In conversation with Alberto Musalem, President of the Federal Reserve Bank of St. Louis

Welcome to the LSE Events Podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences. Thank you very much, everyone for coming. Hello and welcome to the Lensville Economics for this evening's hybrid event. This is hosted by the Centre for Macriconomics. My name is Ricard Price. I am the director of the Centre for Macriconomics, as well as the AW Philips Chair Professor here at the Lensville Economics. I'm really very pleased to welcome both our online audience. This is being live streamed, as well as our audience here in the theatre. I'm going to introduce to you Alberto Musalem this evening. Alberto is currently the president and CEO of the Federal Reserve Bank of St. Louis. He has more than three decades of experience in economic policy, finance and markets, where prior to joining the St. Louis Fair, he served the CEO and co-chief investment office at Vivian Sasset Management, and before that he was executive vice president, senior advisor to the president of the Federal Reserve Bank of New York, and nearly in his career he was an economist at the International Monetary Fund. The highlight of his professional life, though, is, of course, though that he was a student at LSE. We got both his undergraduate and master's degree here. We are very proud of him and very, very happy to welcome him back to the mothership. During this evening's event, we will discuss monetary policy and recent economic trends, and there will be ample time for you to put your questions to Alberto. We will start with his first communication. I will then have a conversation with him, and then we will open it to questions to the audience. For the online audience, you can submit your questions via the Q&A feature at the top left of your scheme. Please include your name and affiliation. For those of you who are here in the theatre, I will also let you know when I open the floor for questions and ask you for your name and affiliation as well. Social media users, the hashtag is #LSEevents. The event is being recorded. We'll hopefully be also made available as a podcast, subject of technical difficulties. For now, I'm very delighted to hand over to Alberto for his open remarks. [Applause] Hi, I'm interrupting this event to tell you about another awesome LSE podcast that we think you'd enjoy. LSEIQ asks social scientists and other experts to answer one intelligent question. Like, why do people believe in conspiracy theories? Or, can we afford the super rich? Come check us out. Just search for LSEIQ wherever you get your podcasts. Now, back to the event. Good evening, everyone. Can you hear me? Yes. It's a real honor and joy to be back at the LSEIQ, my alma mater. In these classrooms, more than 35 years ago, I first learned about some of the topics that I will cover today. I'm very grateful to Ricardo Reyes for inviting me and to the Centre for Macriconomics for hosting this event. Before beginning, the usual disclaimer, let me just stress that these are my views and not necessarily those of my federal open-marked committee or FOMC colleagues. There's a lively debate in the US about how and what the Federal Reserve should communicate about its monetary policy. In my view, a central bank should communicate how it turns incoming information into policy. Note that I'm not talking about Ford guidance of a specific policy path. But rather, the framework of how and why policy is determined. A clearly communicated framework yields smoother monetary policy transmission, better economic outcomes, and stronger democratic legitimacy. In the Q&A that follows, I'll be glad to elaborate on how my communications philosophy applies to the current US economic conditions. A central bank can communicate three things. It can share its forecast, meaning how it expects economic conditions to evolve. It can promise a policy rate path, meaning where it intends to set interest rates months ahead. And it can explain how the policy rate will be adjusted in response to changing economic conditions to achieve its policy goals. This distinction is important. Promising a specific interest rate path is what earned Ford guidance a bad name. The framework I will describe is closer to the third kind of communications. It means telling the public not when the central bank will act, or exactly what it will do, but how and why it will decide. Let me describe what I have in mind. I have advocated for parts of it before, including in my speech, first speech in this job. The FOMC maintains a public statement on long-run goals and monetary policy strategy. It establishes several elements of the framework. For example, it sets 8% inflation target. It indicates that the federal funds rate is the committee's primary tool for implementing monetary policy, while the balance sheet is a complementary tool reserved for unusual conditions. It also highlights that long-run inflation expectations anchored at the 2% inflation target are important for delivering both dual mandate objectives of maximum employment and price stability. When the two goals come into conflict, the statement points out points to a balanced approach when how far employment and inflation are from their respective goals and the horizons over which each is likely to return to target. A useful additional element would be the horizon over which the FOMC expects to achieve mandate consistent levels of inflation and employment. I consider 18 months and 18 months horizon to be reasonable. It is long enough to avoid constant adjustments of the policy stance and short enough that we can be held to it. Specifying it horizon also helps maintain a forward-looking monetary policy posture. The heart of the framework is clarity about how policy will respond to economic conditions. Rather than claim to know a single policy path in advance, a well-articulated framework should include a small number, perhaps two or three, of the most likely scenarios for inflation and employment, estimates of how probable each scenario is and descriptions of how the policy rate would respond under each one. As data and other information arrive, the scenarios and the likelihood of each are updated. This is a forward-looking approach to decide policy as the world reveals itself. None of this requires settling on a particular communications device. A reasonable framework can be conveyed in several ways. What a central bank should avoid, in my view, are communications and actions with no framework to make sense of them. It should also avoid exiting the conversation altogether. A central bank that does not explain how or why it makes policy decisions leaves the public to guess whether it is following a clear and reasonable approach or simply exercising discretion in setting policy. An unexplained policy risk being interpreted as discretion which can be costly in terms of inflation. The central bank's reputation can substitute in part for an announced framework. Given a long and stable track record, people can partly infer the central bank's systematic response to economic conditions from its actions. However, a credible record takes a long time to build. Also, inference through a track record cannot reveal how a central bank would respond in situations that have not yet arisen. It is in those circumstances that anchoring of expectations matters the most. A clearly communicated framework turns a pattern that the public must otherwise infer from a track record into a commitment. Commitment, not silence, delivers the gains that I will now describe. The first advantage of a clearly communicated framework is a smoother transmission of monetary policy to the economy. I am sympathetic to the argument that a central bank should let financial markets react to economic data and other signals rather than to the central bank's communications. The question is how to best achieve that goal. Markets react to data through their expectations of how the central bank will respond to macroeconomic developments. The price of a treasury bond reflects a forecast of the future policy path. So when a central bank keeps its framework to itself, it does not free up markets to focus on data and other information. Rather, it forces participants to get market participants to guess how the central bank will assess the state of the economy and react to it. Guessing as noise, which results in added premiums for uncertainty. This shows up as higher and more volatile long-term interest rates, and ultimately higher financing costs for households and businesses. Communicate the framework and the opposite happens. Markets take the incoming information and apply the central bank's response. Financial conditions then adjust in anticipation of the Fed's reaction, tightening as the economy runs hot and easing as it cools. The intended policy stance takes hold smoothly in real time, with lower risk premiums and volatility. This lowers financing costs for households and businesses on average. Conveying the framework also answers the concern that central bank communication turns markets into a hall of mirrors, in which the Fed ends up reading market prices that only echo its own words back to it. The worry is real, but it is not an indictment of all forms of communication. The echo comes from broadcasting a forecast. Announce of view of the economy and markets reflected back. Communicate a framework, communicating the framework, not a forecast, is the solution. It leaves markets to supply their own reading of the economy and apply a framework they understand. There is no reflection to mistake for signal because the signal about the economy comes from the market, not from the Fed. The second advantage of a clearly communicated framework is better economic outcomes from managing expectations. Monetary policy does not work through today's interest rate alone. It also works by affecting expectations about the future. A 30-year mortgage rate, or a company's decision to build a factory, depends far less on the current overnight interest rate than on where people expect rates will be years to come. Expectations are a powerful policy level. If the public understands the framework, meaning how the Fed will respond as the economy evolves, then private expectations tend to line up with the Fed's intentions on their own. The Fed need not jolt markets by surprise. A well-understood framework anchors inflation expectations and improves the tradeoff between inflation and employment, making the public better off. There is still a deeper benefit from a clearly communicated framework. Economies can be vulnerable to self-fulfilling beliefs. A fear of high inflation can bring it about. A slide toward deflation can feed on itself. A clearly understood framework is a powerful safeguard because the public already knows how the central bank would respond before such a spiral can take hold. Much of the stability that the public takes for granted comes not from any single policy decision, but from the public's confidence that it knows how and why the future decisions will be made. The third advantage of a clearly communicated framework is accountability. The Federal Reserve's monetary policy is deliberately insulated from day-to-day politics for good reasons. Higher and more volatile inflation tends to be the outcome when a central bank is subject to short-run political pressure. In the US, monetary policy independence is a grant of authority from Congress and ultimately from the public. In a democracy, delegated power carries an obligation to explain how and why that power is used. A framework is what makes that explanation possible, allowing the public and the representatives to verify whether the central bank is following its stated policy strategy and to hold it to account when it straights. Judging monetary policy by mandate consistent outcomes is not enough. Without a framework that articulates the how and the why, there is no way to tell sound policy strategy from luck or improvisation. A predictable explained framework is not a constraint on the central bank. It is part of what makes an institution run by unelected officials democratically legitimate. To conclude, the communications choice before us is not between noisy over promising and stoic silence. It is between leaving the public to guess how the central bank thinks and telling them. Communicating a framework delivers smoother monetary policy transmission because markets can price the state of the economy using a map from scenarios to policy. It delivers better economic outcomes because expectations coordinate around the central bank's intentions. And it delivers stronger democratic legitimacy because the public can hold a powerful institution accountable to a policy strategy that it has stated out loud. The most important thing a central bank can tell the public is not what it will do at the next few meetings. It is how and why it will decide as the economy unfolds. A framework is the rare promise that is entirely within the central bank's control. Thank you. (Applause) Thank you very much, Alberto. We will now follow with a discussion between two of us touching on both of the topics that you brought to us as well as some more general topics of monetary policy. But I want to start with this topic of communication. You touched on many sides of it and many facets of it, but there are still a few more for us to expand on. And one of them is the difficulty as a policy maker, maybe not difficult, the privilege of talking to different audiences. You will sometimes be talking to, in very important for accountability, the American public when you go around your district and talk to business leaders as well as just communities. Sometimes you will be talking to financial market participants and sometimes you will talk to brilliant international students in an audience like this one. How do you see the challenge of communicating to different audiences in terms of the transparency of the central bank as well as in terms of how you're trying to see your expectations and the points that you made? How do you see that the job of a policy maker institution like the Fed was making concrete decisions on people's lives, but also has to work through financial markets, and you mentioned the responsive on prices, is able to deal with this tailoring of messages in a transparent way. It's a great question, Ricardo, the way I try to navigate that is, you know, this is no secret, no your audience, no who you're talking to. But always also be mindful that no matter who's in the room, most actually all of our communications need to be broadcast to the public. So really you're not talking only to the people in the room, you're talking to the people in the room and the general public. And a rule that I follow is, even though I am an economist, I tell my team, you know, help me explain these concepts in an accessible way for the general public so that anybody can understand what we're trying to say. So know your audience in the room, but be mindful that really your audience is the general public 99% of the time and tailor your communications that way, that's how I navigate it. Very good. We have many trained people trained to be policymakers, and I think we'll take that message into the room. Likewise, we're not like this, we're following the communication, and definitely central things happen. And now I will be a little nerdier, but you will be able to express it to the general audience. Is it different from the short one in the long run? Yeah. In many ways, depending on different horizons, the central bank has control of some things, shorter horizons of other things. And longer horizons, we teach our students that the central bank can really control inflation, but has very limited if any influence on economic growth and other outcomes beyond providing stability. At the short end, you have a dual mandate, you have to worry about fastest ability, and you have to trade off those. Again, on communication, how would you help communicate to our audience and others this feature of policy having different horizons, and therefore your influence, you can't really, the central bank can't really be blamed or welcomed for the country growing very fast in the long run. But in the short run, you do have trade-offs as a capsule in your mandate, as you have. It's a great question, and I just, my policy is just explaining it. In the short run here, here's what we can control, and then the long run here's what we cannot control, and not leave the conversation there, because then it sounds like a closing conversation. Oh, we can't control that, therefore we can't talk about it. So explain why it is that we can't control. For example, in the U.S., right now there is a debate that some folks feel that monetary policy ought to be run easier than otherwise, because that will help the large investment boom that is happening, and that is going to lead to a different growth rate of the economy over the long term. And what I say to that, and I've given a speech on that recently, is that by law, by statute, the Congress did not give us a responsibility to increase long term growth. We are supposed to, by statute, to worry about smoothing the business cycle. That's our primary goal. and even if we wanted to increase long-term growth by running a monetary policy. policy easier than otherwise, that really risks the anchoring inflation expectations. And if inflation expectations get the anchored, that just makes the stabilization role, maximum employment and stable prices role that we have just that much harder. So I just try to talk people through the economics of the short and long run, and without getting too nerdy to, too, too, to be honest. And you mentioned QE, and that's a particular challenge of communication that most central banks have faced in the last 10 years. It was quantitative easing policies, 10-ish years ago, 15-ish years ago, had a goal of stimulating inflation. When inflation was very low, but initially many of those same policies started as a response to financial prices and were really trying to stabilize the markets. And even in the case of the Fed in 2020, some of the quantitative easing policies were really your response to a pandemic and financial problems that came with it. The difficulty many central banks have felt is not communicating how not every balance sheet policy is quantitative easing is understood, or at least different balance sheet policies come with different intentions. What do you think is both conceptually differently transmitting that? And how have you felt even in your experience of the Fed when you're discussing balance sheet policy? Are you able to say, this is the purpose of this policy, why we're doing it, why we're buying what we're buying or selling what we're selling? Sure. It's a great question. You know, I wasn't around when the balance sheet was used extensively around COVID or after the global financial crisis. So I didn't have to wrestle with those choices in real time, like the other policy Americans will have tremendous respect for the people that were doing this in real time. It's easy to look back and say, you know, could have should have would have. But in real time, it's another story. I think looking back, though, knowing what we know today, I think there is room for improvement in how the Fed communicates about its balance sheet policy and how it distinguishes between balance sheet policy that is intended for for macroeconomic demand management, so to speak, or what you call inflation and control at the beginning. So monetary policy. What balance sheet policy is there for financial stability or market function. And I think we need to explore ways of, you know, in real time, being able to distinguish the different roles of the balance sheet. So there is definitely a room to improve our communications there, in a sense. And you mentioned a little while ago that you've been given recent speeches on how to think about long-term roles and the productivity and what's going on with productivity in the United States. I mean, in many ways, that is a major question that all economists face, including many of the people. Some of the research that I see here in the room, which is we are having an extraordinary new technology in the face of its archivist intelligence. We don't really know very well how productive it's going to be or not. And that, of course, has a big impact on your choices right now, when you've on the FMC in terms of how do we interpret what's going on with investment in the US, what's going to be future growth, what will be future interest rates, interest rates. A difficulty with the productivity growth is on the one hand how to measure it in real time. In here in the UK in the last week, we massively updated upwards what we thought particularly growth had been in the last 15 years. And also forecasted where it's going to be, which is more, I guess, in some ways, your problem. How frustrating have you found the data limitations in terms of measuring that and why not specialized to AI? Because I want to ask you to comment on the UK difficulties. So what do you think are those data limitations, what are some indicators that you find reliable in terms of the productivity, what are the things you personally look at and find useful, and even what would you tell some of the research in this room that we should be working on so that you can judge better in some sense what's going on right now, what's going to happen in the near future? You should have told me we're going to ask all hard questions. So productivity is one of those variables that is very, very important to get a good understanding of. In the 1990s, it was a solo that said, I can see productivity everywhere except in the productivity numbers. And it kind of feels that way right now as well. We all have stories that we can tell about just how much more productive we are with AI. In our bank, we have something like 1500 people in our bank. The 5% are trained to use AI on a daily basis in the daily tasks, 91 are using it on a daily basis in the daily task. So we see the productivity that comes from it in our software development teams, incredible productivity. So it kind of feels like it's happening. But when we go look at the macroeconomic data, the story is a little different. If you look at average labor productivity, it's growing in about 2.1, 2.2%, if you look at the last four-day quarters, which is unremarkable, it's just average. It's middling. That's the historical average, maybe one-tenth above the historical average. Now it's possible, this data gets revised a lot. It's possible that when we look at the data five years from now, it was wow, productivity was way higher than we expected, then we thought it was today in this date. When you look at total factor productivity, where the magic really happens, how the different inputs of production, capital, labor, and raw materials are put together, efficiently in the production function, total factor productivity is actually growing. The growth rate is very low, relative to history right now, very low. Now that could be because there's a meaningful capital deepening going on now with all the investment, and this capital deepening is still unproductive, and the productivity hasn't kicked in yet. But if you look at the data today, as it is today, productivity doesn't seem to be in a renaissance yet. It seems to be kind of recovering to trend in terms of labor productivity, in terms of total factor productivity, it's actually below trend. But when we look around, we all have these productivity stories to tell and observe. In this job, I get to talk to CEOs from all over the country, all over the district, and they all say that they're seeing productivity gains, but it's the very early stages. So everybody's rolled out, all the CEOs are rolled out, all the AI tools, so their staff can use them, but they haven't yet re-architected their entire workflows of teams of people. And every individual has the AI tool, and yes, they're sharing cool stuff with each other. But the re-architecting of an entire production process, an entire workflow, that's still lagging, and that's something we're working on at the Thurs or Bank of St. Louis. So what does it all mean for policy? First of all, you have to recognize that what you believe productivity is today maybe revised higher, as happened in the UK. But when you look at corporate earnings, they are very strong right now, across all sectors of the economy, revenue is strong, profit is strong, and the expectations of the forward guidance of the companies out of the central bank is very strong on revenues and profits. So that kind of tells you there's probably productivity going on. Things wouldn't be this strong otherwise. What does it all mean for policy? What it means for policy is we have to make policy for the economy as we understand it today. We cannot gamble and run monetary policy easier than it otherwise should be on this expectation of a future productivity boom with an uncertain arrival. This productivity boom may arrive within the next 18 months, which is, as you heard me say, my policy horizon, but it could arrive five years from now. If we said policy today for something that may or may not happen five years from now, there's a risk that we could end up with higher inflation both today and in the future. That's how I'm thinking about policy. And if we begin to see the disinflationary impact of productivity growth, then it will be appropriate to take that into account. I'm going to put a shameless plug here. My team just published on our website, a very nice study, a cross-sectional, a cross-industry study, exactly on this. What happens in different industries when productivity growth increases in those industries in terms of the inflationary impacts or when there's a productivity boom. So we're looking very closely at this. For now we have to make policy for what's happening today. And let me just say that the AI, the AI CapEx boom, for the time being, again, the productivity is not yet evident, but what is evident is a very meaningful set of demand pressures on the economy rather than positive supply relief. And so today we have to make policy for what is happening over the next 18 today and over the next 18 months. Thanks. It's a great answer. Can I ask you to also on the productivity and the AI to speak a little bit about fastest ability. To what extent? I mean, you've spoken eloquently now about the inflation dual mandate and trade-off. But how do you see, again, this very large CapEx boom and what may come of it and whether we'll have a lot of productivity or not, are you, do you think there's concerns for stability when it comes from the role that the Fed has both in the supervise. but also especially in terms of trade-offs we're just talking about the balance sheet and others. Do you think there's some sort of concern that you've seen the date or again? Just research you would like us to do to try and tease that out, beyond the influence, you know? Thank you. So a potential risk out there is that the U.S. economy is very strong now. The growth is very strong. The late markets in a good place, corporate earnings are very strong. The economy is growing at or above its long run trend. However, all of that is predicated on a bright future, a bright high productivity future that people expect today. So companies involved in the AI space expect this very bright future so they're investing a tremendous amount today and that's pulling up aggregate demand. Share prices or equities are pricing this future scenario. Markets are forward looking, so they're looking ahead and they're pricing full. Back to today, this bright future, so aggregate prices are very elevated. Equity prices being elevated is producing very positive wealth effects onto consumers. So we have consumption and investment both growing at a very healthy clip and a lot depends on this brighter future coming through, actually happening. So it's a very concentrated situation which hopefully will work out very well for all of us. But there is a possibility that it may not. I'm an AI optimist. I should have said at the beginning, by the way, I'm an AI optimist. I'm a productivity optimist, but you have to consider all scenarios, you know, the optimistic scenario and and you know, the possibly that it may not turn out to be that optimistic. So let's go to more pessimistic things, which is on the one hand yes, we have productivity, we have the AI revolution. On the other hand, there are many supply shocks going on in the world right now. We of course have the big increasing oil prices, but more generally there's due political tensions and certainly having lived through COVID. You do worry that the economy today will have more of what we call in macroeconomic supply shocks, difficult shocks that come and they both raise prices, as in the case of oil shocks, but also have a contractionary impact on the economy. From your experience in last year's, especially looking ahead at what may be a more turbulent future in terms of the shocks that happen on the supply side, what do you think, how do you frame, this is a brilliant question for all central bankers, how do you think about the trade off when you face a supply shock? How much do you lean on controlling inflation versus your demand date? Seeing through the shock and how temporary it will be, walk us through a little bit, how do you think this is? It's not a settled academic question, so every central banker has to deal with it in a somewhat different way. Give us a little bit of a light on how you would think about it. That's where you learn that theory and practice are two very different things. Yes or correct, we live in a tense geopolitical world where countries are wanting to have sovereignty over resources, their choke points are on the world, physical choke points, non-physical choke points, and so it is likely that negative supply shocks will be happening more frequently than they did in the preceding 20 or 30 years. As central bankers we have to contend with how to run monetary policy in that world. The textbook and you all are students and there are some amazing professors here and I can see in the audience some of which were my professors. You get taught that the textbook is if you have a negative supply shock, you should most of the time look through it and the arguments are twofold. One is that it's a price level shock, not an inflation shock and therefore there's no need to react to a monetary policy. The other argument says that it's a transitory shock so by the time monetary policy has any effect on the supply shock with along the variable lags the supply shock will have come and gone and you will arrive late. I think that logic is materially weakened when there are recurring overlapping large negative supply shocks as has been the case in the recent past. When that happens the likelihood that inflation could broaden out and there could be second round indirect effects of the initial shocks because they either because they built on each other or because you know through the production change chain you just have these second round effects the likelihood of that is increases. So this idea of looking through has much less merit and right now we've had five years of above target inflation and the chances the probability of this broadening or second round effects or inflation mentality taking hold is higher because of the recent five years. So that's another reason for being very careful with any look through. Now we have one instrument which is the main instrument which is the policy rate and when you have negative supply shocks we have both of our objectives and employment and inflation moving in opposite directions. So what do you do and what our framework says as I said in the talk is we tend to follow a balanced approach. We try to understand which of our objectives is furthest away from target which was going to take longest to get to target and we try to balance between those two competing objectives in that case. Right now inflation is running meaningfully above our target but only part of it of the inflation overrun is coming from supply shocks. So my team at the St. Louis Fed has done some great work which they're going to publish shortly and to decompose inflation and what we come up with is that about half of the excess inflation on a 12 month basis has been from negative supply shocks and the other half of the excess inflation is persistent demand pressures as we just discussed a minute ago. So what I'm focused on right now is on containing any further broadening of inflation right now we have 55% or so of the PC inflation items in the PC basket running above 3% and I'm focused on containing any second round and indirect effects from the recurring supply shocks and persistent demand pressures. One thing you didn't touch on on your answer now but which ties us back to the beginning of this conversation and your talk is the role of inflation expectations. As you said on the one hand inflation is running above target for a few years on the other hand one of the challenges of supply shocks and looking through is the extent to which the inflation stations stay anchored or not. For if they don't they will amplify the supply shock towards a more persistent inflation. How do you see precisely right now how do you look at the inflation stations data right now? Do you see the man could you see dangers already of the succession of supply shocks that you said that an anchor could just be around the corner therefore justifying being very careful and reticent with what you do with policy and generally expectations are brought to your communication and so going back to the beginning how do you communicate supply shocks to the audience and in order to also help them in anchoring their expectations. So if I said earlier that productivity is one of those very important variables inflation expectations is right up there with productivity and you know we look at inflation expectations in many ways through surveys of households surveys of businesses surveys of CEOs we also look at market implied inflation expectations and what I generally observing all of these expectations my conclusion is that inflation expectations remained anchored consistent with the 2% inflation objective over the long run. My sense is that the inflation expectations remain anchored because financial markets have recently increased the expected long run real policy rate the policy rate that we control and so they markets and the public expect us to address any inflation problems appropriately and because they expect that because they understand our reaction function inflation expectations are remaining very good but but it's missing on in terms of just the communication because I really want to tie us to the beginning. Do you think the communication is a very important part of the expectations and exactly going back to your initial in the scenario supply shocks you said more than once it's very important but I go that I explained to people what we're doing that I explained the trade offs you see that is being an important input to the expectations the expectations are not just something people have you see that you as a policy maker have a duty to do that anchoring beyond the fact that they're You know, expectations get formed in many ways, you know, different people come to the markets with different information sets, you know, different experiences. They transact in the markets, and they form a price, and that price is a summary statistic of all of the information that is available. And part of that information, not all of it, is what the central bank is communicating. Now, a central bank can say inflation expectations are anchored all at once, but if the person is going to the supermarket every day and is experiencing inflation every day every month every year, that's going to be weighed very heavily in their expectations. If it plays a part, our communications plays a very important part in forming expectations, maintaining our credibility, earning our credibility every day, is very with communications and actions, is a very important part of the expectations formation process, but it's not all of it. You know, outcomes are also informed expectations to a large degree. Actions need to backward, I would say, yeah, as you put it. Very good. It's time to open the floor to the audience, question the audience. There's going to be some lovely, some of our wonderful students are going to be carrying some microphones and distributed abroad. If you're online, please submit your question to Q&A, and then I'll pick one or two here. But it's here in the theater, just raise your hand, and there'll be a microphone too, and I'll collect a few questions. In all cases, please remember just, it makes it much easier to just state your name and your affiliation before you ask a question. It just makes it much easier to start. So I want to start with a gentleman here, and then I'll already point to, let me try it a little bit. Hello, my name is Lincoln Harrison. I go to Edge Barrow School. I was wondering, when you say expectations of the within, well, San Luis, how often can you find that, like, conversing, excuse my free language? But things like recording equivalents, do they take place against the use of expectations and perpetuates your bank's goal? How often do things go against it? People whose expectations? Okay, there was a gentleman here. We'll collect three or four of us, okay? Thank you. I'm Levante Carroso. I'm Central Banking's North America correspondent. In 2024, you argued for the usefulness of publishing alternative scenarios as a part of communications. Nowadays, a chair who doesn't believe in or doesn't submit a dot for the set. How do you see your views now? What do you think publishing alternative scenarios plays in the role of Central Bank Communications? Thank you. And then last one here, gentleman, on the front. Good evening. I'm Toby Middlemister, first year undergraduate in New York University. There is a great deal of discussion about erosion of the dollar's reserve status. But reserve composition moves very slowly. So from your perspective, what can constitute evidence of a change? Great, and I'll add one just from the online and then go to Oliver. There are a little bit of many different ones. But one here, as well, is give us a little bit of some thoughts on the survey economic projections. How important do you find for those who don't know certain projections is where different members of the FMMC have to report where they expect for some key macro variables to do. You do it twice a year, believe it or not. Four times a year. Four times a year. And there's been some discussion on whether it's a useful tool of communication or not, and just how do you see that? I think a little bit. This was very different questions. I'll open to it. I'm going to try and address all of them very quickly. So on communicating with scenarios and with some uncertainty, I think it's important to have humility when you're communicating with the public. And of course, there are an infinite number of scenarios. But as a central bank, I think we can boil those down to the two or three most plausible scenarios and explain them. And explain how likely they appear to us at any moment. And explain how policy might behave in any of those scenarios. I've continued to communicate that way. I've said recently on TV that I believe that without a firming of monetary policy, the probability that inflation 18 months from now would be immediately above our target, was larger than inflation being at our target. So there's two scenarios, two probabilities and policy thought. So I intend to continue to communicate that way. So that's on communications. On the dollar, I think the first thing I would look for is that the dollar were depreciating very rapidly. Instead, it's been appreciating. So I'm not sure that fits very well with the narrative that the dollar is losing its reserve currency status. At present. There was a question on recording equivalents, which I didn't quite understand the question. Let me paraphrase the question, see if I understood it. I think you were asking how forward looking are people really? How far are they really recording, I think is what you were saying. Did they really look that far into the future? I would say people are surprisingly forward looking. But I don't think they look forward 10 years into the future. They probably look forward a year into the future, or maybe two years into the future. Financial margins tend to look further into the future, because there's a lot of money at stake. But the horizon of expectations over which they're formed is variable, I would say. What was the other question? What was the question? The question is, how do you think about when you're delivering those projections? Do you think there's too much information? Would it be better to have them or not when you get to fill them out? It's a question about communications. The important thing is that we communicate our framework. How are we thinking about the economy? Why are we thinking about different policy paths? That can be done with any tool. I'm not wet into a particular tool. Right now we have one of those tools. It happens to be the summary of the projections. Otherwise known as the dot plot where we write dots of where we expect the economy to go. Employment, growth, inflation, and interest rates. I think a way in which that could be improved is by connecting the dots. Right now you cannot tell what my interest rate expectations are. How they connect to my employment expectations, to my inflation expectations, and so on and so forth. If we can connect the dots anonymously, I think they would provide the public with more information about different scenarios that the different policy makers are considering going back to the question scenarios. You could understand, okay, this one person is more concerned about inflation. Therefore they have a higher interest rate path. This other person has a different employment path and therefore a different interest rate path. I think that would be an improvement. Now the SAP is just one way in which we communicate. Talks like these are a way in which we communicate. Speeches are another way, the chair's press conference, the minutes. So we have many communications devices to convey our framework. The SAP is just one of them and there are different alternatives to it that could be considered. Very good. Let me start with that gentleman there in the blue shirt. I asked already before, and then here, I'll go there. For example, the white t-shirt. Thank you very much. I wanted to ask about one component of your framework and specifically the monetary stance. We heard at the most recent press conference chairwarch described the action as removing a dose of accommodation. So I wanted to ask one sort of how you view the monetary stance right now. And in a similar lens, there's sort of been this idea of financial conditions as a way to gauge the monetary stance making its way back into the debate. So I wanted to ask how you view that versus the more traditional sort of R-star approach to looking at that. Hey, Sven, research is sent at the Center for Microconomics. So at the beginning, you made it very important and the important task of the Fed is to communicate under all the states of the economy. Now with the rapid AI boom and the big impact on the U.S. economy, I was wondering whether if, and if so, you can talk a little bit about it. What the policy will be, say that the AI boom slows down a bit, optimism fades, and maybe there's an over commitment. So my question is, at the last meeting, the Fed has increased the rates. And some people have interpreted that as a response to the uncertainty in the bond market. And I'm wondering, I know it's out of your responsibility, but let's imagine they're right. All right, wouldn't it be just included? the funding cost of the financial institutions and as a result lower demand in the bond market, both corporate and government bonds. My name is Clarema Master's student here. I'm just wondering at the Fed you know you have ways to observe numbers and observe studies and trends and why not to see what's happening in the economy. I'm just wondering what are some ways that the Fed might collect data on public sentiment to help inform its decisions. Maybe you know you have a lot of Americans thinking that things are generally unaffordable. So I guess how do you weigh both the the numbers and the data versus what people are actually thinking? Sure. I'll start with yours because it's part of mine. You know something that people will appreciate is you know my bank and the other 11 banks and the board of governors we spend a lot of time interacting with the public. We interact with community leaders, we interact with households, we interact with companies, we interact with governments, local governments and and that anecdotal information helps us. Some of it is informal through just conversations. No I meet with dozens of people before every FOMC meeting and my team meets with more dozens of people. So together we meet with hundreds of people and we take all that information in. Some of it is informal conversations. Some of it is formal surveys. So we actually survey people on sentiment and other things. We also look at all the sentiment surveys out there produced by private and public institutions. So I think we have a pretty good sense of what's going on. In the first day of the meeting all 19 people share how they're seeing the economy. A big part of that sharing is sharing their impressions from the outreach that we do with the public. So whether through surveys or more informally. So that's the answer to that. We do take into account there's always room for improvement as to how we do that but we do rest assured we invest a lot of time in that. On the question on monetary policy at last meeting we removed some accommodation monetary policy. My judgment is that monetary policy remains somewhat accommodative. Financial conditions are rather accommodative if you look at prices. If you look at financing conditions meaning the amount of financing it is also rather accommodative at present. I think there's a question up there about what to do with the AI boom which fizzle. Did I understand a question correctly? That was a question right? Do you have already say a policy in state what if AI doesn't go with the cost of its attendance? Yeah. So you said something I didn't say in the talk. You said that I said the Fed should communicate in all states of nature. I said two or three. I said that two or three most likely. We run simulations and one of those simulations considers how would the economy look if the AI boom turned out to fizzle. And it could fizzle in many different ways. So the economy would look different. We would have to see which of those ways it would fizzle if it fizzled and then make decisions based on it. And there was another question which I omitted. Okay, let's do one very last round. So here at the front. Oh, there's a microphone on the left side. Sandra, here in blue and then we'll take that lady there in the corner. Put your hand up. No, no, no, no, no, no. Go ahead, Lorenzo. Sorry. Thank you very much, chef. Lorenzo Codonio and the CDN. You presented extremely well the trade off that the central banker has to face when, you know, confronted with supply side shots. Now over the past few years we had a number of supply side shots that combined, you know, one with the other and so forth. Now we can say that with the information set available that time, maybe central bankers and Fed did, you know, decided the right move. But with hindsight, give it that inflation has remained very high and above target for a long while. Would you say that maybe it would have been better to act a bit earlier? And the lady there here, go ahead. Hi, I'm Julien. I'm doing my masters here. Well, we've seen kind of a surge in investment over the past couple of years, even with interest rates very high, named because of AI. And it kind of makes me wonder if there's such an important, less sensitive to interest rates actor in the economy. What can happen to the more interest rates sensitive sectors in the economy and how the Fed deals with this continuum that is facing right now? And a final question, a front question here. Benning markets. Useful source of information? Okay. The first question was one of hindsight. Now, what should we have done anything different? I'm really focused on looking ahead. I'm focused on making monetary policy for the next 18 months and to bringing inflation back down to 2% in about a year and a half or two. And I'm focused on containing the second round effects of the supply shocks plus the demand pressures on the economy. So I don't want to second guess the past. I would say that last year, the late market has shown some signs of weakening. And I'll just leave it at that. The other question on interest rate sensitivity. It's important that we don't get drawn into distributional conversations. You know, distributional policy is best left for elected officials, members of Congress, and so on and so forth. You know, we buy law. To the American public through Congress, the man that Congress gave us was to maintain price stability and maximum employment. And that's what we need to do. Right now, we have 55% of the inflation index running about 3%. We're beginning to hear, at least I'm beginning to hear, price setting behavior by firms that are thinking of setting prices over the next 12 months between 3% and 4%, not at 2%. And the late market looks stable. The unemployment rate is at or below. It's natural rate. And so we need to be very focused on umbrella inflation back. The best thing we can do to promote economic growth is to achieve price stability. If we do that, the real incomes of households, which are being challenged out, they're not growing at historical rates. They're growing below historical rates. People in my district that are low-modored income folks are increasing having difficulty making it to the end of the month. And companies are seeing very high input costs, less labor, more non-labor input costs. It's really important that we achieve price stability. And there was over the bank markets. Quick, useful already, not we'll see. As a source of information in data. I think financial markets are the best aggregators of information that we have, the humanity has. Financial markets aren't always right. They often get the future wrong, but in the present, they're the best aggregates of information. I think what are being called prediction markets are really what economists have always called error-the-brew markets. But now they have a sexy name, prediction markets. And they are, depending how they're structured and depending how liquid they are. And as long as there's no manipulation of the markets, assuming all these things, they tend to be good aggregators of information. They have proven to be better than polls, for example. Very good. We're just at the end. We're 30 seconds over. Thank you so much for everyone to have joined the series today. Reminder that at CFM, we run several regular public events, so keep an eye on our website. Including tomorrow, we're going to have the ex-governor of the Bank of France, Francois Vilaplier. See you there. But for now, please let's. Thank you for listening. You can subscribe to the LSE Events Podcast on your favorite podcast app and help other listeners discover us by leaving a review. Visit lse.ac.uk/events to find out what's on next. We hope you join us at another LSE Events Zoo.