25th Annual Financial Markets Conference - Rewiring for Resilience in an Evolving Financial Network - Day 1 Keynote Transcript - May 17–19, 2020

Banner image for FMC 25 Years: Fostering a Resilient Economy and Financial System - The Role of Central Banks

May 17–18, 2021
Virtual

Day 1 Keynote Transcript

Raphael Bostic: Good morning. My name is Raphael Bostic, and I'm president and CEO of the Federal Reserve Bank of Atlanta. I'd like to welcome you to the Atlanta Fed's Financial Markets Conference.

Conferences like this are critical for us at the Fed. They are an essential way that we stay connected to the best thinking in finance and economics beyond our organization, and they're also helpful for advancing important policy conversations of the day. I'm especially glad to welcome you today since we had to cancel last year's conference. I'm feeling really, really good about being back at the FMC, even if we have to do this virtually.

This is the 25th anniversary of our signature research and policy event. While the title of this year's conference, Fostering a Resilient Economy and Financial System: The Role of Central Banks, could be a permanent theme for an event like this, I think it's particularly relevant for this year's conference given what we've all have had to endure over the past 14 months. I remind anyone and everyone I talk to that we're still navigating rough terrain. The U.S. economy remains about 8 million jobs short of where it was prepandemic, and recent evidence suggests that the recovery is likely to be uneven and unpredictable.

This means that the decisions by the Fed and fiscal policy makers will be vitally important for stabilizing financial markets and the macroeconomy and setting us up for growth. The way that we grapple with these issues will shape monetary policy and economic outcomes for millions of people, businesses, and financial markets for years to come.

This is the backdrop of this year's conference, and our team has put together an excellent agenda as always. Over the next two days, we will no doubt hear interesting views on policy responses during the pandemic to date, and what should come next. I will say this: The speakers we've assembled are not noted for their reticence, and that's perfect for two reasons. First, these profound questions merit hard thought and unfettered discussion. Second, we just appreciate candor. It makes the conversation more engaging, and honestly, more fun. It's one reason why I look forward to the FMC every year.

So, let's get going. For our opening session we have the pleasure of hearing from Richard Clarida, vice chair of the Federal Reserve Board of Governors. Rich began a four-year term as vice chair of the Board of Governors in 2018 after a distinguished career in public service, academia, and the corporate sector. He was on the Columbia University faculty for 30 years, including a stint as chairman of the economics department. He was an assistant Treasury secretary, a member of President Reagan's Council of Economic Advisors, and a strategic advisor and managing director at PIMCO. Rich also consulted for the Group of Thirty, a project led by the legendary Fed chair Paul Volcker. He also was the head of our "Fed Listens" series that we used in 2018 and 2019 as a benchmark and a baseline to help guide us as we develop a new long-run policy framework.

Before I turn this over to Rich I want to say one last thing: If you didn't already know this, he does have original music streaming on any service that you might be able to access, so I would encourage you to listen to Rich perform and get pleasure from him from that avenue as well. Richard's going to talk for about 20 minutes, and then I'll be back for 20 minutes of conversation.

Rich, I'll turn it over to you.

Richard Clarida: Raphael, thank you for that introduction. I am truly delighted to participate in the 25th Financial Markets Conference sponsored by the Atlanta Fed, which this year focuses on the role of central banks in fostering a resilient economy and financial system.

Central banks can indeed make important contributions to the resilience of the economy and financial system. In the case of the Fed, our responsibilities include ensuring that banks are well supervised and regulated, working with other agencies to promote financial stability, and of course, conducting a U.S. monetary policy that aims to achieve our dual mandate goals of maximum employment and price stability. As the title of my talk suggests, my remarks today will focus on the importance of some specific global financial linkages that are relevant to the execution and communication of U.S. monetary policy aimed at achieving our domestic mandates.

Signs of financial globalization are abundant and evident across markets for many asset classes. But why, and in what ways, is financial globalization relevant for national monetary policies charged with achieving domestic mandates? A comprehensive and complete answer to this fundamental question is, of course, beyond the scope of a single speech. In my remarks today, I will focus specifically on two ways in which the integration and globalization of sovereign bond markets is relevant to the execution and communication of national monetary policies.

Central banks rightly pay a lot of attention to domestic sovereign bond yields across the curve for at least two reasons. First, yield curves for nominal and inflation-indexed bonds provide useful, if also noisy, information about the expected path of the policy rate, inflation, the business cycle, and the term premium. Second, yields on long-maturity bonds represent, generally, a key transmission channel for monetary policy and specifically are a fundamental building block that markets use to discount cash flows for valuing financial assets. To anticipate my bottom line, the message of this speech is that global integration of sovereign bond markets has important implications not only for how central banks extract relevant signals from observed bond yields, but also for how central banks calibrate the transmission of policy and policy guidance to the real economy.

There is a rich academic and practitioner literature devoted to modeling and interpreting fluctuations in sovereign yield curves. A fundamental empirical regularity that motivates this research is that across time and geography, yields along any given curve tend to rise and fall, and steepen and flatten, together. This empirical regularity led Litterman and Scheinkman to hypothesize and demonstrate that in the market for U.S. Treasuries a very small number of common factors, two or at most three, are able to account not only for most of the time-series variation, but also for the cross-sectional dispersion in yields across the entire curve. Moreover, the two most empirically important factors extracted statistically from the Treasury curve have intuitive geometric interpretations as "level" and "slope."

The original Litterman and Scheinkman factor model, with its geometric interpretation, has held up remarkably well over the ensuing three decades and has been replicated for sovereign yield curves across scores of countries around the world, revealing similar regularities. Indeed, many if not most major central banks, and certainly their central bank watchers, estimate yield curve models and extract factors that are reflected in their domestic sovereign curves.

For example, for the three major economies included in figure 1, one can easily extract, on a country-by-country basis, U.S., UK, and German level factors, as well as U.S., UK, and German slope factors. As is clear from figure 1, level and slope factors extracted from these individual yield curves are highly correlated across these three major sovereign bond markets.

Economic theory suggests at least two reasons why the factors embedded in sovereign yield curves may be correlated across countries. First, this correlation will be present if the underlying macro fundamentals that drive the factors are themselves correlated across countries. Second, as I've emphasized and also recently Maury Obstfeld has, this correlation will also be present if countries are tightly financially integrated, even if the fundamentals themselves are independent across countries.

From any set of level and slope factors extracted across a collection of sovereign yield curves, one can in turn extract a global level factor and a global slope factor that account for the correlation among country-specific level and slope factors. As can be seen in figure 1, the global level factor (the blue line) accounts for most of the evident downward trend and much of the variation relative to that trend estimated in these level factors. But what is this global level factor? Plausibly, the global level factor embedded in these yield curves reflects the contribution of possibly several global macro fundamental drivers, including productivity growth, saving and investment, and inflation expectations, and likely also other market or technical factors.

As can be seen in figure 2, however, most of the trend and variation in the global level factor can be accounted for by the evolution of estimates of the neutral real interest rates in these countries. Figure 2 plots the global level factor against a simple average of the Holston, Laubach, and Williams time-series estimates of r * for these countries.

While it is certainly intuitive that an r * index would be correlated with the global factor extracted from these yield curves, the degree to which this simple index can account for the trend and variation in the global level factor is striking. And because central banks, including the Fed, typically channel Milton Friedman and believe that the evolution of r * primarily reflects nonmonetary factors that are beyond a central bank's control, an "r * theory" of the level factor, if true, has important implications for how central banks extract signal from noise in their sovereign curves, as well as for how they calibrate the stance of monetary policy consistent with a credible inflation target.

Under this interpretation, and as was anticipated years ago by Greenspan, Bernanke, and others including myself, credible inflation-targeting central banks operating in an integrated global capital market, at least when they are operating away from the ELB, are primarily in the yield curve "slope" business but much less so in the yield curve "level" business.

Figure 3 shows the relationship between the yield on a 10-year Treasury note and an estimate of the neutral nominal U.S. interest rate, which I set equal to the HLW estimate of r * plus a 2 percent inflation objective. As is evident from the figure and as can be verified econometrically, there has been since at least the 1990s a stable, mean-reverting dynamic relationship between the benchmark nominal Treasury yield and a neutral nominal interest rate proxy derived from the HLW time-series estimates of r *.

I would now like to illustrate what I mean when I say that the slope of the yield curve is an important channel through which monetary policy is transmitted. Figure 4 plots the Diebold-Li slope factor for the U.S., which is included in figure 1, against the spread between the HLW estimate of the U.S. neutral nominal policy rate and the actual federal funds rate (hereafter the "policy rate spread"). As is evident from figure 4, most of the variation in the DL slope factor for the Treasury yield curve can be accounted for by changes in the U.S. policy rate spread. A simple regression over the 1999 to 2019 sample of the slope factor on the policy rate spread shown in figure 4 yields an R2 square of 0.84, with a coefficient on the policy rate spread of 1.23.

In other words, over the past 20 years more than three-fourths of the variance of the Treasury slope factor can be accounted for by the policy rate spread, which is obviously something the Federal Reserve can control when it sets the federal funds rate. The remaining variants of the benchmark Treasury slope factor are, by construction, accounted for by factors that are uncorrelated with the U.S. policy rate spread. A simple empirical relationship between the policy rate spread and the slope factor embedded in gilt and bund yield curves is also evident in the data, although there is some evidence in these markets of a structural break sometime after the Global Financial Crisis. In the interest of time, I shall not put forward a theory of what accounts for the residual variance of yield curve slope factors after accounting for the policy rate spread, but obvious candidates would include forward guidance about the path of future policy, as well as actual and prospective large-scale asset purchase programs.

It is a truism that "correlation is not causation," and this is especially the case when trying to interpret contemporaneous correlation among asset prices generally, and among bond yields in particular. Having identified one possible parsimonious set of economic fundamentals that can help account for yield curve fluctuations in major sovereign markets, I will now review what the empirical evidence has to say about the direction of causality reflected in observed correlations among sovereign yields. I will explore two possibilities.

The first possibility is that in reality there are no latent "global" factors whatsoever, but instead, rather there are just U.S. factors that exogenously fluctuate and cause the global correlations in bond yields that we observe in the data. There's a vast literature that documents the existence of spillovers from U.S. monetary policy, especially to emerging markets, although a recent paper by Hoek, Kamin, and Yoldas suggests that the degree of those spillovers depends importantly on the source of the shock that triggers changes in Fed policy. In particular, as summarized in figure 5.1, they identified FOMC actions associated with "growth news" as those that were followed by changes in the 10-year Treasury yield and the S&P index in the same direction, whereas actions associated with "monetary news" elicited changes in yields and equity prices in opposite directions. Their key finding, illustrated in figure 5.2, was that the FOMC policy rate surprises attributed to stronger U.S. growth generally have only moderate spillovers to EM financial conditions, whereas FOMC policy rate surprises attributed to U.S. inflationary pressures trigger more substantial spillovers to EM financial conditions.

While I certainly believe that both fundamental and financial shocks originating in the U.S. propagate throughout the global financial system, and likely do account for a significant share of the asset price correlations across global markets that we observe in the data, the evidence and introspection suggest to me that causality can and often does run both ways. Anecdotally, it is not difficult to recall events, plausibly exogenous to the U.S., that have triggered spillovers from foreign sovereign markets to the U.S. Treasury market. A prominent example would be the surprise Brexit vote of June 23, 2016. As the news of the Brexit vote filtered through global markets, sovereign yields plunged in both Germany and the U.S. Indeed, as shown in figure 6, on that day the 10-year Treasury yield fell almost 20 basis points, the single largest one-day decline in the eight years and over 2000 trading days between January 2012 and March of 2020.

The evidence that two-way causality is reflected in sovereign bond yield correlations is not limited to one-off geopolitical events such as Brexit. For instance, Curcuru, De Pooter, and Eckerd examined 12 years of monetary policy announcements by the Fed and the ECB and focused on how sovereign yields in one jurisdiction respond to monetary policy announcements made in the other. Their main findings are summarized in the two panels in figure 7. The left panel presents some of the evidence of the well-known spillover from FOMC policy announcements to euro-area bond markets. But, as is shown in the right panel, the authors found that the spillover from ECB policy announcements to U.S. yields is roughly as large as that from Fed announcements to Bund yields.

In another influential study using a very different identification methodology, Ehrmann, Fratzscher, and Rigobon estimated significant and approximately equal spillovers from U.S. bond market shocks to EU bond markets, and from EU bond market shocks to the U.S. Treasury market. They attributed their findings to significant incipient portfolio flows across the two jurisdictions that respond elastically to expected rate-of-return differentials.

To sum up, I believe that in extracting signal from noise in the Treasury yield curve it is essential to incorporate the fact that observed yields in the U.S. and other markets are determined in a global general equilibrium that is reflected in part in the global level of neutral policy rates, and the state of longer-term inflation expectations. Conditional on neutral policy rates and longer-term inflation expectations, the Federal Reserve and other major central banks can be thought of as calibrating and conducting the transmission of policy, be it through rates, guidance, or LSAPs, primarily through the slopes of their yield curves and much less so via their levels. Thank you very much for your time and attention, and I look forward to my conversation with Raphael.

Bostic: Thank you, Rich. I really do appreciate your comments. They were actually very good. I want to just say for the listeners: We had a little mix up on the figures, so we will get them to you. Rich, they couldn't actually see the figures as you were talking.

Clarida: Wow; the best part of the paper!

Bostic: Oh, no; please! Come on, you're the full show here. We will get those posted so everyone can see it. I just wanted to say, for your remarks, I really did appreciate the academic foundation on them and the real appeal to some of the technical capabilities that are required to get really deep understandings on this. You do this as well, and a lot of times when I'm on interviews, sometimes the conversation doesn't really emphasize that there's a foundation behind all of this, and that we're not just showing up and making things up. I really did appreciate how you went about it, and congratulations on that QJE article, very nicely done. So that's very good.

Clarida: Thank you.

Bostic: What I would say is this: Whenever you're in public we can talk theory all we want, but at the end of the day what people want to know about is the outlook. So, can you talk a little bit about your outlook for the current state of the economy, and forecast going forward?

Clarida: Thank you, Raphael. As the saying goes, if you can't forecast well, forecast often. Obviously, we're in a very fluid period. We had an unprecedented shock last year with the pandemic: 22 million jobs lost, 30 percent decline in GDP. The economy began to recover last year, robustly, due to the ingenuity of the American people, very strong policy support from the Fed and fiscal authorities, and really game-changing scientific development of effective vaccines. It looks like the economy, if anything, can pick up speed this year, and my baseline outlook for economic activity is very constructive. We can have growth north of 6 percent, possibly 7 percent. That would be the fastest pace of growth in 35 years, and I think the recent GDP report showed that that is indeed possible.

On the other hand, we got a very disappointing employment report recently, and as I looked through the details of that report, a couple of things come to mind. First and foremost, as you mentioned in your opening remarks, we're still more than 8 million jobs short of where we were 14 months ago, so there's still a deep hole in the labor market. But I also believe that it may take more time to reopen a $20 trillion economy than it did to shut it down. When we shut down the economy last year, that put severe downward pressure on prices (most of it transitory); and as we reopen this year, that may also put, and indeed in the CPI report it did clearly put, upward pressure on prices.

My baseline view is that most of this is likely to be transitory, but we have to be attuned and attentive to the incoming data. I will say, as I'm sure I speak for my colleagues, a key element of our mandate is price stability, and an important component of price stability is well-anchored inflation expectations. If we were to see upward pressure on prices or inflation that threatened to put inflation expectations higher, I have no doubt that we would use our tools to address that situation. That is not my baseline view, it's a risk case; but it's a risk case that we need to be attuned and attentive to.

Finally, as you know very well, as we've been close colleagues now for three years, monetary policy is as much about risk management as the baseline. So that's my broad outlook for the economy right now.

Bostic: I'm glad that you mentioned the risk management because that's such an important perspective that we all have to take moving forward on this. To that regard, you talked about 6-7 percent annual growth for this year. That's pretty hot. Historically the Fed has been reluctant to let an economy run too hot, and really try to preemptively slow things down. Do you worry that the new approach that we've talked about in terms of our long-run framework, saying we're going to be comfortable letting the economy run hotter than we might have otherwise, are you worried that things can get out of control there? What is your thinking on how we should be responding to that and monitoring the economy?

Clarida: Well, thank you, Raphael; and thank you for mentioning our new framework, which was a very extensive effort that culminated last August in a unanimous vote in support of a new monetary policy framework. Let me provide some context for that. One thing that we observed on the committee at the tail end of the last economic expansion, which of course was tragically cut short by the pandemic, is the substantial benefits to the economy of achieving maximum employment, or certainly something in the vicinity of maximum employment, and keeping the economy there, which we did for three years. The unemployment rate got down to 3.5 percent, and labor force participation picked up.

One of the things that research has shown over the decades, and that we saw firsthand, Raphael, together in that period, is there are substantial benefits to workers with less education, different demographic and racial groups. Historically, an unfortunate fact of life about the U.S. economy is that the rising tide in the labor market doesn't lift all boats evenly. Oftentimes that progress is really only evident towards the middle of an expansion, and so in my observation if policy working together can get to the vicinity of maximum employment, again, we don't observe it, but to get in that vicinity, and keep it there, then an economy operating there will be a more broad-based and inclusive economy.

That was the rationale for one of the key changes in our framework, to say that we will respond to shortfalls of employment from our goals. I think with regards to running the economy hot, that gets back to the inflation story that I discussed a moment ago. Under our baseline view, for example in the SEP projections that we submitted in March, our baseline view is that achieving maximum employment will not put unwanted or unwelcome upward pressure on the price level. Under our baseline view, those two are not in conflict.

Again, we'll have to see how the economy evolves in real time. We'll have to form those judgments, and again, that will also get into the risk management case that I discussed. But I think it is fair to say that we're going take our lead in looking at the data less so from a particular level of the unemployment rate and much more from broader measures of the labor market, including how wages are going up relative to productivity, and whether or not those were passed into prices. I think that's the way I would summarize our approach.

Bostic: Just to echo where you are. When I started this job, unemployment was relatively low and then it just kept getting lower and lower, and there was all this expectation that we were going to start to see inflation explode, and that just didn't happen. I think for me, I will say one of the reasons I was very supportive of the new framework is that we weren't seeing inflation, and that meant that we had the potential to cut economic growth short and then prevent that full attachment that you've mentioned in your opening to that answer.

Let me turn to large scale asset purchases. You mentioned them in your remarks. What do you see as the role of balance sheet policy, given that interest rates are so close to the effective lower bound?

Clarida: Well, certainly what we and other central banks discovered in the GFC is once you get to the effective lower bound, which in our case is zero, if the economy still needs support then central banks need to turn to, and have turned to, large scale asset purchases, essentially as another way to facilitate economic recovery through accommodative financial conditions. Last year, in the depths of the worst crisis maybe since the Great Depression, we substantially expanded the size of our balance sheet, both by buying mortgage-backed securities and Treasuries. The goal of those purchases initially was to restore market functioning, but towards the middle of last year, and currently, we acknowledge that an additional rationale for those programs is they're helping to support the flow of credit to households and businesses.

So, in December we unanimously agreed as a committee to provide guidance that we expect purchases to continue at the current pace until we've made substantial further progress towards our goals. The committee reaffirmed at our April meeting that we think it is appropriate to provide support for economic recovery. As we go through the year, we're going to be looking at the data and discussing as a committee what it means; and at the appropriate time, we will (I'm sure) communicate that. Chair Powell has, and many of us have, indicated that as we do that process it will be something that will be conveyed through our communication, and that we will certainly give advanced warning before we anticipate scaling back the pace of those purchases. I think that that's where that stands right now.

Bostic: I just wanted to follow up on this. You mentioned substantial, further progress. What are you looking at to make judgements about whether we are making that progress?

Clarida: Well, again, we have a dual mandate, so I would be looking at the labor market; and also, I would be looking at inflation developments. Because of the year-over-year base effects, and probably some bottlenecks in reopening, inflation is going to be above our 2 percent longer-run goal. Again, in our new framework 2 percent is not a ceiling; and if, as we believe under our baseline, that's transitory, then that's perfectly consistent with the framework, which would indicate more of a focus on the labor market conditions.

But as I did say in my response to your first question, Raphael, I think what the April employment report said to me is that the way in which we bring supply and demand into balance in the labor market, especially in the service sector, may take some time and may produce some upward pressure on prices as workers return to employment, so we have to be attuned and attentive to that data flow. What I would say is, in my judgment, through that April employment report we have not made substantial further progress. But as the data comes in, we as a committee will have to evaluate that and ultimately make a judgment on that.

Bostic: I think it's been very, very interesting in the last several months that demand seems to be able to snap back much faster than supply, and in that context, you're going to see upward pressure on prices that may not be enduring. I think that your observation about your baseline being for this to be more transitory, I think has some of that embedded in it, at least, that's how I'm thinking about it.

Clarida: Yes, it does. But again, this was an unprecedented shock, it led to an unprecedented collapse, and we may have an unprecedented recovery, so I think the thing I'm most confident on is we have to be attuned and attentive in looking at the data flow, and I'm sure we will be.

Bostic: Well, that's exactly right. I always say, there wasn't a chapter in my graduate economics textbook titled "Pandemic Response," so we really just have to pay close attention.

Clarida: Yes; I must've missed class that day. I didn't find that either.

Bostic: Let me turn to an international question. There's been a lot of discussion about the international role of the dollar, and how that's playing out given all of the turmoil that we've seen in terms of global markets. Are you concerned about the potential for the outsized international role of the dollar to come under pressure, and if that pressure will then translate into pressure on our policies in terms of monetary policy or other lending arrangements? How are you thinking about the U.S. dollar in that context?

Clarida: I'm going to date myself a little bit. I've been studying international macroeconomics since I was in college in the 1970s, and a constant throughout my 40-year career has been every 8 or 10 years there's renewed speculation that the reserve currency role of the dollar is under threat. That's turned out not to be the case for the last 40 years, and I don't think it's the case now. The dollar serves the role as reserve currency for several reasons. One, we have a very credible policy. We have an open capital market (and also a large capital market). In particular, there's sort of a path-dependence element as well, because the dollar has been the reserve currency, invoicing, financial derivatives, and many other transactions not involving the U.S. at all have the dollar on one leg of that transaction.

Realistically, the U.S. enjoys what a French official in the '60s called "exorbitant privilege" of having the reserve currency role. It keeps our borrowing costs lower. But also, Raphael, with privilege comes responsibility, and there are some important responsibilities of being a reserve currency country. You have to be willing to tolerate potentially huge swings in your exchange rate and capital flows as the global economy rises and falls. Whenever there's a global downturn or uncertainty or anxiety, geopolitical or otherwise, money flows into the U.S., appreciates the dollar, and puts pressure on other parts of the system. There are, honestly, very, very few countries in the world that could perform that role even if they were raising their hand.

Let me also talk about another element of the responsibility, which, of course, these are decisions we had to make at the Fed back in the spring. One of the responsibilities that we have as a reserve currency country is that under periods of stress and crisis, we need to be willing to provide dollar liquidity to foreign central banks and foreign official institutions. We do that through swap facilities, and we also do that through a new FIMA repo program. FIMA is the foreign institution accounts at the New York Fed, where we now have a program where they can obtain liquidity by posting Treasuries as collateral.

We're doing this primarily because it's in our interest to achieve our U.S. goals. For example, a lot of that liquidity that we lend out through the swap program immediately found its way back into the U.S. through foreign subsidiaries, U.S. subsidiaries of foreign banks, on lending to the U.S. In sum, I think the dollar's role as a global reserve currency is secure so long as we run responsible policies and continue to provide liquidity when needed under times of stress. I think that's where we are today, so in some ways things aren't all that different from 40 years ago when I started my career.

Bostic: It occurs to me that right at the very beginning of the pandemic, some of the things that FMOC did, was very much in this global currency swap space, to make sure that that liquidity persisted. And it's interesting, as I talk about facilities and all the things that we did, I don't know that that gets us the appropriate level of spotlight because I think that was actually quite important to ensuring that financial markets across the world remained liquid and functioning.

Clarida: Absolutely. Well, in part because under the leadership of Ben Bernanke, Janet Yellen, and Bill Dudley, we had a similar swap program. In some sense a lot of the focus perhaps in the financial press were on some of the new programs we rolled out, and that would include the FIMA Repo Facility. But the swaps, if anything, were more effective this time, arguably, than they were last time. At the time, as we were going through crisis management in our meetings, none of us knew what the world would look like in April or May, and indeed, as you know, some of those briefings we got were pretty scary and gloomy.

In the event, the swap lines grew very rapidly. Then actually as normality returned, they scaled back pretty quickly. I think they were a huge success, and they're clearly part of our toolkit internationally going forward.

Bostic: I think that's for sure. I mentioned the pressures on the dollar as the global currency. One development where there's a question of "Is this a threat to the dollar?" is digital currency, and in particular central bank digital currency. It can take several forms as a digital version of paper currency, or even direct accounts between a central bank and citizens of a country. China seems to be ahead of us and other countries, in terms of a central bank digital currency. What are your views? Can you talk about how you're thinking about the U.S. and the Federal Reserve rolling out a central bank digital currency? If we don't do this very shortly, are you worried that we will be falling behind and might actually leave the dollar at risk of being put to the side?

Clarida: This is obviously a very complex and timely topic. As you know, Raphael, we in the system, it really is a system effort, are actively engaged in studying central bank digital currencies. In fact, I had the joy of visiting you back early in my time as a Governor, and at one of the dinners you were talking to us about central bank digital currency efforts at your own Bank. So, this is a system-wide effort. It's under active study.

With that said, as Chair Powell has indicated, our priority is to get it right, not to be first. Central bank digital currency is a complex subject. It's one of those subjects I've come to appreciate in which the details are very important. The Federal Reserve System is actively engaged with central banks in other countries and comparing notes about how they're thinking about CBDC. The BIS is organizing a lot of those efforts, the Financial Stability Board. And I think as Chair Powell has indicated recently in some public comments, part of our goal in engaging in study and analysis now is to come up with a refined sense of the benefits as well as the potential costs. Like with any new idea, there are benefits and costs, so it's under active study. Nothing is eminent.

I would also say, and this may not be as sexy as CBDC, but the Federal Reserve for the last several years has been working actively on a FedNow program that will actually substantially upgrade our existing payment rails in the U.S., towards something that the aficionados call "real-time gross settlement." We're expected to launch that sometime in 2023, and when we do that a lot of the advantages of CBDC, in terms of real-time clearing, will be available already. So again, it is a process. It's requiring efforts in the system. Nothing is imminent, and as Chair Powell said: We want to get it right, and I'm sure, ultimately, we will.

Bostic: I'm very excited about FedNow. Being able to have real-time assessment of an ability to pay can potentially be very beneficial to consumers because it will really close down the possibility for overdrafts and the fees associated with that, which are the most debilitating for people who have the least. This can really create some safeguards that I think can leave us much better off and leave families in a much more secure place.

I wanted to turn to a different question, which is, I remember talking with you right when you started at the Board, and you told me that you had been a Fed watcher all your life basically, and now it was rich to actually be part of it. Can you talk a little bit about how your experience has gone, and are there things that have surprised you about the experience or the process?

Clarida: Well, my goodness, that would take a long time. Let me try to be concise. This has been the professional honor of my life to be selected to be vice chair of the Federal Reserve, and to be a Governor. Little would I have known when you and I met in September of 2018 what would lie ahead in the upcoming three years. I pinch myself sometimes when I go back and look at my emails and my notes of those three years, of what we had to confront and the decisions that we had to make. I made a promise to myself, Raphael, when I joined, that I would try to learn something new every day. That's been very easy; some days I've learned 8 or 10 or 12 things.

One thing that I suspected, but that I do now know viscerally, is that the Federal Reserve is an incredible institution. It goes back 100 years, which means it can sometimes be a little bit stodgy, but the big picture on the Fed is that it's a remarkable institution. I actually think, and I'm not just saying this because I'm on your event, one thing that I appreciate more than I did as a Fed watcher is the strength of our system and having our structure with the 12 district Reserve Banks and the Board. It's a big committee, as you know, but I think the benefits of that far outweigh some of the cumbersome costs, which again, are born more by the Chair than you and I. But I think it leads to better decisions.

We also showed in March of 2020 that if we have to, we can act very quickly to changing circumstances, and so I think I could go on and on, but it's been a privilege of my life. I've learned something, and I certainly could never have imagined in September 2018, what would be ahead of us for the next three years. So, absolutely.

Bostic: Well, I will say you have helped keep us extremely dynamic and on top of things. The "Fed Listens" series I think was providential in the sense that the lessons that we learned, we actually got to apply pretty much in real time under extremely stressful conditions. It's been a pleasure to work with you. I'm looking forward to having many more conversations.

I talked to my guys about this, and we didn't get this set up, but next time we're going to start, instead of the video about the conference, we're going to find a video of you playing guitar and have that as your intro. That'll be great.

We're just about out of time, but Rich, I wanted to just thank you so much for agreeing to speak here and to open up the 25th version of our Financial Markets Conference. With that, I will just say thank you again, and for everyone else: Give us a little time as we switch on to our next panel. Thank you very much.