On Thursday, Federal Reserve Chair Jerome Powell delivered remarks at the Second Thomas Lauder Research Conference.
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00:00All right, good morning. Great, let's get started. Thank you so much for joining us
00:07this morning. My name is Trevor Reeve and I'm the Director of the Division of
00:11Monetary Affairs here at the Board. And on behalf of the Federal Reserve, let me
00:16welcome you to the second Thomas Laubach Research Conference. We established this
00:21conference to honor the legacy of Thomas Laubach, former Director of Monetary
00:27Affairs. As this room well knows, Thomas was a renowned economist, an influential
00:32policy advisor, as well as a close colleague and friend. I would especially
00:37like to acknowledge Thomas's wife, Taniyat, and his son, Laub, who are joining us here
00:42today. Thank you.
00:50This year's conference is a key element of the Federal Reserve's ongoing review of its
00:56monetary policy framework. And that is highly appropriate for this conference,
01:00given that Thomas played a critical role in the Fed's first framework review in
01:052019 and 2020. The research presented and discussed over the course of today and
01:11tomorrow will help inform the FOMC's discussions as the committee considers
01:16potential changes to its monetary policy strategy and communications. And we have
01:21the vast majority of the FOMC sitting right over here today. Let me extend our great
01:26appreciation to the paper authors, discussants, and panelists for investing their time and
01:31energy and sharing their insights with us. And let me thank all of you in attendance for
01:37contributing to what I'm sure will be a very engaging and productive conference. Before
01:43we turn it over to the chair, let me address just a few logistical items. For
01:49everyone's awareness, this conference is being live streamed on the board's website
01:53and YouTube channel, and the recording will be available for viewing later. Please keep
01:59this in mind when posing questions or making comments, and members of the press are
02:03here today as well. All of the conference materials, including the papers and the
02:08presentations, will be posted to the board's website. Each of our paper sessions will
02:13begin with a presentation by the author, followed by comments from a discussant, and
02:17then we'll open it up to the room for Q&A and discussion. Whenever making a
02:22comment or asking a question, please use a microphone so that people can hear you
02:27both in the room and importantly online. When you speak, please begin by introducing
02:33yourself, and please try to keep your remarks concise so we can create more
02:38opportunities for other people to participate. If you have any questions
02:42about anything related to today's conference, please find any of my
02:46colleagues around the room or outside who are wearing a white lanyard. They'd be
02:50happy to help you. And with that, let me get us started by introducing Federal Reserve
02:56Chair Jay Powell, who will offer opening remarks. Thank you.
03:03Thank you, Trevor, and good morning. I'd like to add my welcome to everyone. Thanks for
03:14being here. Thomas Laubach's research and his broader support of the FOMC helped us
03:20better understand monetary policy, and it is fitting that this work will continue
03:24today in his name. Thank you to the authors of the papers, to the discussants, and to
03:29our panel participants, and thank you also to Trevor and his team for organizing this
03:33conference. A whole lot of work went into bringing us together. As in our last review,
03:39the 2025 review consists of three key elements. This conference, Fed Listens events at the
03:46Reserve Banks around the country, and policy maker discussions and deliberations supported
03:51by staff analysis at a series of FOMC meetings. In the current review, we will reconsider aspects
03:57of our strategic framework in light of the experience of the last five years. We will also
04:02consider possible enhancements to the committee's policy communication tools regarding forecasts,
04:07uncertainty, and risks. In 2012, the FOMC first codified our monetary policy framework in a document
04:16entitled The Statement on Longer Run Goals and Monetary Policy Strategy, which we refer to as the
04:21consensus statement. The language in the opening paragraph, which has never changed, articulates
04:26our commitment to fulfilling our congressional mandate and to explaining clearly what we're doing
04:31and why. That clarity reduces uncertainty, improves the effectiveness of our policy, and enhances
04:38transparency and accountability. As chair, Ben Bernanke led the committee through the creation of that
04:44initial consensus statement, adopting a 2 percent inflation target, and outlining our approach
04:49to achieving our congressionally assigned dual mandate. The framework laid out in that document
04:54broadly aligned with best practices for a flexible inflation targeting central bank.
05:00The structure of the economy evolves over time, and monetary policy makers' strategies, tools,
05:05and communications need to evolve with it. The challenges presented by the Great Depression differ from
05:10those of the Great Inflation and the Great Moderation, which in turn differ from the ones we face today.
05:16A framework should be robust to a broad range of conditions, but also needs to be updated periodically
05:22as the economy and our understanding of it evolve. From 2012 to 2018, the FOMC voted at each
05:29January meeting to reaffirm the consensus statement in most years without substantive changes.
05:34In 2019, we changed that practice, conducting our first-ever public review, and said that we would repeat
05:41such reviews at roughly a five-year interval. There's nothing magic about a five-year pace.
05:47We believe that frequency is appropriate to reassess structural features of the economy,
05:52and to engage with the public, practitioners, and academics on the performance of our framework.
05:57Several of our global peers have adopted similar approaches to their framework reviews.
06:01At the time of the last review, we had been living for about a decade in a new normal,
06:07characterized by proximity to the effect of lower bound, with low interest rates, low growth,
06:12low inflation, and a very flat Phillips curve. If I could capture that era with one statistic,
06:18it would be that the policy rate had been stuck at the lower bound for seven long years,
06:23following the onset of the global financial crisis in late 2008. After liftoff in December 2015,
06:31we were able to raise the policy rate only very gradually over a period of three years,
06:36to a peak of just 2.4 percent. Seven months later, we began reducing it, leaving the rate at 1.6 percent
06:43in late 2019, where it would be when the pandemic arrived a few months later. Policy rates in other
06:50major advanced economies were even lower, in many cases below zero, and in all such economies,
06:56inflation regularly ran below its target. The sense at that time was that when the economy next
07:02experienced even a mild downturn, we would be right back at the lower bound, probably for another
07:08extended period. The post-financial crisis decade had demonstrated the pain that that could bring.
07:15Inflation would likely decline in a weak economy, raising real interest rates as nominal rates are
07:19pinned at zero. Higher real rates would further weigh on job growth and reinforce downward pressure on
07:26inflation and inflation expectations. Reflecting these concerns, we adopted a policy to make up for
07:32persistent shortfalls from the inflation target, an approach that was common in the extensive
07:36literature on the risks associated with the lower bound. Given the downside risks to employment and
07:42inflation from proximity to the lower bound, and the need to anchor longer-term inflation expectations
07:47at 2 percent, we said that following periods in which inflation has been running persistently below 2
07:53percent, we would likely aim to achieve inflation moderately above 2 percent for some time.
07:59We also concluded that policy decisions would be informed by assessments of shortfalls rather than
08:04deviations from maximum employment. The change to shortfalls was not a commitment to permanently
08:10foreswear preemption or to ignore labor market tightness. Rather, it signaled that apparent labor
08:16market tightness would not, in isolation, be enough to trigger a policy response, unless the committee
08:21believed that, if left unchecked, it would lead to unwelcome inflationary pressure. This change
08:28reflected our experience with long expansions that featured historically low unemployment amid low and
08:33stable inflation, suggesting that a policy approach that carefully probed for the maximum level of
08:39employment could bring about the benefits of a strong labor market without risking price stability.
08:45In the years just prior to the pandemic, for example, unemployment was at multi-decade lows,
08:50while inflation ran below 2 percent. By December 2019, estimates of the longer-run unemployment rate
08:57had fallen sharply. The use of shortfalls acknowledged that a combination of low inflation and low
09:03unemployment does not necessarily pose an adverse trade-off for monetary policy.
09:09The economic conditions that brought us closer to the lower bound and drove the changes in our consensus
09:14statement were thought to be rooted in slow-moving global factors that were likely to persist for an
09:18extended period, at least until our next five-year review. And that might well have been the case had the pandemic not intervened.
09:27The idea of an intentional moderate overshoot proved irrelevant to our policy discussions and has remained so
09:33through today. There was nothing intentional or moderate about the global inflation that arrived a
09:38few months after we announced our changes to the consensus statement, and I acknowledged as much publicly in December 2021.
09:46We fell back on the rest of the framework which called for traditional inflation targeting.
09:51Through the end of 2021, FOMC participants continued to forecast that inflation was likely to subside fairly
09:57quickly in 2022 with only a moderate increase in our policy rate. That projection was consistent with
10:03other central banks with different frameworks and the vast majority of forecasters. When the evidence showed
10:09otherwise, we hiked 525 basis points over a period of 16 months. The most recent data suggests that 12-month PCE
10:17inflation was 2.2 percent in April, far below its 7.2 percent peak in 2022. And in a welcome and
10:25historically unusual result, as this room knows, this disinflation has come without the sharp increase
10:31in unemployment that has often accompanied a campaign of rate hikes to reduce inflation.
10:36The economic environment has changed significantly since 2020, and our review will reflect our assessment
10:41of those changes. Longer-term interest rates are a good deal higher now, driven largely by real rates,
10:48given the stability of longer-term inflation expectations. Many estimates of the longer-run
10:53level of the policy rate have risen, including those in the summary of economic projections.
10:57Higher real rates may also reflect the possibility that inflation could be more volatile going forward
11:02than during the inter-crisis period of the 2010s. We may be entering a period of more frequent and
11:08potentially more persistent supply shocks, a difficult challenge for the economy and for central banks.
11:14While our policy rate is currently well above the lower bound, in recent decades we have cut the rate
11:19by about 500 basis points when the economy is in recession. Although getting stuck at the lower bound is
11:25no longer the base case, it is only prudent that the framework continue to address that risk.
11:29While the framework must evolve, some elements of it are timeless. Policymakers emerged from the
11:36great inflation with a clear understanding that it was essential to anchor inflation expectations
11:41at an appropriately low level. During the great moderation, well-anchored inflation expectations
11:47allowed us to provide policy support to employment without risking destabilizing inflation. Since the
11:53great inflation, the U.S. economy has had three of its four longest expansions on record, anchored
11:58expectations played a key role in facilitating these expansions. More recently, without that anchor,
12:04it would not have been possible to achieve a roughly five percentage point disinflation
12:08without a spike in unemployment. Keeping longer-run inflation expectations anchored was a driving force
12:15behind establishing the two percent target in the 2012 framework. Maintaining that anchor was a major
12:21consideration behind the changes in 2020. Anchored expectations are critical to everything we do,
12:26and we remain fully committed to the two percent target today. In the current review, the committee
12:32is engaged in discussions about what we have learned from the experience of the past five years.
12:36We plan to complete consideration of specific changes to the consensus statement in coming months.
12:42We're paying particular attention to the 2020 changes as we consider discrete but important updates
12:48reflecting what we have learned about the economy and the way those changes were interpreted by the
12:52public. In our discussion so far, participants have indicated that they thought it would be appropriate
12:58to reconsider the language around shortfalls. And at our meeting last week, we had a similar take
13:03on average inflation targeting. We will ensure that our new consensus statement is robust to a wide range of
13:09economic environments and developments. In addition to revising the consensus statement, we will also
13:15consider potential enhancements to our formal policy communications, particularly regarding the role of
13:21forecasts and uncertainty. As we have been reviewing assessments of the 2020 framework and of policy
13:27decisions in recent years, a common observation is the need for clear communications as complex events unfold.
13:34While academics and market participants generally have viewed the FOMC communications as effective,
13:40there is always room for improvement. Indeed, clear communication is an issue even in relatively placid times.
13:46A critical question is how to foster a broader understanding of the uncertainty that the economy generally faces.
13:53In periods with larger, more frequent, or more disparate shocks, effective communication requires that
13:58we convey the uncertainty that surrounds our understanding of the economy and the outlook. We will examine ways to
14:05improve along that dimension as we move forward. So let me end by saying thank you again for being here.
14:12We've been looking forward to us. All of us have been looking forward to being with you today and having these
14:17conversations that will occur over the next two days. These discussions will help broaden and deepen our
14:22thinking about these issues. And they're critical to the success of these reviews. Thank you very much.
14:39All right. Thank you very much. We are going to just roll right into our
14:43first paper session today. On the agenda today will be sessions that address the two sides of the
14:49Federal Reserve's dual mandate, employment and inflation, and also the strategies and tools
14:54used to pursue those goals. So I'm going to turn it over to my colleague Stephanie Aronson,
14:59who will moderate this panel. All right. Great to see everyone here this morning. I'm super excited to
15:21be kicking off the session. I'm Stephanie Aronson. I'm a senior associate director in the division of
15:27research and statistics. And I was told that I could say a few words.