26th Annual Financial Markets Conference Transcript: Keynote Address: Roger W. Ferguson Jr. - May 8, 2022

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Keynote Address: Roger W. Ferguson Jr.

This fireside chat, which kicked off FMC 2022, features Roger W. Ferguson Jr. from the Council on Foreign Relations and Atlanta Fed president Raphael Bostic, who leveraged Ferguson's diverse background as a former Federal Reserve vice chair and CEO of TIAA-CREF to ask questions touching on a range of topics.

Transcript

Raphael Bostic: You guys are a lot easier than when I was in class. [laughter] It's really good to see everyone. I'm Raphael Bostic; I'm the president of the Atlanta Fed, and I'm...causing static here? [inaudible off-mic comments] So, this table is going to be a problem; for anybody who is going to be on stage, just keep an eye on these people. [laughter] It could go a lot of different ways.

It's really good to see you. I want to welcome you here to our Financial Markets Conference. I'm going to do a more formal welcome tomorrow morning, so I'm not going to say too much on that, but I wanted to just express how exciting it is for me to actually see live people, in three dimensions, in a room together, and the energy that was here before I stood here, and you all got quiet was just really very nice. In our Bank, we started our return to the office in March, and the change in just walking down the hallway and hearing voices and hearing laughter and excitement—it just changes what the workplace is in a very fundamental way, and it's really helped us, I think, get back into the swing of being together. It's just been a very rich time.

I'm really looking forward to the time here, and I said I wasn't going to do an extended opening, but I'll just say the same welcome tomorrow. It's really good to see you, and I also wanted to just welcome those of you who are with us via the livestream; it's good to have you with us as well. I hope you're able to join us for as much of the conference as possible because it's going to be a great show.

For tonight it's really my pleasure to introduce Dr. Roger Ferguson. Roger has just a tremendous breadth of experience, and his knowledge is surpassed by just about nobody. In this space, he's seen and done pretty much everything, so I can hardly think of a person who could be better to open our research conference than Roger. The theme for this year is "the challenges and opportunities presented by financial innovation and disruption." Roger has seen a lot of innovation and a lot of disruption that he's had to deal with, so I'm looking forward to tapping into those experiences to give us insights tonight.

Formally, Dr. Ferguson—that's the last time I'm going to say that; I don't let people call me "doctor," so, Roger, I hope that's okay—is the Steven A. Tananbaum Distinguished Fellow for International Economics at the Council on Foreign Relations [CFR]. I'm not going to go through his whole CV, but I will just point out a few things: he is part of the Fed family; he was on the Board from 1997 to 2006 and was the vice chair for seven of those years, and that included September 11, 2001, with the terrorist attacks here. If I'm not mistaken, he was the only Governor at the time who was actually in [Washington] DC, so he was effectively running the day-to-day through that very, very uncertain and turbulent time. There was a lot to take care of, a lot to worry about, and great uncertainty.

Roger is also a lawyer as well as an economist. He has practiced law, being a director for research at McKinsey & Company, as chairman of the Swiss Re America Holding Company, and most recently as president and CEO of TIAA-CREF, which manages more than a trillion dollars in assets, so he has a lot of perspective on deploying capital as well. These days, he is a thinker, and a writer, and a speaker on a range of economic and policy concerns. He's been freed to be and cover the things that he's interested in, and we're going to talk about a lot of those things today, I'm expecting. I'm just very excited to have you here, Roger. Please join me in welcoming Roger Ferguson.

Welcome.

Roger W. Ferguson Jr.: Pleasure to be here, Dr. Bostic.

Bostic: That was a test, because technology usually doesn't work for me, so you guys are doing a good job; it's very, very good. Why don't we start with the big picture and talk about your outlook and what you're seeing in the macro economy, and how you're thinking about strengths, weaknesses, things that keep you up at night that you might be worried about.

Ferguson: Well, that is the big picture. I'm seeing in the macro economy what all of you are seeing in the macro economy, which is, frankly, great uncertainty. Some of the issues in the macro economy fall appropriately in the ambit of our various policymakers, and frankly, some of them do not. Thinking about global health, which is still very much on everyone's mind. Looking at what's happening in China and how that spills over into the supply chain. Thinking about war in continental Europe, which obviously was a bit of a surprise but it's certainly still with us, and that has impacts on supplies of some major commodities, and some commodities you don't even think about; sunflower seed oil, for example, which is a major input into much of what we eat, believe it or not, as well as oil itself. Then obviously, here in the United States, inflation that is clearly far above the Fed's target.

This combination of things that the Fed can have some influence over directly on the demand side, versus things on the supply side, is very much on my mind. This is a challenging time for policymakers because, as we heard from Chair [Jerome] Powell, the tools that the Fed has are, I think he described them as notoriously blunt. Not just blunt, but notoriously blunt. They're working really hard to get to the right outcome but walking, as he would say, on a bit of a tightrope. That's what's on my mind. That's obviously playing through markets, it's playing through expectations, and the goal for all of us in the private sector is to respond to stimuli that come from the Fed, come from other places, to try to send the right sets of signals so that you guys can make your very, very tough policy calls.

So as you say, I've been thinking about and looking at monetary policy for quite a while, since 1966 actually, and I have never in that period of time seen such a confluence of forces creating so much uncertainty and challenge in the policy environment.

Bostic: I'm not going to be using the word "notoriously," so that is not going to do. I was curious as to how you would characterize the strength of the economy. I was talking with someone a couple of days ago and they said, "Is the economy strong? Is it weak? How should we be thinking about it?"

Ferguson: You should think the economy is in many ways quite strong. We see it creating jobs. There's obviously a type of strength in the number of job openings versus the number of individuals who are saying that they're looking for jobs. This is a very strong labor market. One might describe it as tight, right? And the unemployment rate is at 3.6, 3.7 percent, so that's clearly strong.

The housing sector continues to be strong in a way that is consistent; it's strong, but partially the reason it's strong is there is a great imbalance between supply and demand, which is an awkward kind of strength, so to speak. Nevertheless one could say the housing sector is one of the sources of strength in the US economy. We are now in earnings season; we've seen some unevenness, but earnings have come in reasonably well, and household balance sheets, as well as income statements, continue to be strong.

There are many things that are driving forward momentum in the economy. Frankly, as you well know, the interest rates as set by the Fed are still certainly below whatever the range of "neutral" might be. The chair talked very much about a range between two and three [percent]. You're not there yet, so that's one of the things that's giving some forward impetus. I would say the economy is in fact really quite strong, and that's one of the challenges, right? You have demand that appears to be outstripping the very uneven supply capabilities, so people should recognize the economy is indeed strong. Part of your job, I believe—I'm not lecturing, I'm sharing with you as a friend here in front of so many friends—as the chair said, is to get demand and supply in greater balance. As you well know, your challenge is you can have some influence on demand and very little influence on supply, but it's in the context of the economy, and it's very strong.

Bostic: Given that as the foundation of where we are today, what's your outlook for the US economy and the global economy over the next year or period of time? You can go short-run, medium-term, long-term, however.

Ferguson: I think short-term forward momentum is certainly built in for a number of reasons. One is, monetary policy, as we say famously, works with long and variable lags, so even though the Fed is in the process of normalizing rates there's still a lot of stimulus from the legacy of relatively easy monetary policy. I think we're going to continue to have very strong labor market growth for the rest of this year. I think the housing market is going to continue struggling with these imbalances for a period of time.

Next year gets to be harder to call, so to speak, partially because some of the events of this year will start to be seen more clearly in macroeconomic outcomes next year. We have had, clearly, quite a decline in equity markets. That wealth effect, I think, will show up more and more next year. The tightening of financial conditions that is part of that, I think, will put more of a drag on the economy.

I think we're going to have global challenges that continue to play, so it wouldn't surprise me if sometime next year we have a quarter or two of very, very slow growth, maybe even negative growth. Nothing that is going to be of crisis magnitude, but I think we need to figure out a way to communicate broadly the combination of factors that are going to create, I think, positive momentum this year and more volatility potentially next year. That, I think, is just part of the process given, frankly, the range of forces and the great uncertainties, and the number of things that are not directly in anyone's control.

Now, having said that, one can also imagine some of these things sorting themselves out much more quickly, and we get to a place where it becomes a little easier to manage the macroeconomic outcome. But right now, I think: '22, continued forward momentum; '23, probably a bit more shaky, a bit more volatility. It wouldn't surprise me in '23 to see maybe a couple of quarters of negative growth, the way GDP math works, but that's on the way towards getting the most important thing, I believe, which is getting inflation coming down much closer to the longer-term 2 percent target.

Bostic: So, let me ask a bit about where you get your information to get an outlook like that. There are a lot of official data releases, there's research, all that kind of stuff. Where do you go for economic and financial information and insight?

Ferguson: Well, first I go to the same place you go, but I don't have a huge staff to help me understand it anymore. [laughter] I do have a very good research associate at the Council on Foreign Relations, so I've got one person who I would put up against the entire Board of Governors' economic staff. [laughter] So that will help him, right?

Bostic: Yes, that's very good.

Ferguson: So I do that, but I also have the advantage of being on several boards—different kinds of companies—and I hear the words that they're using, and what those CEOs are grappling with. Actually, through the conference board and through the business council I do a survey of CEOs every quarter, which I then report on publicly, and I have other informal conversations. I continue to be involved in financial markets, and so the material that the Fed gathers up through the Beige Book, I'm also hearing.

The final thing, obviously, is filtering all this through a little bit of economic history. People don't talk about it very much, but in 1951-53—which is a period that we almost never talk about—there was a very uneven opening after the second World War. There was a huge amount of pent-up demand. The supply chain in the world, but certainly in the United States, had been geared towards defense and then had to be geared towards consumer goods. We had exactly the same kind of inflation, [then-Fed chair] William McChesney Martin did, and he had just come over from the Treasury. That was the first time that we had one of these; it was a relatively short and mild recession to try to get things under control.

The other place I think about things is, "Gee, in the history of the Fed, has there been any..." It's not that we've seen everything, but if you go back and think about economic history, that, I think, also plays into this. At the end of the day, I think that's really what this is about. The models are very powerful, but they have fixed coefficients, so to speak. They predict the past really well. They are an input to all these other judgmental factors, and that's how I end up coming up with some of the prognostications that I have.

Bostic: We agree with you completely in the context of needing other information, because these models are never going to fully capture the context of whatever moment you're actually living in. The additional kinds of information you can get from surveys—we've actually built up a pretty significant survey shop through our surveys of business inflation expectations, of business uncertainty. We do a CFO survey; you do a CEO survey—all of these with the idea of trying to get this supplemental information to add some contour and richness to the context.

Then we also—I have to do a commercial [laughter]—but we also do have something we call the Regional Economic Information Network, where we have people who just go around and their job is to go talk to people and bring that back in real time. I will just say, in this pandemic, those sources of information have been far more valuable because the world has just changed so fast that if you're looking a quarter back or even a month back, you can be not really where the world is, and that's really a challenge.

Ferguson: I agree. One of the things I look at literally every day is my FRED app...

Bostic: That's St. Louis, so I'm just going to say...[laughter]

Ferguson: No, no, no.

Bostic: We'll have to get to the other one.

Ferguson: We'll get to all of them. But it's really helpful, because the Fed and regional banks pull together a huge amount of data, as you well know.

Bostic: A huge amount of data.

Ferguson: It's very, very constructive to people, so yours and all the others, I think, are very, very useful. There are a lot of great data sources, and the challenge is making sense of them in some sort of decision-making framework, that takes into consideration the incredible uncertainty of the time that we're living in right now.

Bostic: Well, yes; so there's art, right? There's a lot of art to being able to take this and integrate it all together to make sense of it. I'm curious as to the survey you mentioned that you guys are doing. You do a survey through the CFR. How has that been helpful? What kind of insights are you getting that are helping you see things?

Ferguson: I've insisted on asking questions about pricing dynamics, and how do CEOs see pricing dynamics, so a couple of surveys ago I asked the question: Do you think the Fed's going to be successful at bringing inflation back down? And the answer that many of these CEOs gave was, "There are so many forces and factors that we're not 100 percent certain that the Fed is going to be able to do this job."

We're now out in the field with our most recent one, and the question I'm asking now is about the ability to pass price increases through. We'll get that result I think next week, and that will give us a sense of how CEOs who are overseeing pricing are going to try to drive that through. I'm asking a series of questions about margin, how they're doing with labor force, all these things just to try to see how they're dealing with the world of inflation, because the last time you had a world with this kind of inflation was quite a while ago. Most active CEOs, most active CFOs, most active folks and markets, haven't really dealt with this. Trying to understand how they're thinking about it is going to be really important.

Bostic: Just very quickly, I can't have a conference like this and not ask you your thoughts on the path for monetary policy. How do you think we should be approaching our job? [laughter]

Ferguson: I didn't think you'd have the nerve to ask that question. [laughter] What I heard Chair Powell say was, "Two more meetings, 50 [basis points] looks like it's expected and definitive." I think that seems like absolutely the right baseline. Beyond that, obviously, as you say, you are going to be very data-dependent. My expectation is that the path will continue to be, as I think the Chair suggested, data-dependent but probably still fairly intentional. I don't know if that's the word he used, but that's the way I would think about it.

The market has gotten itself on and off around 25, 75, et cetera. I don't know what the path is going to be, as in 25 versus 75, but I do think you've got to get to—and you are going to get back to—something that looks like neutral by the end of this year, certainly. When I looked at the most recent SEP [Summary of Economic Projections]—I'm not sure if you want to, but I'm happy to talk about this in this sort of public setting—I thought that the central tendency around the SEP was a little soft in terms of the rates outlook for the outcome that was expected. The upper end of the SEP, I think, felt to me like that might be perhaps a little more likely.

I say all of that with a lot of humility, because the degree of uncertainty around this is just phenomenal. I've never seen anything quite like it, and I'm obviously not at all envious of you, or Loretta [Mester], or anyone else on the committee. My view of the path is in some sense irrelevant because it is going to have to be meeting by meeting, and there are going to be so many crosscurrents that it's going to be, I think, almost impossible to have a strong hypothesis about the path until you get closer and closer to each meeting.

I don't see any other way to get around it. Markets are hungry for the answer. I think the Chairman gave them a clear answer for two. I don't think markets should expect more than that, because everyone's got to see this incredible uncertainty. But I do think moving as you are to neutral as quickly as you can is going to be a pretty important goal.

Bostic: Well, there is a tremendous amount of uncertainty. Just through this pandemic, we asked people, business leaders, how long do you think this is going to last? In March of 2020, they said, "We'll be done by September." We got to September, they were like, "Well, maybe April." We got to April, then they were like, "Maybe next April." There are things that continue to come up, and all of this was before the war. That was dropped in as a new factor that I don't think was on radar screens for most people before, so it's really difficult.

Let me ask you another question related to this, which is: How do you think about the balance sheet fitting in with all of this?

Ferguson: I should ask you that question. [laughter] I tell people that, to your point, when I was responsible for the day-to-day under the Fed on 9/11—Vincent Reinhart, who is here, was part of our monetary affairs team, and Nellie [Liang] was on the board staff at that point—that was, in some sense, the first time that we chose to use a balance sheet as a tool for financial stability. Compared to where you are today, we were pikers. I think the balance sheet ended up topping out at $800 [billion], something like that. Am I correct, Vincent; roughly? So, you guys have done 10 times the balance sheet that we did. How do I think about that? One, it was right to use it; two, I think the challenge that exists in the balance sheet is the pace at which you can run it off. The mortgage-backed side of it is very much controlled by market dynamics.

You have much more control over the Treasury runoff, and what I heard, I think, sounds reasonable, which is if it's not going to naturally happen with the short-term instruments, you can use the longer-term ones. The mortgage one is much more complex, as you well know.

I think it's right to use it as a tool. I think the challenge is, you can manage the up much more easily than you can manage the down. The second challenge, obviously, is people say it's the equivalent of a 25-basis point. I don't know how one knows that.

I think you're on the right path, and the only dilemma, of course, is that your ability to actually control some of the balance sheet runoff depends very much on what's happening in the markets. The repayment market, as you well know, and mortgage space, are not going to be something that you control completely.

Having said that, I think you also have an issue, not you personally, of what is the right size of the balance sheet, once you get back to whatever the new normal is going to be? That can be determined technically, obviously, because of the amount of reserves you need in the banking system.

So, I think it was right to use it as a tool; we used it in our own way on 9/11. I think going up is easier than coming down. But you start on the path, and I think the main thing is just be very, very clear about your intentions, and also clear—as I think Chair Powell was, and you will be, and others—on what you can control, and what you can't control. That's what I think about it.

Bostic: There's a question that came in on Pigeonhole—if you do have questions, you should put them in through the app. They'll come up to this computer, and I can ask them—and it's really related to this conversation we've just been having. You talked about the SEP central tendency maybe being a little low; the question is, how do you think about a neutral fund rate in the context of a balance sheet policy that's also tightening? How do you think about that intersection, and could it be that the two of those together might...

Ferguson: Yes, so it certainly could be, right? I've heard people—I'm not sure if at the Fed or other places—talk about the runoff as being the equivalent of a 25 basis-point tightening. What I did observe about that is it wasn't quite clear to me what the timeframe is for that story. So, 25 basis points over what period of time? The main message is that you have to look at both of them in conjunction. Because of balance sheet runoff, I think some people in the market are worried about what it might mean for market functioning and tightening of financial conditions.

One has to look at them as a pairing, I think, without necessarily being able to be scientifically precise about the impact of the runoff. You can be scientifically precise about where you want the funds rate to be, and it's against an uncertain context of the impact from the runoff. I think one just has to recognize that uncertainty. I don't know if that's helpful, but that's sort of the way I would think about it.

Bostic: Well, uncertainty makes it hard to give precise answers in this space, so we will all be watching to see how the markets respond to this.

Let me pivot a bit. Tomorrow we're going to have a panel on central bank digital currencies, which I'm very excited about because I feel like there's a lot for everyone to learn in this space, and I'm expecting we're going to learn quite a bit. You've spent a lot of time at the Fed thinking about the payments space in your time there; how do you think about digital currency, and the risks and the opportunities of the Fed using these sorts of tools?

Ferguson: You're right, I did spend an awful lot of time on payments systems. It's so funny. Payment systems, it's sort of boring, backwater. Who cared? I was the junior-most governor. You do payments systems. [laughter] Next thing you know, it's where we all want to be. So it's true, I was like "I'm now a cool kid" because I know payments systems. [laughter]

Very honestly, I think about it three ways. One is, the history of central banks is around controlling money, right? It's the reason that the oldest central bank in the world, the Swedish Central Bank, exists. The Banque de France under Napoleon was created to create a new currency; the Bundesbank was created to create a new currency as they created a country. The same thing is true of the Bank of Italy.

I start with the fact that the role of central banks is creating currency, which is why you have to care about payments systems of others. The second point I make, whenever I talk about this, is there are three different types of digital currencies out there. One of them, one class known as Bitcoin, and other things like that, Ethereum, are very volatile, and I look at those as interesting speculations. Ironically, I don't think people have noticed this, but Bitcoin has been most highly correlated with the NASDAQ over the last two or three months, so it's not really clear what the message is there.

Then, you obviously have stablecoin, and then you have the "question mark" of central bank digital currencies. As I think about this, I'm not sure that's a stable equilibrium, as in I'm not sure whether or not in the long run having private currency backed by some basket of government fiat currency is a stable outcome. Now, the central banks will decide whether or not they want to actually create their own digital currencies, and you'll talk about that, but I think you have to think about that in the context of, well, if you don't do it, you will have the private sector creating currencies based on the fiat currency that you control. That has a number of questions around regulation, financial stability, how are you sure that it's appropriately backed. Some of this is somewhat opaque.

I think this is going to be a very, very interesting space to watch, and I start with the goal of central banking. The legacy role of central banks is to create currencies, and now this is a version of delivering a currency. Now, I also know full well that there's an experiment going on in China now with the e-renminbi. My observation is that it hasn't really exactly taken off, but I don't know what will drive it, so we'll see how that goes, and then we'll see what the other central banks do.

I very much like the combination of the Fed's paper, and the emerging policy out of the administration, which I think is going to give us some clarity going forward. Then obviously this conference will resolve everything by the [laughter] next day or two, so we're waiting. It's exciting.

Bostic: I look forward to that happening as well. It occurs to me that in this space there are lots of players who are going to have to participate in it who don't really know what the nature of that participation is going to look like. They don't really have even frameworks around it, so they're asking questions. They actually don't even know what questions to ask because they don't know how they might be asked to enjoin the space. It's actually going to be very, very interesting.

Ferguson: But it's very exciting, right? The chance to build a new currency. It's an exciting moment, and for those who live and breathe this kind of thing, there's nothing more interesting than being part of the creation of a new currency. The question is, can it solve problems or only reflect problems? I know our friends at the Bank of Canada have thought a great deal about their central bank digital currency in dealing with the issues they have with some remote communities and indigenous populations. We have to ask ourselves if we go down this path, what does that mean about financial inclusion in this country? It implicates many different, very important policy issues. But what could be more exciting than to be on the cusp of creating a brand new way of thinking about currency?

Bostic: You're a great salesman for the backwater, right? [laughter] You talked about "payments is not interesting..."

Ferguson: No, it's the most important thing you have to worry about.

Bostic: Well, maybe the second most important thing. [laughter]

Ferguson: It's one of the many important things that central bankers get to worry about.

Bostic: There you go. Let me turn to another topic that we're going to explore during the conference, which is the environmental, social, and corporate governance investment space. You were at TIAA-CREF, and you had, we'll just say, a lot of money that you had...

Ferguson: It wasn't personal to me. [laughter]

Bostic: That you had responsibilities for allocating into the marketplace. How do you think investors should be thinking about ESG as a component of a strategy? Is there such a thing? Do you feel like ESG is sufficiently well-defined that we can even talk about it that way?

Ferguson: Well, there are a couple of things. One is, let's be very clear: huge amounts of money are flowing into this space, whatever "this space" is, right? The first thing as an economist one thinks about is, what's the market telling us? What the market is telling us is that investors want something that they think reflects their underlying values in these very important topics.

Point two is, I think, the three of them are very uneven in terms of maturity. We can, and we will, get more and more disclosure from companies, issuers, et cetera, around environmental impact, at least for their own footprint. Then you go out to levels. So-called "level two" is where it gets much more complicated.

People are going to be expecting to hear from issuers, companies, what is their environmental footprint? That we've got and will develop. The governance one, I think, also will emerge because I think there's some clarity around what really good corporate governance looks like. That will continue to evolve. The one that I think is most uncertain is the "S" because, as we've now seen, that covers such a broad range of topics, and it's not a space necessarily where there's an easy solution.

I think where we are, Raphael, similar to the conversation we just had about digital currencies, is in a mode of early discovery, it's different because it's—well, maybe it's also similar—because there's already a lot of money in it.

Having said that, I think this is really an important space. I was very proud that at TIAA our entire portfolio had to be screened for these ESG matters. The portfolio managers, if they're choosing a company that maybe doesn't score high on some of these factors, we'll have to talk about how they're getting paid for that risk. Once you think of it as both an asset class, but also a risk category...I don't know what the portfolio looks like today at TIAA; I've been away for a year but I do know that all the assets are screened, and that really drives portfolio managers to think about, "What am I getting paid for that environmental risk? Am I getting paid for poor corporate governance of that company? Am I getting rewarded appropriately for where they might be positioned on some societal questions, and sustainability issues?"

I think that's the very beginning. The final, which takes us to a slightly different place, is a subset of all of this, which is called "impact investing," which is not just simply thinking about a passive sense of ESG, but is your money actually creating better outcomes? There's a whole category of work around that as well that's starting to emerge, so it's really an exciting space. The most important thing is investors are expecting this as an asset class, so the industry has and will continue to create solutions.

Bostic: This question about monitoring and measuring to see if the companies are delivering is a pretty significant one, and then how do you enforce if you find that they're not. I think there's a lot there.

We have a number of questions, and I don't think we're going to have time to go through all of them, but let me start in this ESG space. There's a question here, "How does the war in Ukraine..." I'm going to change this. "Does the war in Ukraine illustrate limitations of ESG investment?"

Ferguson: I'm trying to figure out the question behind the question. I mean...

Bostic: I think in this case it would be the disruptions in energy, and if you're going to find substitution in today's world, substitution is going to necessarily involve using carbon.

Ferguson: Yes, but we always knew that. The issue around carbon in the ESG space is, how does one engineer what is being called a "just transition?" We know that right now we have a very carbon-dependent energy sector, or we depend on carbon-driven energy. We also know that we need to gradually wean, or rapidly wean, ourselves off of that. There will be disruptions along the way. This is a massive one. But the real question for me is, if we're trying to get to something, net zero or whatever, by 2050 or some relatively near year, what is the path forward?

I would be cautious. I don't think one can generalize from the kind of shock that we've had from this war to say, "That's no longer relevant." I think what it is showing us is three things: one is how incredibly dependent we are on hydrocarbons to drive energy, which is, over the long term, not going to be sustainable. Two, the path from here to there is going to be pretty rough. We see that because of these sorts of challenges. And three, folks—not necessarily in this room, but generally—are worried about making sure this is a pretty just transition, so it takes a fair amount of work. I don't think the war in Ukraine suggests that we need to change our goals. I think it suggests that we need to recognize the complexity of weaning a global economy off of an asset base or an asset class that has been central to us for well over 120, 130 years. I forget when the first big find was in Pennsylvania, but it was 120, 130 years ago. You can't expect an immediate and smooth transition for something that is so central and embedded in the way we drive our economy forward.

Bostic: All right, thank you. Next question here is back to inflation, and the neutral rate, and the question starts with an assertion, which is, "To defeat inflation, policy needs to be restrictive, but 2.5 percent being neutral assumes a 2 percent inflation target is being met, which it is not today. So given that, where is underlying inflation and what is the nominal neutral rate?" [laughter]

Ferguson: Did you plant that question?

Bostic: I read this verbatim, and it got the most number of votes. [laughter]

Ferguson: All right. This is the most devilish problem in monetary policy right now. The fact is certainly true that having to move into restrictive territory seems pretty likely, and we don't know exactly where that is and how far we have to go, partially because some of these inflationary impulses are coming from supply chain, which no one on the FOMC [Federal Open Market Committee] controls. Where is underlying inflation? We see where headline inflation is. We'll see new numbers, obviously. If you think about where inflation expectations are, inflation expectations that measure the market out over 10 years, roughly 2.81 percent. Inflation expectations over five years is 3.3 percent.

So, if you're thinking about a neutral rate versus inflation expectations, which is one way to do it, then you add whatever you think it takes to be neutral in the short term, and that tells you where you need to head. It's not that hard to figure out numerically where a neutral rate might be. What is really hard is to figure out the process of getting from here to there. If you're going to get into restrictive territory, given the great uncertainties that you're confronting—we're all confronting—how do you get there? How long do you stay there? And, in all honesty, what are the side effects of doing that?

Theoretically the question is right. You have to get to restrictive territory to try to bring things under control. But I think here the challenge that we've talked about many times is, so much of this, some portion of this inflation, is not driven by things that monetary policy necessarily controls. That is, I think, where the art comes in. That's where the judgment comes in.

I don't know if that's a helpful answer, but that's a series of facts that allow people to try to figure out where they think the neutral rate is. To be very honest, what I think about the neutral rate's totally irrelevant. It's what you and other people think about the neutral rate. [laughter]

Bostic: So, the next question here...

Ferguson: I notice you're not answering what you think about the neutral rate.

Bostic: No.

Ferguson: You don't have to.

Bostic: I can't; I'm the speaker at the end of the program, so I can't scoop myself. [laughter] I was trained long ago never to scoop myself. The next question actually emphasized this, the amount of uncertainty there is, because it asks almost the exact opposite question: "If inflation has peaked and the economy slows down faster than forecast, would it be prudent to pause your interest rate hikes and/or the balance sheet?"

Ferguson: What I heard Chairman Powell say, which I think is absolutely right, was, "If things unfold as expected, then here's a path." By definition, if things unfold in an unexpected way, you have to develop a new path. So, the challenge on the way the question is phrased is if inflation slows down—we're pretty sure inflation is going to slow, because I can't quite imagine inflation keeps picking up and prices keep rising more and more quickly. The press is looking like, "Oh, what did he say?" [laughter]

What does it mean to say we're at peak inflation? Well, inflation still has a long way to go to get back to the target; and so the challenge, I think, for the central banking community is even if inflation appears to peak, what's the path getting down to somewhere roughly around that 2 percent number that's the target? You've got to have that long-term horizon, so from my standpoint it's not good enough to say, "Peak inflation is behind us now; we're done." Because obviously we're not done until you get it down to the promised target, and I think some credibility depends on that.

The flip side, and here I do agree, because policy works with these famously long and variable lags, it would not, in my view be a mistake—if things are unfolding in a way that inflation is coming down more quickly, the economy is slowing more quickly—it wouldn't be a mistake to take a pause and say, "Let's take a meeting and see what happens." And that's the challenge that I think central banks have. Many central banks around the world are driving towards tighter rates. Some of them have already talked about things slowing quickly; the Bank of England, for example, had that discussion.

If you assume what the questioner assumes, which is inflation has slowed quite significantly and the economy is slowing, then it would be reasonable to take a pause. But the question is, to my mind, not that inflation is slowing quite significantly, it's, "Is it getting close enough to the 2 percent target roughly that you and your colleagues are comfortable taking a pause to see how things unfold?"

That's the problem that we have right now: Is uncertainty two-sided? Or, to put it another way: the risks, I think, are pretty large on both sides of this equation, which is why moving forward as I think you intend to makes sense, while also recognizing from meeting to meeting you might come up with a different answer. Does that help you?

Bostic: That's very helpful for me, and it's very helpful for you guys, too, because that was the last word [laughter] and now we can have dinner. Please join me in thanking Dr. Roger Ferguson.

Ferguson: Thank you.