraditional, real-time information, such as Google mobility data and Open Table data on dining reservations, which were useful in estimating economic activity during various waves of the pandemic. In considering whether standard models remain appropriate, one focus for me is the well-known long and variable lag between monetary policy actions and their effect on the real economy and on inflation. Less of a lag may exist now between rate hikes and the tightening of financial conditions, which occurs as markets anticipate future rate hikes. Residential investment also responds quickly to changes in monetary policy, while consumer spending is slower to react. Lags between monetary policy and inflation are even more unclear. Expectations of future monetary policy can have quite rapid effects on commodity and other import prices, but monetary transmission through economic slack appears to affect inflation more slowly. I believe that uncertain times require a risk-management approach to policy- setting--looking not just at the expected outcomes, but also considering the most salient risks in setting the policy stance. In the current situation, with risks to inflation forecasts skewed to the upside, I believe policy judgments must be based on whether and when we see inflation actually falling in the data, rather than just in forecasts. Although most forecasts see considerable progress on inflation in coming years, it is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain. How do these experiences and the principles of data dependence and risk management influence my views on current monetary policy? In 2019, well before joining the Board, I took part in the Federal Reserve's event in Chicago. A key takeaway from was the value of a sustained strong labor market that brings people off the sidelines--those who have been on the margins but who have skills that can be developed and the desire to be part of the workforce, if given a chance. Just two weeks ago, we held another event to hear how businesses, families, and communities are adapting to changes in the post- pandemic economy. Notably, we heard about the burden that lower- and middle-income families are feeling from high inflation. These events highlighted for me the importance of achieving both our employment and price-stability mandates. In our current economy, with a very strong labor market and inflation far above our goal, I believe a risk-management approach requires a strong focus on taming inflation. Inflation poses both a near- and long-term threat. Aside from the immediate effect of higher prices on households and businesses, the longer it persists and the more people come to expect it, the greater the risks of elevated inflation becoming entrenched. I think it is critical that we prevent an inflationary psychology from taking hold. This is not simply an abstract concept, but a risk I take seriously based on personal experience. My time doing dissertation research in Russia in the mid-1990s taught me just how disruptive and painful an extremely high-inflation environment can be. Reports over the past few months have shown high inflation to be stubbornly persistent, while the labor market has remained strong. Being data dependent, I have revised up my assessment of the persistence of high inflation. And given my risk- management approach, with upside risks to inflation being the most salient, I fully supported the step-up in the front-loading of policy over the past three FOMC meetings. Front-loading has several positive features. It puts monetary restraint into place more quickly to reduce demand while supply is constrained. It may also act to rein in inflation expectations and, as a result, to influence wage- and price-setting behavior. This preemptive approach is appropriate. Although lowering inflation will bring some pain, a failure to restore price stability would make it much harder and much more painful to restore it in the future. When I first joined the FOMC, our policy rate was still below 1 percent. In the three meetings since, we have moved expeditiously by raising rates 75 basis points at every meeting. As we move forward in these uncertain times, policy should remain focused on restoring price stability, which will also set the foundation for a sustainably strong labor market. With inflation running well above our 2 percent longer-run goal, restoring price stability likely will require ongoing rate hikes and then keeping policy restrictive for some time until we are confident that inflation is firmly on the path toward our 2 percent goal. At some point, as we continue to tighten monetary policy, it will become appropriate to slow the pace of increases while we assess the effects of our cumulative tightening on the economy and inflation. In any case, the path of policy should depend on how quickly we make progress toward our inflation goal. In sum, inflation is too high, it must come down, and we will keep at it until the job is done. Thank you.

r221006a_FOMC

united states

The Economic Outlook with a Look at the Housing Market

waller

Thank you, Jim, and thank you to the University of Kentucky for the opportunity to speak to you today. It is nice to be back in the Bluegrass state and see old friends and colleagues. I taught at UK from 1998 to 2003 and one of my colleagues at that time was Mark Berger, who passed away at far too young an age. Mark was a good friend, and I am honored to speak in this seminar series that is named after him. My subject is the outlook for the U.S. economy and inflation, and the Federal Reserve's efforts to get inflation under control. I will start with the outlook for the economy, focusing on inflation, and then turn to a discussion of the housing market, where strong demand has outrun limited supply, causing substantial increases in prices for shelter, which is a large component of inflation. Because the housing market is sensitive to changes in interest rates and thus to monetary policy, I'll conclude by discussing how housing is being affected by the Federal Open Market Committee's (FOMC) efforts to achieve our dual mandate of maximum employment and stable prices. Recent data on economic activity suggest that after a slight contraction in gross domestic product in the first half of this year, the economy is posed for modest but below-trend growth in the latter half. Meanwhile, the labor market remains strong and very tight. Employers added 315,000 jobs in August, well above the rate needed to keep up with population growth. While the unemployment rate rose, that was largely due to nearly 800,000 people who joined the civilian labor force, many of them drawn in by ample job openings and fast wage growth. At 3.7 percent, the unemployment rate was below the median projection for its long run rate among FOMC participants. Furthermore, initial unemployment claims are very low and stable. We will get another jobs report tomorrow. Expectations are for job gains of around 260,000, which would be lower than recent months but very healthy relative to past experience. A jobs number in this range along with the job openings rate reported on Tuesday would show that the labor market is slowing a bit but is still quite tight. As a result, I don't expect tomorrow's jobs report to alter my view that we should be focused 100 percent on reducing inflation. Since I last spoke about the economic outlook on September 9, we have received two important pieces of data on inflation for August, consumer price index (CPI) and the price index for personal consumption expenditures (PCE). Both reports confirmed that overall inflation remained much too high in August. Though gasoline prices fell, which was very welcome news for consumers, food prices increased notably. Core PCE inflation, which strips out the volatile categories of food and energy, moved up to 0.6 percent for the month, which implies an annualized rate of inflation of about 7 percent in core goods and services. Furthermore, core PCE inflation is not only high, but very persistent, with monthly prints of core PCE inflation at an annualized rate averaging about 5 percent this year. These numbers indicate that inflation is far from the FOMC's goal and not likely to fall quickly. This is not the inflation outcome I am looking for to support a slower pace of rate hikes or a lower terminal policy rate than projected in the September 2022 SEP. And, though there are additional data to come, in my view, we haven't yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed's balance sheet, to help restrain aggregate demand. As far as achieving our dual mandate, this is a one-sided battle. We currently do not face a tradeoff between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation. Let me turn to the troubling persistence of inflation. In the past couple of inflation reports, housing services has been a major contributor to measured inflation. In the latest inflation reports, shelter prices rose 0.7 percent on a monthly basis. Housing has a large weight in price indexes, as households spend a sizable amount of their incomes on housing services. The combination of high monthly inflation and a large weight in measuring overall prices means that shelter inflation is a key driver of overall inflation. Moreover, shelter inflation is a particularly persistent component of inflation and why I am focused on closely watching shelter inflation in determining my outlook for U.S. inflation. Unfortunately, the message is that shelter inflation will likely remain high for several months, meaning overall core PCE inflation will continue to be persistently high. There has been a considerable imbalance in the supply and demand for housing for some time. Housing is also sensitive to interest rates and thus quite responsive to monetary policy. So for the next few minutes, I would like to focus on how demand- supply imbalance in both owner-occupied and rental markets came about, how it is affecting prices for housing today and in future, and how housing is likely to affect the FOMC's efforts to return inflation to our 2 percent goal. Housing demand increased strongly in the years leading up to the pandemic, sustained by relatively low interest rates, the formation of new households, and rising incomes. Demand for housing then surged during the pandemic as people spent more time at home, initially on the intensive margin--more housing square footage per household. Couples in apartments wanted more space to work from home and opted for bigger apartments or houses. Also, remote work enabled people to work from preferable locations so the demand for second homes surged. As the pandemic wore on, demand for housing also increased on the extensive margin--meaning more household formation--as roommates sharing apartments now wanted to live on their own as they continued to work from home. And adult children began moving out of their parent's homes. All of these factors led to higher rates of household formation and greater demand for housing. So, by the end of 2021, the pandemic was driving up the demand for housing on both margins. Meanwhile, the pandemic's supply constraints caused shortages in construction materials and construction workers, limiting the supply of new housing. The combination of soaring demand for housing and limited supply until earlier this year meant the housing market had substantial excess demand, which was reflected in substantial increases in housing costs. But now imbalances in the owner-occupied market have started to shift. Due to the Fed's actual and anticipated tightening of monetary policy, mortgage rates have increased from less than 3 percent at the end of last year to nearly 7 percent recently. Higher borrowing costs have made it more expensive for households to buy homes, whether they are first-time buyers or trading their current home for a different one. And so, we have seen big drops in home sales over the course of this year. The monthly numbers of new and existing home sales are now back below the average levels seen in the few years before the pandemic. And the August decline in pending home sales released last week suggests that sales will fall further. Reflecting the slowdown in sales, builders have responded by pulling back on starting new single-family homes. So far, the contraction in housing demand has been more pronounced than the changes in supply, and so inventories of homes for sale have increased. While inventories of existing homes are still low in historical terms, they have grown a lot for new homes. Based on the current pace of sales, estimates of the number of months of supply of new homes has shot up and is now nearing the peaks seen in 2008 during the previous housing cycle. The easing in housing demand can also be seen in a slowdown in house price increases. Nationwide, prices of existing homes rose by about 20 percent over the 12 months ending in May, while they rose at an annual rate of less than 10 percent in recent months. Prices have even fallen in some areas of the country, especially those that saw the largest increases over the previous two years. And many builders are reportedly cutting their list prices and offering larger incentives. The combination of price cuts and slowing of new single-family construction should help builders work off excess inventory, continuing to bring the market into better balance. In addition, after mortgage rates stabilize, their drag on housing demand should ebb. While this market correction could be fairly mild, I cannot dismiss the possibility of a much larger drop in demand and house prices before the market normalizes. Despite the risk of a material correction in house prices, several factors help reduce my concern that such a correction would trigger a wave of mortgage defaults and potentially destabilize the financial system. One is that because of relatively tight mortgage underwriting in the 2010s, the credit scores of mortgage borrowers today are generally higher than they were prior to that last housing correction. Also, the experience of the last correction taught us that most borrowers only default when they experience a negative shock to their incomes in addition to being underwater on their mortgage. Because people still need a place to live, demand for rental housing has remained quite strong. Rental vacancy rates are very low. Reflecting this fact, multifamily construction has been quite high this year, at a level not seen since the mid-1980s, when the tax treatment of investment in structures was much more favorable than it is today. But demand is still much greater than supply, so rents have continued to surge. So what does all of this mean for inflation? The measures of inflation that receive the most attention in the United States attempt to measure the prices of goods and services consumed by households. For housing, this means measuring the price of consuming the shelter and other services provided by a home. The price of shelter is most easily measured by rents. Of course, rent cannot be observed for owner-occupied homes. For these homes, the price of shelter is estimated as the rent that owners would pay based on rents of nearby rental units. The purchase price of a home is not incorporated into these measures of inflation because it reflects the cost to invest in a real estate asset, not the price to consume the shelter that housing provides. As I mentioned earlier, rent growth has been very high recently. The housing services component of the PCE price index rose a bit above 0.7 percent in August, which was slightly above the previous three-month average. And I expect a similar pace to continue for a while, well into next year. Why? Shelter inflation measures the rents actually paid by households. Only a fraction of households sign a new lease in a given month or renew their lease each month. So, when monthly shelter inflation is calculated, it includes a large share of homes under lease where rents did not change. As a result, changes in market conditions show up in the inflation statistics only over a period of several months. In addition, the inflation statistics use a six-month average when calculating rent growth. Asking rents and rents on new lease contracts--which do reflect contemporaneous rental market conditions--have been rising at a fast pace for more than a year. These increases have fueled shelter inflation so far this year, and they should continue to do so for at least the next six months. That said, there is a glimmer of hope in the most recent readings of asking rents, where the rate of increase has stepped down a bit. This slower pace should eventually contribute to a slowdown in shelter inflation, although that might not be seen until later next year. So now let's consider the implications of this picture of the current and future housing market for overall inflation and monetary policy. If we assume that the recent rate of inflation in the cost of shelter continues, how much would prices of goods and other services need to moderate in order to lower overall inflation meaningfully--say, to When talking about future inflation, it is most helpful to focus on measures of core inflation. So if the price index for housing services continues to increase at the recent monthly average rate of around 0.6 percent for the next several months, then other core price increases would need to moderate considerably, to a monthly average of a bit less than 0.2 percent. This would be a big slowdown from inflation in August, which had core inflation of 0.6 percent, with non-housing services and core goods each increasing more than 0.5 percent. Such a step-down in non-housing core inflation, if sustained over several months, would be a big improvement in inflation, and I think it is quite possible to get there because of the considerable tightening of monetary policy that has occurred so far and additional anticipated tightening. But this exercise shows why it is so important for the FOMC to maintain its focus on the appropriate path of monetary policy in order to moderate demand. While housing seems likely to continue contributing to high inflation in the near term, in the medium-term higher mortgage rates should slow the housing component of inflation as housing demand cools. Meanwhile, increases in broader interest rates should help moderate demand and damp inflation in other sectors. So, across sectors, a moderation in demand should help bring inflation down toward our 2 percent target. As we think about policy actions for the remainder of the year, one can look at the Summary of Economic Projections released by the FOMC at our meeting last month. These projections showed participants expected an additional 100 to 125 basis points of tightening by the end of the year, which means either a couple of 50 basis point hikes at our remaining two meetings, or 75 basis points in November and 50 basis points in December. Of course, the exact path for policy will depend on the data we receive between now and the end of the year. Before the next meeting on November 1-2, there is not going to be a lot of new data to cause a big adjustment to how I see inflation, employment, and the rest of the economy holding up. We will get September payroll employment data tomorrow, and CPI and PCE inflation reports later this month. I don't think that this extent of data is likely to be sufficient to significantly alter my view of the economy, and I expect most policymakers will feel the same way. I imagine we will have a very thoughtful discussion about the pace of tightening at our next meeting. So, as of today, I believe the stance of monetary policy is slightly restrictive, and we are starting to see some adjustment to excess demand in interest-sensitive sectors like housing. But more needs to be done to bring inflation down meaningfully and persistently. I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening as we continue to move into more restrictive territory. In considering what might happen to alter my expectations about the path of policy, I've read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected. Let me be clear that this is not something I'm considering or believe to be a very likely development. I am a little confused about this speculation. While there has been some increased volatility and liquidity strains in financial markets lately, overall, I believe markets are operating effectively. Actions by banks and financial regulators in recent years have greatly strengthened the financial system. Banks are well capitalized. Functioning in the Treasury, equity, and commodity markets remains orderly. One factor that is likely helping to stabilize the financial system is the existence of monetary policy tools which could serve as a backup source of liquidity in times of financial stress. For example, swap lines that the Fed maintains with other central banks have been used effectively in the past to relieve stress in the financial system, and I think the availability of these facilities tend to be a stabilizing force at other times. In addition, to help implement monetary policy, the Fed established new standing repurchase agreement (repo) facilities in July 2021, one for domestic counterparties and another for foreign and international monetary authorities. These facilities are capable of responding to strains that may put upward pressure on money market rates, but I think it is likely that their mere existence has been a stabilizing force. Along with the improved regulatory framework, I believe we have tools in place to address any financial stability concerns and should not be looking to monetary policy for this purpose. The focus of monetary policy needs to be fighting inflation.

r221010a_FOMC

united states

Restoring Price Stability in an Uncertain Economic Environment

brainard

It is a pleasure to join this discussion today. Inflation is high in the United States and around the world reflecting the lingering imbalance between robust demand and constrained supply caused by the pandemic and Russia's war against Ukraine. Global supply chains have eased significantly, but by some measures they are still more constrained than at nearly any time since the late 1990s. High inflation places a burden on all Americans, but especially lower-income families, who spend three-fourths of their income on necessities--more than twice the share spent by higher-income families. The Federal Reserve has tightened policy strongly to bring inflation down, and U.S. tightening is being amplified by concurrent foreign tightening. We are starting to see the effects in some areas, but it will take some time for the cumulative tightening to transmit throughout the economy and to bring inflation down. Uncertainty remains high, and I am paying close attention to the evolution of the outlook as well as global risks. Higher interest rates are working to temper demand and bring it into better alignment with supply, which is still constrained. Output has decelerated so far this year by more than anticipated, suggesting that policy tightening is having some effect. Real gross domestic product (GDP) declined at an annual rate of roughly 1 percent in the first half. Real private domestic final purchases stepped down from a 6.4 percent pace last year to an annual rate of only 1.3 percent during the first half of this year. Recent revisions to national income and product accounts data imply that the current stock of excess savings held by households is lower and has been drawn down more rapidly in recent quarters than had been previously estimated. Indeed, by Board staff estimates, the revisions imply that the stock of excess savings held by households is about 25 percent lower, which may imply a more subdued pace of consumer spending going forward than had been projected. Market expectations for the level of the policy rate at the end of the year are now more than twice as high as they were just seven months ago. As a result of the significant increase in interest rates and associated tightening in broader financial conditions, I now expect that the second-half rebound will be limited, and that real GDP growth will be essentially flat this year. The moderation in demand due to monetary policy tightening is only partly realized so far. The transmission of tighter policy is most evident in highly interest- sensitive sectors like housing, where mortgage rates have more than doubled year to date and house price appreciation has fallen sharply over recent months and is on track to soon be flat. In other sectors, lags in transmission mean that policy actions to date will have their full effect on activity in coming quarters, and the effect on price setting may take longer. The moderation in demand should be reinforced by the concurrent rapid global tightening of monetary policy. Against the backdrop of slower output growth, we are seeing some tentative signs of rebalancing in the labor market. Anecdotal reports suggest the availability and retention of workers are improving. For the second month in a row, growth in monthly payroll employment stepped down, slowing from 315,0000 in August to 263,000 in September. There was a sharp 1.1 million decline in job openings from July to August in seekers declined to 1.7; for purposes of comparison, this ratio was 1.2 prior to the pandemic. The sharp fall in vacancies at a time when initial claims held steady at low levels provides support for the possibility that businesses that faced significant challenges finding and retaining qualified workers following the pandemic may be more inclined than in past cycles to retain rather than lay off their workers as demand weakens. In particular, there is still a sizable 1.2 million shortfall in employment levels relative to pre- pandemic levels in the in-person services sectors that accounted for the majority of September payroll gains, suggesting businesses in those sectors may still be trying to narrow that gap. That said, a variety of indicators suggest labor demand remains strong, while labor supply remains below pre-pandemic conditions. The unemployment rate is now at the very low level that prevailed pre-pandemic, and the volume of quits remains elevated. This supply-demand imbalance in the labor market is reflected in strong wage growth. The employment cost index increased by an annual rate of 6.3 percent over the second quarter--its highest level in decades. A more-timely data source, average hourly earnings, decelerated slightly to a 4.4 percent annual rate over the third quarter, down from 4.6 percent annual growth in the second quarter. Although it is well above levels consistent with 2 percent inflation, wage growth has been running below current inflation. Strong wage growth along with high rental and housing costs mean that inflation from core services is expected to ease only slowly from currently elevated levels. In contrast, core goods have been expected to return to something closer to the pre- pandemic trend of modest disinflation as a result of demand rotation away from goods to services, coupled with the healing of supply chains and declining core import prices. Disinflation in core goods would help to offset the inflationary pressures in services. During the five years before the crisis, core goods made a small negative contribution to inflation. The contribution of core goods to inflation swung sharply into positive territory in 2021, and had started to step down somewhat in the middle part of 2022. So the surprise in the August inflation data was the large contribution of core goods inflation to overall inflation at a point in the post-pandemic recovery when many forecasts anticipated this contribution would continue moderating. Since the pandemic, significant supply and demand imbalances have coincided with large increases in retail trade margins in several sectors. In some sectors, the increase in the retail trade margin exceeds the contemporaneous increase in wages paid to the workers engaged in retail trade, although this is not true in food and apparel. The return of retail margins to more normal levels could meaningfully help reduce inflationary pressures in some consumer goods, considering that gross retail margins are about 30 percent of total sales dollars overall. For instance, among general merchandise retailers, where the real inventory-to- sales ratio is 20 percent above its pre-pandemic level, retail margins have increased 20 percent since the onset of the pandemic, roughly double the 9 percent increase in average hourly earnings by employees in that sector. In the auto sector, where the real inventory-to-sales ratio is 20 percent below its pre-pandemic level, the retail margin for motor vehicles sold at dealerships has increased by more than 180 percent since February 2020, 10 times the rise in average hourly earnings within that sector. So there is ample room for margin recompression to help reduce goods inflation as demand cools, supply constraints ease, and inventories increase. Despite the higher prices for a broad set of goods and services, market- and survey-based measures of longer-term inflation expectations are within ranges consistent with expectations that inflation will return to 2 percent over the medium term. Inflation-Protected Securities-based measures of five-year, five-year-forward breakeven inflation compensation are currently at 2.15 percent, roughly 10 basis points below their level at the start of the year. The median of inflation expectations over the next 5 to 10 years in the Michigan survey ticked down in September to 2.7 percent, below the 2.9 to 3.1 percent range in which it had been fluctuating since July 2021 and back within the range that was common before the 2015 decline in this metric. Currently, there is a greater dispersion than usual of views about future inflation in survey responses. Previously this reflected a rise in expectations for significantly above-target inflation, but now that dispersion also reflects expectations on the part of one quarter of respondents that prices are likely be the same or below their current level 5 to 10 years in the future. In order to bring inflation down and to keep inflation expectations solidly anchored at 2 percent, the Federal Reserve has increased the federal funds rate target range by 300 basis points in the past seven months, and both market and policymaker surveys indicate additional increases through the end of this year and into next year. In addition, balance sheet shrinkage is now proceeding at its maximum rate, reinforcing the move to a restrictive stance. Broader U.S. financial conditions have tightened rapidly in response: The two-year Treasury yield has moved above 4 percent for the first time since 2007, and the 10-year yield is near its highest level in over a decade at 3.9 percent. Corporate bond yields have risen even more, as investment- and speculative-grade corporate bond spreads have increased about 80 basis points and 170 basis points, respectively, over the year. Mortgage rates have more than doubled since the beginning of the year. The Board's broad dollar index has appreciated 11 percent year to date. Monetary policy tightening is also proceeding rapidly abroad. Many central banks in large economies have raised rates by 125 basis points or more in the past six months, and yields on 10-year sovereign debt in Canada, the United Kingdom, and the largest euro area economies have seen increases on the order of 190 to 360 basis points this year. The combined effect of concurrent global tightening is larger than the sum of its parts. The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction. We are attentive to the risk of further adverse shocks-- for instance, from Russia's war against Ukraine, the pandemic, or China's zero-COVID policies. And we are also very aware that the cross-border effects of unexpected movements in interest rates and exchange rates, as well as worsening external imbalances, in some cases could interact with financial vulnerabilities. In this environment, a sharp decrease in risk sentiment or other risk event that may be difficult to anticipate could be amplified, especially given fragile liquidity in core financial markets. In some countries, the realization of these risks could pose challenging tradeoffs for policy. That said, the real yield curve is now in solidly positive territory at all but the very shortest maturities, and the entire real curve will soon move into positive territory with the additional tightening and deceleration in inflation that are expected over coming quarters. Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time. It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down. In light of elevated global economic and financial uncertainty, moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate.

r221012b_FOMC

united states

Managing the Promise and Risk of Financial Innovation

barr

Thank you, Chris, and thank you for the invitation to speak to you today about the opportunities and risks of innovation. For the purposes of our discussion today, I will be focusing on financial innovation supported by new technologies, or fintech. In the fall of 2017, we managed to get Chris to accept an invitation to speak at a fintech conference in Ann Arbor, so it's about time that I returned the favor. Since then, we have continued to see major changes in technologies and the financial services and products they support. In looking over the materials for that conference, however, I'm struck by how the key themes have remained constant over, not only the last five years, but arguably for centuries. Financial innovation has always brought promise and risk, and the urgent need to get regulation right. In 1610, when Dutch merchants and bankers were otherwise busy creating global finance, a series of destabilizing bank runs also moved them to establish a ban on short-selling. Many of the issues we grapple with today are not as new as we think. First, let's start with the promise. Every day, we all have countless interactions with the financial system--depositing our paychecks, buying groceries, paying rent, borrowing, saving, and insuring against important risks. The promise of fintech is that it can make financial products and services better, faster, cheaper, and more available. Financial innovation supported by new technologies can disrupt traditional providers by spurring competition, creating products that better meet customer needs, and extending the reach of financial services and products to those typically underserved. To realize the benefits of innovation, we need to manage relevant risks. We have seen through history that excitement over innovative financial products can lead to a pace of adoption that overwhelms our ability to assess and manage underlying vulnerabilities. As we saw in the lead up to the Global Financial Crisis, innovative financial products can mask emerging risks, resulting in significant harms to businesses and households and ultimately undermining financial stability. These products can leave consumers vulnerable if they are not coupled with meaningful disclosures and basic protections against abusive practices. Innovation can lead to disruptions of existing markets, which may be beneficial, but may also generate new systemic risks. Guarding against these risks is one of the jobs of financial regulation and supervision, and I'll talk through a few examples of how we are working to do so now. But I would note with some humility that striking the right balance between creating an enabling environment that supports innovation and managing related risks to businesses, households, and the stability of the financial system is no easy task. When regulations are too prescriptive or regulators too cautious, they run the risk of stifling innovation and locking in the market power of dominant participants in ways that can raise costs and limit access. When regulation is lax or behind the curve, it can facilitate risk-taking and a race to the bottom that puts consumers, businesses, and the economy in danger and discredits new products and services with consumers and investors. I believe everyone has a stake in getting the regulatory balance right. Crypto-assets have grown rapidly in the last several years, both in market capitalization and in reach. But recent fissures in these markets have shown that some crypto-assets are rife with risks, including fraud, theft, manipulation, and even exposure to money-laundering activities. Crypto-asset-related activity, both outside and inside supervised banks, requires oversight that includes safeguards to ensure that crypto service providers are subject to similar regulations as other financial services providers. We continue to work on this issue from the overriding principle that the same type of activity should be regulated in the same way. This principle holds even when the activity may look different from the typical activities we regulate, or when it involves an exciting new technology or a new way to provide traditional financial services. The Board is working with our colleagues at the Office of the Comptroller of the crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system. Many of these activities pose novel risks, and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks. In August, the Board issued supervisory guidance that outlines the steps Federal Reserve-supervised banks should take prior to engaging in crypto-asset-related activities. The recent volatility in crypto markets has demonstrated the extent of centralization and interconnectedness among crypto-asset companies, which contributes to amplified stress. While banks were not directly exposed to losses from these events, these episodes have highlighted potential risks for banking organizations. When a bank's deposits are concentrated in deposits from the crypto-asset industry or from crypto-asset companies that are highly interconnected or share similar risk profiles, banks may experience deposit fluctuations that are correlated and closely linked to broader developments in crypto-asset markets. In addition, misrepresentations regarding deposit insurance by crypto-asset companies can cause customer confusion and lead to increased withdrawals at banks providing deposit services to crypto-asset firms and their customers during times of stress. The Fed is working with the OCC and the FDIC on these issues and highlighting them to supervised institutions. For example, it is important for banks to understand some of the heightened liquidity risks they may face from certain types of deposits from crypto-asset companies. This effort is not intended to discourage banks from providing access to banking products and services to businesses associated with crypto-assets. Our work in this area is focused on ensuring risks are appropriately managed. Looking ahead, there are additional types of crypto-asset-related activities where the Fed may need to provide guidance to the banking sector in the coming months and years. Because crypto-assets have proved to be so volatile, they are unlikely to grow into money substitutes and become a viable means to pay for transactions. However, stablecoins, which purport to maintain a stable value, have greater capacity to function as privately issued money. For this reason, they pose specific, and well-understood risks, similar to other types of money-like assets. History has shown that money-like assets are subject to runs that can threaten financial stability. Stablecoins linked to the dollar are of particular interest to the Federal Reserve. As Chair Powell said the other day, a central bank is and will always be the main source of trust behind money. Stablecoins borrow that trust, so we have an abiding interest in a strong federal prudential framework for their use. Over time, stablecoins could pose a risk to financial stability, and it is important to get the regulatory framework right before they do. Here too, the Fed is working with other regulatory agencies. The President's Working Group report on stablecoins that came out about a year ago called upon Congress to take the necessary action to ensure that stablecoins, particularly those that serve as a means of payment, are subject to prudential regulation. Congress should take action to provide a strong federal framework for prudential oversight, and regulators must also use existing authorities. We are seeing banks explore a variety of different models to issue dollar- denominated tokens on distributed ledger networks. The proposals range from issuance of tokens on private, controlled networks to facilitate payments within or among banks, to proposals that explore issuance of freely circulating tokens on open, permissionless networks. As banks explore different options to tap into the potential of the technology, it is important to identify and assess the novel risks inherent in those models and whether those risks are surmountable. For instance, with some models that are being explored, the bank may not be able to track who is holding its tokenized liability, or whether its token is being used in risky or illegal activity. While there is work underway on technical solutions for managing these risks, it remains an open question whether banks can engage in such arrangements in a manner consistent with safe and sound banking and in compliance with relevant law. Given these open questions, banks looking to experiment with these new technologies should do so only in a controlled and limited manner. As banks experiment, I invite them to engage with their regulators early and often to discuss the benefits and risks of new use cases, ensuring they are consistent with banking activities conducted in a safe, sound, and legally permissible manner. Let me mention an example of where I think regulators could play a more active role in shaping how innovation is changing the financial products landscape. Over the past decade, digitization of financial services has led to the creation of vast amounts of customer data. Advancement in technologies now facilitates greater connectivity and secure data sharing between banks and nonbanks. This has served as the foundation for open banking and the development of new types of financial products and services that offer consumers greater customization and an end-user experience with less friction, compared to traditional banking. Jurisdictions around the world have taken different approaches to open banking. Some, such as Australia, Britain, and the European Union have adopted a regulatory approach to facilitate open banking by implementing specific regulatory frameworks that are built upon the concepts of consumer data rights, data privacy, and competition. So far, the United States has taken more of a market-driven approach to open banking. The Consumer Financial Protection Bureau is charged with implementing regulations to give consumers access to their financial data, pursuant to Section 1033 of the Dodd-Frank Act. While this is not an "open banking" rule, it will set the stage for consumers to gain greater control when it comes to sharing their data with prospective providers. The goal of this effort is to advance consumer autonomy, enhance competition for financial services, and to provide easier portability of account information from bank to bank as well as nonbank providers. I look forward to hearing more on this from the CFPB. So let me now turn to how the Federal Reserve is taking proactive steps to work with the private sector to support innovation. The Federal Reserve has been working on modernizing our payment system for a few years now, and we are in the final stages of creating the FedNow Service, a new platform for digital payments that will safely, efficiently, and instantaneously move money. FedNow will improve safeguards on instant payments, making the financial system safer. And it will improve access to the financial system by reducing payment delays and the high costs associated with those delays. As I have discussed extensively in my writings and speeches, these costs are particularly borne by those least able to afford them. Banks and service providers will be able to build innovative financial products using FedNow's real-time, low cost, safe payment rails, benefiting households and businesses. We plan to launch FedNow between May and July next year. It will help to lower costs, extend access, and improve security for consumers and safety for the financial system. No conversation about payments innovation is complete without mention of central bank digital currencies (CBDC). The Federal Reserve has not made any decisions about whether to issue a CBDC, and if we believe it makes sense to do so, we would want the support of Congress and the Administration. In the meantime, we're doing the work of understanding the technological requirements of such a system, deepening our understanding of potential policy tradeoffs, and taking a look at how other countries are thinking about and experimenting with CBDCs. Let me end where I began: We need to get the guardrails right to successfully support a dynamic marketplace of innovative financial products and services. We have a responsibility to ensure that regulation and supervision foster innovations that improve access to financial services, while at the same time safeguarding consumers, financial institutions, and financial stability. Thank you.

r221012a_FOMC

united states

Forward Guidance as a Monetary Policy Tool: Considerations for the Current Economic Environment

bowman

Thanks to the Money Marketeers for inviting me to share my perspective on the conduct of monetary policy in the current environment of unacceptably high inflation. It is a pleasure to be here with you this evening. I will focus my remarks today on the use of explicit forward guidance as a tool for monetary policy. Before I start, let me briefly discuss near-term monetary policy. You likely already know that I have fully supported the Federal Open Market Committee's (FOMC) decisions over the past several meetings. Those decisions were to increase the target range for the federal funds rate in 75 basis point increments, and the federal funds rate now stands at 3 to 3-1/4 percent. Inflation is much too high, and I strongly believe that bringing inflation back to our target is a necessary condition for meeting the goals mandated by Congress of price stability and maximum employment on a sustainable basis. Naturally, the focus is now on what will happen at the next FOMC meeting and beyond. At this point, for me, it comes down to what the incoming data and other economic information will tell us about the outlook for inflation. If we do not see signs that inflation is moving down, my view continues to be that sizable increases in the target range for the federal funds rate should remain on the table. However, if inflation starts to decline, I believe a slower pace of rate increases would be appropriate. To bring inflation down in a consistent and lasting way, the federal funds rate will need to move up to a restrictive level and remain there for some time. However, it is not yet clear how high we will need to raise the federal funds rate and how much time will pass before we begin to see inflation moving back down in a consistent and lasting way. My general point is that inflation is much too high, and the outlook for inflation remains significantly uncertain. This uncertainty makes it very challenging to provide precise guidance on the path for the federal funds rate. With this in mind, I will turn to the main topic I'd like to discuss today, which is the potential role that explicit forward guidance can play as a monetary policy tool. Forward guidance is official FOMC communication that is intended to signal to the public the likely future path of monetary policy. In my remarks today, I will refer to explicit forward guidance as forward guidance that references specific economic outcomes that would need to be achieved, or a specific amount of time that would need to pass, before the Committee would take or consider taking a particular policy action. To be considered forward guidance, a statement does not need to be explicit about future policy actions or the timing of potential actions. It may be more qualitative in describing likely policy actions that may be taken in the future and, in some cases, may only describe how the FOMC will be thinking about its future decisions rather than signaling the likely future direction of policy actions. The intent of all forward guidance is to influence the public's expectations about the FOMC's future monetary policy actions, and in doing so, affect longer-term interest rates and broader financial conditions to help support a path for inflation and economic activity that would be consistent with accomplishing t the Committee's price-stability and maximum-employment goals. As you know, over the past 20 years or so the Federal Reserve has increased the transparency and the frequency of its communications with the public, including through more frequent use of forward guidance in describing its monetary policy decisions. Let me stress here that I view clear and transparent communication with the public from the Federal Reserve as crucial to enable a better understanding of and to reinforce the effectiveness of our monetary policy actions, all of which help keep us accountable to the public. Over about the past 10 years, the use of explicit forward guidance has become an integral part of the Federal Reserve's monetary policy toolkit. In fact, explicit forward guidance is generally seen by many as especially helpful when use of the Committee's main monetary policy tool (changes to the federal funds rate) is constrained. This is when the rate has been lowered to zero, which we also call the effective lower bound. It is important to note that the degree of specificity contained in the Committee's forward guidance comes with tradeoffs. Explicit forward guidance hasn't always been viewed as a helpful addition to the monetary policy toolkit, particularly before the 2008 financial crisis. Before that time, while there was some acknowledgement that forward guidance could meaningfully affect financial conditions, there was a great deal of concern about the "costs and risks" of providing this type of guidance. These costs and risks included the confusion and potential financial market volatility that could result if the public did not fully understand the Committee's forward guidance. Another common concern was that, if the Committee had to alter its forward guidance too frequently in response to rapidly changing economic conditions, its forward guidance could become ineffective (meaning that the public could heavily discount or simply disregard the guidance) or, worse, the public could come to question the Committee's overall credibility. A related worry was that if the Committee were too slow to alter its forward guidance--perhaps because it feared an outsized market reaction or a loss of credibility-- monetary policy could be more likely to fall behind the curve. In this regard, one cost of providing explicit forward guidance would be a loss of the flexibility needed to respond to changes in economic conditions as required by the pursuit of our price-stability and maximum-employment goals. On the whole, there was a consensus before the turn of the century that cost-benefit considerations did not favor the use of explicit forward guidance as a monetary policy tool. This was especially true when the benefits from providing such guidance--tightening or easing financial conditions--could be achieved in a more straightforward way. This could be accomplished in two ways--first, through simple changes in the federal funds rate and second, relying on the public to infer any future moves in the policy rate based on their own assessments of the FOMC's likely policy reactions to developments in inflation and economic activity. Over time, Federal Reserve officials began to more seriously consider the possible benefits that forward guidance could provide to the effectiveness of the FOMC's monetary policy decisions by influencing longer-term interest rates in a way that aided the Committee's achievement of its statutory price stability and maximum-employment goals. Starting in 1999, the FOMC began to release a public statement after each of its meetings. And beginning in 2000, in addition to describing the current policy decision, the post-meeting statement contained a paragraph on the "balance of risks" that was meant to indicate how the Committee "assesses the risks of heightened inflation pressures or economic weakness in the foreseeable future." The time frame in the new language was intended to cover a period extending beyond the next FOMC meeting and was meant to give an indication of the likely direction of future policy decisions based on the Committee's assessment of the economic outlook. Beginning in 2003, the FOMC post- meeting statement began to include more direct, but still qualitative, forward guidance regarding the future path of the federal funds rate. Notably, this forward guidance did not reference explicit outcomes or specific timelines that would guide the FOMC's future policy decisions. Evidence suggests that the shift toward more transparent communication by the FOMC in the early 2000s, including its use of forward guidance, allowed financial market participants to better anticipate changes in the stance of monetary policy, which were then reflected in broader financial conditions. The 2008 financial crisis significantly altered most assessments of the costs and benefits of providing more explicit forward guidance. With the federal funds rate remaining at near-zero levels for several years after that crisis, the Committee had to look for new tools to change its policy stance and affect financial conditions. Explicit forward guidance and large-scale asset purchases quickly emerged as the two main new tools of monetary policy. In a way, explicit forward guidance was seen as providing monetary policy accommodation when the current setting of the federal funds rate could not. providing guidance on specific outcomes that would need to be achieved before the FOMC would consider raising the target range for the federal funds rate, the Committee could help reduce uncertainty regarding its future policy decisions and keep longer-term interest rates low as the economic recovery progressed. In addition, with the risks to the outlook generally seen as tilted to the downside in the years that followed the financial crisis, using explicit forward guidance to signal a "low for longer" policy was not seen as posing significant risks to the Committee's credibility, because short-term interest rates were generally expected to remain unusually low during those years. I should note, however, that even then, low-for-long policies did raise some financial stability concerns, such as those related to reach-for-yield behavior. In addition, the outcome-based forward guidance employed by the FOMC in the years following the financial crisis explicitly recognized the possibility that inflationary pressures could emerge. It incorporated a version of an "escape clause" in its forward guidance that would prompt a reconsideration of the policy stance should such inflationary pressures emerge. In particular, in its December 2012 statement, the Committee noted that it expected the target range for the federal funds rate to remain at 0 to 1/4 percent for "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well Of course, today's circumstances are much different from those we faced during most of the decade that followed the 2008 financial crisis. I will focus here on two features of our current environment that I see as especially relevant for assessing the role of explicit forward guidance as a monetary policy tool in the current conduct of monetary policy. The first is that with inflation unacceptably high and the resulting urgent need to remove monetary policy accommodation, the federal funds rate is no longer near zero. The Committee can now indicate its intended stance of monetary policy through changes to the target range for the federal funds rate--its stated primary tool of monetary policy-- rather than relying on more unconventional monetary policy tools, such as forward guidance and balance sheet policy, to serve as the main indicators of the stance of monetary policy. The second is that the outlook for inflation and economic activity is especially uncertain, with significant two-sided risks. Gone are the days when the risks to the outlook were skewed to the downside, especially with respect to inflation. And two-sided risks to economic activity are also widely recognized by the public, with press reports of an overheating labor market often featured alongside discussions of high or rising recession risks. In our current environment, I view the benefits of providing explicit forward guidance as lower than they were in the years immediately after the 2008 crisis. Given that the federal funds rate is now well above zero, the FOMC can communicate changes in the stance of monetary policy through changes in the target range for the federal funds rate and not rely on explicit forward guidance as it did when the federal funds rate was at the effective lower bound. And I would argue that the costs and risks of providing explicit forward guidance are now higher than they were in the decade that followed the last financial crisis. For example, relative to current conditions, it was easier and less risky to provide explicit forward guidance back then (especially guidance of the low-for-longer variety). After all, back then, the economy was still weighed down by the after-effects of the 2008 financial crisis, and inflation was running persistently below our 2 percent target. Let's contrast those conditions with the ones we face today. With uncertainty about the economic outlook unusually high today, the pre-2000s concerns about providing explicit forward guidance have regained their relevance. High uncertainty about the outlook puts a premium on flexibility, and--to the extent that the Committee sees a cost to frequent changes to its forward guidance--the provision of explicit forward guidance could reduce the Committee's flexibility to respond to unexpected changes in economic conditions. The Committee's experience in the second half of last year illustrates this point. Looking back, one might reasonably argue that during that time the Committee's explicit forward guidance for both the federal funds rate and asset purchases contributed to a situation where the stance of monetary policy remained too accommodative for too long--even as inflation was rising and showing signs of becoming more broad-based than previously thought. The facts on the ground were changing quickly and significantly, but the communication of our policy stance was not keeping pace, which meant that our policy stance was not keeping pace. As late as November 2021, our forward guidance still indicated that the Committee intended to keep the target range for the federal funds rate at 0 to 1/4 percent "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." And we were still purchasing assets at the same pace we had earlier in the year, although we did announce in November 2021 that we would start slowing the pace of our purchases in December. With the benefit of hindsight, one might ask whether we would have moved sooner to remove monetary policy accommodation if we hadn't been so explicit about our forward guidance in prior months--particularly forward guidance that had set such a high bar for slowing our asset purchases and starting to raise rates. Of course, the fact that some of the data that were directly relevant to our decision-making did not accurately reflect the economic conditions prevailing at the time--and which were subsequently revised--likely also led to a delay in the removal of monetary policy accommodation in 2021. More generally, I will note that high uncertainty and two-sided risks to the outlook raise some practical questions for the use of explicit forward guidance in the current monetary policy environment. For example, how can the Committee provide explicit forward guidance about the path of the federal funds rate when overall macroeconomic uncertainty makes it more challenging for the Committee to know beforehand the size and timing of its future policy moves? Putting it all together, what lessons can we take for the use of explicit forward guidance in today's economic environment? A key point to me is that a cost-benefit analysis similar to that which I've just discussed here suggests that the case for explicit forward guidance is much less compelling today than it was in the years that immediately followed the 2008 financial crisis. My own view is that discussions about the use of explicit forward guidance as a policy tool should be limited. It should be used during periods when the Committee cannot adjust the federal funds rate any lower due to the effective lower bound, and when the Committee also has reasonable confidence that that the federal funds rate will need to remain near zero for a period of time to stimulate growth and when inflationary pressures are expected to be subdued. Even in such periods, the Committee should recognize possible risks to a low-for-long monetary policy stance, including upside risks to inflation, and provide escape clauses that would detail the circumstances that would cause the Committee to reevaluate its policy stance. Outside of such periods, our focus should be on changes in the target range for the federal funds rate--the Committee's primary tool for implementing monetary policy decisions--in communicating the stance of monetary policy and in providing more qualitative guidance regarding how the Committee will be thinking about its future policy decisions. Our recent experience with using qualitative forward guidance in our post- meeting statements illustrates this point. In the first half of this year, when the Committee began to signal that it would increase the target range for the federal funds rate and that it anticipated that "ongoing increases in the target range will be appropriate," longer-term interest rates rose and financial conditions tightened. However, being more explicit in our communications regarding the likely size of the increases in the target range at each future meeting was not helpful during this time, because our decisions depended on the incoming data and its implications for the outlook. Before I conclude, I will emphasize, again, that, my reservations about explicit forward guidance notwithstanding, I am a strong believer in the role of communication in the conduct of monetary policy. Clear and transparent communications with the public reinforce the effectiveness of our monetary policy and keep us accountable to the public. Under current circumstances, however, the best we can do on the public communications front is, first, to continue to stress our unwavering resolve to do what is needed to restore price stability. Second, as Chair Powell noted recently, we should acknowledge that the outlook for inflation and economic activity is subject to unusual uncertainty, and that, as a result, we will be making our policy decisions on a meeting-by-meeting basis. we should continue to reiterate that we will remain "highly attentive to inflation risks." This is probably the best and clearest forward guidance we can provide at this point. Thank you again for the opportunity to share my views with you today.

r221014a_FOMC

united states

The U.S. Dollar and Central Bank Digital Currencies

waller

Thank you, Professor Jackson, and thank you to the for the invitation to speak at this symposium. As the payment system continues to evolve rapidly and the volume of digital assets continues to grow, it is critical to ensure that we keep both the benefits and risks of digital assets in the policy conversation, including the implications for America's role in the global economy and its place in the world. My speech today focuses on exactly this issue and on an aspect of the digital asset world that is now the center of domestic and international attention--central bank digital currencies (CBDCs) and how they relate to the substantial international role of the U.S. dollar. In January 2022, the Federal Reserve Board published a discussion paper on CBDCs to foster a broad and transparent public dialogue, including the potential benefits and risks of a U.S. CBDC. To date, no decisions have been made by the Board on whether to move forward with a CBDC. But my views are well known. As I have said before, I am highly skeptical of whether there is a compelling need for the Fed to create a digital currency. I am not a national security expert. But one area where economics, CBDCs, and national security dovetail is the role of the dollar. Advocates for creating a U.S. CBDC often assert how it is important to the long-term status of the dollar, particularly if other major jurisdictions adopt a CBDC. I disagree. As I will discuss, the underlying reasons for why the dollar is the dominant currency have little to do with technology, and I believe the introduction of a CBDC would not affect those underlying reasons. I offer this view, again, in the spirit of dialogue, knowing how important these issues are, and I am very happy to engage in vigorous debate regarding my view. I remain open to the arguments advanced by others in this space. served as the central currency for the international monetary system. Other countries agreed to keep the exchange value of their currencies fixed to the dollar, and eventually, countries came to settle international balances in dollars. That role has continued long after the Bretton Woods system dissolved. By any measure, the dollar is the dominant global currency--for funding markets, foreign exchange transactions, and invoicing. It also is the world's predominant reserve currency. In terms of the dollar's reserve currency status, 60 percent of disclosed official foreign reserves are held in dollars, far surpassing the shares of other currencies, with the majority of these dollar reserves held in safe and liquid U.S. Treasury securities. in a world of largely floating exchange rates, many countries either implicitly or explicitly anchor their currencies to the dollar; together, these countries account for about half of world gross domestic product. The dollar is by far the dominant currency for international trade. Apart from intra-European trade, dollar invoicing is used in more than three-fourths of global trade, including 96 percent of trade in the Americas. Approximately 60 percent of international and foreign currency liabilities--international banking loans and deposits as well as international debt securities--are denominated in dollars. And the dollar remains the single most widely used currency in foreign exchange transactions. Why does this matter to the United States? As indicated in the Board's CBDC discussion paper, the dollar's international role lowers transaction and borrowing costs for U.S. households, businesses, and government. It widens the pool of creditors and investors for U.S. investments. It may insulate the U.S. economy from shocks from abroad. It also allows the United States to influence standards for the global monetary system. The dollar's role doesn't only benefit the United States. The dollar serves as a safe, stable, and dependable form of money around the world. It serves as a reliable common denominator for global trade and a dependable settlement instrument for cross- border payments. In the process, it reduces the cost of transferring capital and smooths the world of global payments, including for households and businesses outside of For example, consider the dollar's role in foreign exchange markets. To make a foreign exchange transaction between two lightly traded currencies, it is often less expensive to trade the first currency with the dollar, and then to trade the dollar with the second currency, rather than to trade the two currencies directly. The factors driving the dollar's role as a reserve currency are well researched and well demonstrated, including the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and the rule of law. We must keep these factors in mind in any debate regarding the long-term importance of the dollar. Threats to the U.S. dollar's international dominance are numerous, including shifting geopolitical alliances and pressure to invoice in alternative currencies, as well as deeper and more open foreign financial markets. My focus today is on just one supposed threat--namely, the purported shifting payments landscape as a result of the growth of digital assets, particularly CBDCs. Recent years have seen a number of changes to the payments system, from instant interbank payments to mobile payment services to a shift toward nonbank payment providers. Some of this shift has been through the rise in digital assets and include cryptocurrencies and other crypto-assets such as stablecoins, which have money-like characteristics. They also include CBDCs. A CBDC is a digital instrument that is a liability of the central bank. That is all it is--a direct liability of a central bank. What major security gap exists that a CBDC, and only a CBDC, can close? What would be the effect of CBDCs and other digital money-like instruments on the role of the dollar? There are many ways to approach this question, but I want to do so by using a simple example: What is it about a CBDC that would make a non-U.S. company, engaging in international financial transactions, more or less likely to use the dollar? This example, of course, focuses on the reasons for why contracts are generally invoiced in U.S. dollars, which is just one feature of the dollar's international role. To me, however, it simplifies the overall question regarding the effect of a CBDC on the dollar's dominance. We can break down this question into three others: First, would a foreign CBDC And, third, while stablecoins are not CBDCs, how would a privately issued stablecoin have a different effect? First, I will consider the emergence of one or more foreign CBDCs in a world the company acts pragmatically; it would only move away from using the U.S. dollar if it is better off by doing so. The discussion around this question usually tends to focus on the potential technological advantages of a CBDC and doesn't grapple with the underlying reasons for the dominance of the dollar. That is, advocates for a CBDC tend to promote the potential for a CBDC to reduce payment frictions by lowering transaction costs, enabling faster settlement speeds, and providing a better user experience. I am highly skeptical that a CBDC on its own could sufficiently reduce the traditional payment frictions to prevent things like fraud, theft, money laundering, or the financing of terrorism. Though CBDC systems may be able to automate a number of processes that, in part, address these challenges, they are not unique in doing so. Meaningful efforts are under way at the international level to improve cross-border payments in many ways, with the vast majority of these improvements coming not from CBDCs but improvements to existing payment systems. For argument's sake, though, let's suppose that this foreign CBDC is more attractive for payments to the non-U.S. company, perhaps for technological reasons, or because the preferences of the firm's consumers or trading partners change in response to the introduction of the CBDC. Due to the well-known network effects in payments, the more users the foreign CBDC acquires, the greater will be the pressure on the non-U.S. company to also use the foreign CBDC. In this case, it is true that the appeal of the foreign CBDC as a transactions medium--not as a unit account or store of value--might gain at the expense of the dollar. These effects will likely only be on the margin because they rely on a large enough number of individuals and businesses being nearly indifferent between the dollar and the foreign currency in CBDC form. But the broader factors underpinning the dollar's international role would not change. Changing those factors would require large geopolitical shifts separate from CBDC issuance, including greater availability of attractive safe assets and liquid financial markets in other jurisdictions that are at least on par with, if not better than, those that exist in the United States. The factors supporting the primacy of the dollar are not technological, but include the ample supply and liquid market for U.S. Treasury securities and other debt and the long-standing stability of the U.S. economy and political system. No other country is fully comparable with the United States on those fronts, and a CBDC would not change that. Finally, as I've noted before, it is possible that a foreign-issued CBDC could have the opposite of its intended effect and make companies even less willing to use that country's currency. Since digital currencies would make it easier for a government to monitor transactions, shifting to a CBDC might make a company less willing to use that country's currency. For example, I suspect that many companies will remain wary of China's CBDC for just this reason. I am also skeptical that a U.S. CBDC would affect this hypothetical foreign company's decisionmaking. A U.S. CBDC is unlikely to dramatically reshape the liquidity or depth of U.S. capital markets. It is unlikely to affect the openness of the U.S. economy, reconfigure trust in U.S. institutions, or deepen America's commitment to the rule of law. As I have said before, the introduction of a U.S. CBDC would come with a number of costs and risks, including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar's standing internationally. Like a foreign CBDC, the technological advantages of a U.S. CBDC would have a hard time overcoming long-standing payments frictions without violating international financial integrity standards. For the non-U.S. company already conducting its business in dollars, introducing a U.S. CBDC would not provide material benefits over and above the current reasons for making U.S. dollar-denominated payments. For non- U.S. companies conducting their business in currencies other than dollars, a U.S. CBDC similarly would likely not be preferred to their current options. It could be that individuals outside the United States would find a U.S. CBDC particularly attractive, but, again, making a U.S. CBDC globally available would raise a number of issues, including money laundering and international financial stability concerns. And as with a foreign- issued CBDC, the dollar's function as a unit of account and store of value is unlikely to be affected, resulting in a limited effect on the international role of the dollar. The last scenario I want to consider is one in which a privately issued stablecoin pegged to a sovereign currency is available for international payments. Stablecoins are crypto-assets that aim to maintain a stable value relative to a specified asset or pool of assets. The reasons that stablecoins may be more attractive than existing options for payments include their ability to provide real-time payments at lower cost between countries that were previously poorly serviced and to provide a safe store of value for individuals residing in or transacting with countries with weak economic fundamentals. This is different than an intermediated U.S. CBDC, for which access in developing economies would depend on banks' incentives to provide such access. Stablecoins, however, may be held directly in any country that allows its citizens to do so. To improve payments, especially for jurisdictions that are not well served under the current global payments ecosystem, stablecoins must be risk-managed and subject to a robust supervisory and regulatory framework. Could such an asset affect the role of the U.S. dollar? Once again, I am unsure whether even a large issuance of a stablecoin could have anything more than a marginal effect. It has often been suggested by commentators that private money-like instruments such as stablecoins threaten the effectiveness of monetary policy. I don't believe that to be the case, and it should be noted that nearly all the major stablecoins to date are denominated in dollars, and therefore U.S. monetary policy should affect the decision to hold stablecoins similar to the decision to hold currency. This follows from a vast body of evidence in international economics showing how countries pegging their exchange rates effectively import monetary policy from the country to which their currency is pegged. Also, because stablecoins are pegged to the dollar, they may increase rather than reduce the primacy of the dollar abroad, since demand for stablecoins increases demand for dollar-denominated reserve assets held by the stablecoin issuer. The ongoing debate over the risks and benefits of a CBDC is important, and I am happy to continue to engage with both advocates and skeptics of CBDCs. But, for the reasons I have laid out, I don't think there are implications here for the role of the United States in the global economy and financial system. We should instead focus and debate the salient CBDC-related topics, like its effects on financial stability, payment system improvements, and financial inclusion. Thank you again for having me to participate in this fantastic event.

r221020a_FOMC

united states

Welcoming Remarks

bowman

Welcome, and thank you for joining us to discuss topics important to the nation's economy. This research seminar is part of the Federal Reserve's series of events called "Toward Today's seminar, hosted by the Board of Governors, will focus on how the COVID-19 pandemic affected educational outcomes and the subsequent impact we anticipate for transitions to the labor force. We have invited accomplished researchers to discuss their work--and what practical lessons might be drawn from it--that could help inform community development practice and public policy considerations. As I am sure you are aware, the pandemic created significant disruptions for our students and the education system. At the onset of the pandemic, steps taken to slow the spread of COVID-19 resulted in widespread closures of businesses and schools. Many, myself included, were immediately concerned about the negative effects on education from changes that included shifting to virtual instruction, lack of access to technology, and changes to the accessibility and provision of childcare. It is critical to consider that access to education at every step along a student's learning path serves as a pipeline into the labor force and enables future generations of Americans to participate and thrive in our dynamic labor market. The disruption of education throughout the pandemic undoubtedly led to an absence of workers in the labor force, creating a shortage that held back the early economic recovery. Education outcomes, including learning losses and achievements, take time to measure, aggregate, and analyze. As we enter the fourth academic year affected by the pandemic, data on student performance are becoming more available. Much of this early data confirms our initial concerns. For example, early test scores show that throughout the country nine-year-olds suffered a decline in learning outcomes during the pandemic. But other data also indicate that learning losses were unequal and disproportionately affected low-performing students and low- income students. It is likely that the sudden shift to online classes contributed to the learning declines. SHED), only 22 percent of parents with children attending virtual classes agreed that their children learned as much as they would have attending classes in person at school. I hope that the return to in-person learning and reopening of schools will enable children to resume normal learning and that academic achievement will rebound. It seems that even with this return to in-person attendance, many schools are struggling to provide students with the same quality of education as they did pre-pandemic. With the return to onsite education, many schools are confronting challenges that impair their ability to meet the educational needs of students. A number of educators appear to have left the profession, as indicated by the nearly 100,000 more job openings for teachers in July 2022 than before the pandemic. Complicating these issues, across the country the return to in-person instruction has been met by an increase in chronic absenteeism, which is defined as a student missing at least 10 percent of school days in a school year. Compared to a typical school year pre-pandemic, 72 percent of U.S. public schools reported an increase in chronic absenteeism among their students during the 2021-22 school year, which is a 39 percent increase over the previous year. Missed school typically means missed learning, so chronic absenteeism is a key metric of school performance. It's likely that these challenges will result in lower graduation rates and possibly less stable employment than would have otherwise been the case. These outcomes raise difficult questions about how to best respond to the needs of students and educators going forward. For example, how can curricula be adjusted to meet students where they are today, after nearly three years of pandemic-impacted learning? How can we best re-engage the larger proportion of students who may have become disconnected as a result of these pandemic-related disruptions to their education? What does this all mean for the future of the labor force? In addition to the challenges facing primary and secondary education, higher education was not immune to pandemic disruptions. Like K-12 education, studies show that online instruction reduced the academic performance of college students. In addition, we have seen declines in both college enrollment and the rate of first-year college students who continue their education into a second year. These declines are most pronounced at community colleges and open-access programs. Some of this decline was due to a supply-induced shortage resulting from colleges unable to offer remote learning options for many technical and vocational programs. The reduction in these "hands-on" programs, such as air-conditioning repair and auto detailing, had a greater impact on male enrollment and may lead to labor supply shortages for some of these skills-based professions. Education is the greatest and most effective input into the future of our labor market. In order to have the strongest possible labor force in the future, it is critical to understand and act immediately to address the educational losses experienced during the pandemic. I'm sure there's much to learn about how these education challenges, both longstanding and more recent, will ultimately affect the job market. That's a question of particular interest to policymakers, and it's one of the most important reasons that we host events like this seminar. I look forward to hearing from the experts we have invited here today to discuss ideas to successfully and quickly address academic declines, expand K-12 education options, improve higher education outcomes, and prepare this generation to participate and thrive in the future labor force. I hope that the research presented today is useful to you in your work. Community development professionals in our audience may consider how the design and implementation of their services can be enhanced. And researchers may encounter ideas that spark new work that can shed further light on these important topics. Thank you so much for joining us.