By the Brookings Institution center on fiscal and Monetary Policy, an hour and 45 minutes. So, in thinking about this event and in what we wanted to accomplish here, what we set out to do was to have Larry Summers make the case why we should think about this, have a number of very experienced monetary economists who have views about what we should do, think about what we should do. In this panel, the question was, could we get some people to some very different points of view, to talk about, what difference does this really make . Is this worth the energy we spend on it and to whom does it matter . So we have a deliberately diverse panel. John taylor from stanford, wellknown for his taylor rule, thinking about Monetary Policy for a long time. Christian forbes from mit, until recently on the Monetary Policy committee of the bank of england, correct me if i am wrong, you never had a chance to raise rates, is that right . Right. You tried. Peter hooper chief economist of Deutsche Bank securities and writing about the relationship between the fed and the congress only briefly mention this morning but is relevant given after the Federal Reserve exists because congress created it. As we know legs, what congress created it can take away, sarah and her colleague have a book out called the myth of independence tracing the history to congress. I will ask a question or two to get things going and not have the sequential opening presentations. Mr. Taylor, starting with you, when you give the taylor rule a guide to setting Interest Rates, you kind of assume a 2 inflation target is where they want to be. Im curious in 2018, given everything you heard, whether you think that was a good idea or whether if youre doing it all over again and trying to come up with some normative ghid to policy you would have come up with a Different Number . Its a good question. I would say just out of nowhere a 2 inflation target. Theres a discussion and zero bound very much in our minds, measuring inflation. So, while we maybe thought about price stability and inflation, 2 seem like the best thing to assume. That was before the 2 inflation target was anywhere. You have to put that in mind, it just didnt come out of nowhere, lots of thinking behind it. Part and parcel to that was the assumption, more of an assumption of the equilibrium Interest Rate, i assumed that was 2 , based on considerations like growth rates. Nobody had thought about it. The notion of an Interest Rate as an instrument was still foreign to many Central Banks. Two on the real Interest Rate and 2 on the inflation rate gave the nominal Interest Rate of 4 i thought was great and Larry Summers described that useful for many purposes. Thats where it came from. The second part of your question is what would i do now . I dont think theres much difference what we think the measurement bias is or zero bound because its always been there. The main difference is equestc briium. I question that, not so much about the research but uncertainty. Wheelland showing how difficult it is to determine this, unusual Monetary Policy, very unusual and still unorthodox in other parts of the world and makes it hard to estimate. They think its about 1 now. That suggests if you have a rule useful in current policy, i suggest to 1 or so, i think they should be doing if they think ours is 1. I have my doubts about it and we should be careful about it and it most likely will go up and should stick with that 2 inflation target. If i could say one other thing. There are many good things about the inflation target choosing it numerically. Sometimes, its taken too much attention away from other parts of the policy. In the discussion this morning very little discussion about the reaction, implicit in the comments about strict inflation targeting. With a policy rule you dont do strict inflation targeting, theres a Movement Towards it. Theres a worry i have the extra emphasis on the target has actually taken us away from the notion of a rule or reaction about what the central bank should be doing to achieve that target. Ive noticed that to some extent. It worries me. If we continue with the new inflation target i hope we do, we find more ways to bring attention to the policies actually used to achieve it. Thank you. I wonder if you could talk, you had the experience like some people earlier, of being both an academic and policymaker. Do you think this whole framework thing is as important as the speakers on the previous policy suggested . Id say a very clear yes, the fair market is incredibly important. I can say that based on my experience to set Monetary Policy. Not just important for the policymakers sitting in the seats, important for discipline for them but more important for accountability, transparency for the general public and overseeing you. First, as someone studying Monetary Policy, youre asked to comment on a lot of different things. At the bank of england we were dragged into debate on inequality and Climate Change and fiscal policy and brexit. There are lots of ways to comment on lots of issues. Having a clear mandate, 2 inflation target was a discipline for all of us, we will only comment if it relates to our goals on 2 inflation target. I think that was good for our goals. Internally i thought it was very healthy what i would focus on. We would meet and debate and decide where the forecast is and which then determines what we do with rates. Theres a lot of variables of people with different views and different takes. You cant argue the view on these forecasts. I found it helpful to say, okay, its 2 target. Instead of x and y. I usually go through that list, here is a list of eight things i dont think are important. I wont worry about those, instead focus my discussion on the points on things that matter. Bottom line having a disciplined framework internally and how you talk externally. Most important is maintaining credibility of Central Banks. Right now, Central Banks have a tremendous amount of power, influencing peoples lives were not aware of as in the peace and have a big public world. They have to explain how Public Officials carry out those youll roles and justify actions they take. Going forward more Central Banks will probably be raising rates and people take out a mortgage and realize it will suddenly cost more. Banks have to explain why theyre raising rates and make it harder to get a mortgage. You need the framework why youre doing what youre doing. They seem understandable, easy to us, nominal gdp targeting, things like that. Ex a spring to it the public i worry is incredibly difficult. Explaining it to the public. They were off by 2, 3 Percentage Points today, even what seem very simple ideas getting them out to the public is hard. The other issue framework is important is relevant today. Were averaging what happened in the past a couple years and youre justifying behavior, especially in the past. When you go out and explain to the public why youre doing what youre doing, they dont care what happened. Be based on what you think is happening today or planning in the immediate short term future. For all those reasons framework is very important but very easy to explain and understand and very relevant to peoples lives today, not intangible in the distant past or future. When you were at the bank of england, was there any consideration whether having an inflation target was a good framework, whether there out to be an alternative. The bank of england has been able to achieve its inflation target. I suppose we could deflate our currency by 25 and drive that as well. Does this issue seem strange to you from the point of bank of england . There was a debate before i started, Governor Carney started there should be a change. There was no debate. 2 inflation target was a very good focused discipline for all of us. We were also told when we started the government sets the inflation target, not us, dont comment on it inflation tart no us. Some of the discussion we have had suggests that having a strict inflation target is constraining in some way. Doesnt let you do the optimal monetary you would do to reduce welfare. In the uk hassen even stricter target than the u. S. 2 inflation thats it. No out put gap. Its just the inflation target. My sense being there we had a tremendous amount of flexibility. We could look through price shock. Whether its medium term shocks such as Exchange Rate move. Didnt effect inflation for three or four years. We could look through that. We could when there were large out president gaps we talk about that. As part of the inflation frame work. We usually brought it in in a way that our goal is meet the 2 inflation target sustain bli. That meant even if the there was an out put gap we would not sustain inflation around 2 . More recently there was more discussion about the speed with which you return ip flags to 2 and the cost of that. In sense we had a strict mandate. 2 inflation thats it. We could work in the other considerations that other frame works seem to be bring in more formally. Im not entirely convinced we need to bring it in formally. Does anybody in the market care about what frame work they pick. Price lev, 2 inflation target . Turn on your mike. They dont know whether you care or not. Let me start by giving a disclaimer. What i say doesnt fesly reflect the view of the entire market. Certainly theres quite a bit of interest. I wont say there we put it quite at the level of importance as inside Central Banks at this point. Yes, theres interest. The possibility of something happening here is i think people looking to the likely hood we see a substantial increase in uncertainty. If it went to the level of a raising an inflation target substantially to 3, 4 . That would obviously open up the fed Federal Reserve act. Thats no longer price stability. And that would i think raise quite a bit of question as well. Certainly anything any move in that direction youre raising you are raising Inflation Expectation. But over time very slowly. People tuned into the possibility. And the inflation risk premium. I think the inflation the notion of a shift in the inflation target up toward 3, 4 . Kind of agree its not likely. People are generally discounting that would be my sense. Its the view in the market is currently if the fed changes their target they should change it to something achievable. Like 1. 5 . Which is where its been. There was a question raised which is a serious one. People in the market generally dont believe theres a groove. Or at least the view that inflation is always and everywhere a monetary fe no, maam holding inflation low. Everyone nice work at the San Francisco fed suggesting the element of the economy is growing. As it now more than 50 . And tending to hold inflation down. Theres a real challenge getting inflation back maybe even to 2 let alone 3, 4 . So the notion of inflation target increase just isnt there. If i can talk about the alternative. The one that seems to be coming through is the average inflation target. Or price level target. Here youre dealing with something that would folks on the market recognize increase volatility. Certainly to hit an inflation price level of over time youll have shocks to the downside. That will have to be offset to shocks to the upside. More variance in inflation and more variance in out put. I would argue. Lets take an example of what if we had adopted this has been been suggested when we hit the 0 bound. And find ourselves today as 5 below target. On inflation. What are we going to do for five years . Are we going to raise the rate immediately to 3 and have it stay there. Maybe that raises expectation chl Inflation Expectations adjust slowly. They are adaptive. And it will take time to get there. Lets say we get there. How does the fed achieve that. By driving the Unemployment Rate i think significantly lower. Its already below. Maybe we go down into the midthrees maybe lower. Id like to go back to the 1960s. The last time we had an occurrence like we are now. We went through the 50s with 2 . The 60s 1. 5 . The Unemployment Rate went down below. About 2 below. With no movement in inflation buena vis. In 66 it jumps by 2, 2. 5 Percentage Points in one year. Going into the great inflation. I think the there is a fair amount of work suggesting there are nonlinearties in the phillips curve. Whats going to keep this from over shooting. So we could relive the 60s. I do sometimes think everybody in Monetary Policy is fighting the last war. Different people are fighting different last wars. We have been you dont steam to agree with larry and the ohs that we have an urgent problem here. Were likely to hit the next recession unable to use Monetary Policy sufficiently to get us out. The risk of hitting the 0 lower bound is large u uncomfortably large. The natural rate has come down. And the risks of being not reliving the 60s but the last five years are worthying about. Okay ill observe that the fed has never been able to get the Unemployment Rate up from significantly below nay rue. Without a recession ensuing. The record in achieving soft landings here is pretty remote. Question is how does this lack of ammunition create significant risk going into the next recession . My view on this is the cost are pretty significant. We need to have a better handle on what the cost of higher inflation maybe. Yes there are benefits obviously from the ammunition for policy standpoint. But the balance here is close. I would say rather than jumping into something right away lets see how it goes in the next recession. And lets see how it goes in terms of getting us back to naru. On what is our ability to control things here. It seems to be like saying you have this massive heart attack and trying to decide whether they should do coronary by pass and the cardiologist says wait to have another heart attack before we decide. That analogy is not perfect. No but it was. Im not as summer i cant come up with them like that. I take your point. Let me gif you a chance. One of the interesting things about the conversation this morning. Er once this a while congress would come into the picture. Most notably there were some suggestions and people made this a number of times that 4 inflation maybe hard to justify with price stability. And thats just in a legal sense. Not political sense. No i know you have don thinking about what role does Congress Play in this. And how would you look at this discussion we have this morning. Earlier this afternoon. From the eyes of the political reality of central bank in the United States. Sure. So i think theres been good discussion Economic Cost earlier today. About either raising the target or alternative regimes. But with the exception of ben. No one has nailed down the political cost. Here. I would argue politically congress has to buy in to either raising the target. Let alone any other radical changes to how it goes about pursuing its mandate. I can the usual. Pull the microphone. Look at me. Make sure the mike is on my side. I usually its good to anticipate. Look keep in mind thats dan fisher distinction. That the Congress Gives the fed mandate. So the fed has goal dependence. And the fed has instrument or tool independence. Why should we worry about any political cost. To put it bluntly the notion of independence for the fed we could call it a myth. Three reasons here that will help us think about the political cost. First its crystallized if the fed pushes too much into the policy of changing its target. We could easily see it risk losing half of the side of the mandate the employment side in the first place. Second even without legislative action, its not at all clear on this sort of goal vs. Instrument distinction. Its not clear where the inflation target or any targeting where it fits. Is the target a goal . Is it an inherent part of the feds price stability mandate. Thus changing it is congress prerogative. Is it a tool for achieving price stability . Congress also sets tools. 13. 3. Interest and so forth. So conceptionally. Theres little expectation for making changes to the target. Third, more important will set aside the conception issues think about the current target. As we know from his memoir and the transcripts he worked for a decade to convince his colleagues on the and also his congressional bosses on the hill. That the fed should have an inflation target. We hear the constraints for those of us not around the table. But dependent on the transcripts. 2008 quote having the inflation target wont have any effect if its reputeuated by the congress. 120 around the table. One of the main issues has been whether we can succeed politically in creating a target or whether there would be quote push back from congress. Of course there was push back from congress. When he went to the hill in 2009 barnny frank house of the Financial ServicesCommittee Said this will be a particularly bad time at the height of the recession to adopt a target for just one side of the feds dowel mandate. Think about it that was 2009. It took until january 2012. It took the fed three more years. They were busy. In any theory of instrument independence. They might have most needed it. We might have expected it. Perhaps to move more quickly. Whats critical here is six years later, lawmakers theyre still threatening the fed about the target. Not from the left this ti