Wait. He said he would wait. If you were on the Federal Reserve its a very close call. If you were on the Federal Reserve financial policy committee, would you be concerned there are beginning of signs that this very easy money, lots of low rates is causing excess . Yes. I think i would point to the leverage lending market, for example, where the terms on a lot of loans have become socalled covenant lights so a lot of the terms have gotten much easier. Banks putting fewer and fewer strings. Right. Its not just the banks. Those loans tend to be securitized. The banks originate them and some are in the market. Junk bond market. And there are other signs. I do think i would be somewhat concerned. I think the Federal Reserve has reacted in an entirely appropriate and proportionate way. Among the things theyve done is they have put out guidance on leveraged loans and said we are worried about whats happening here to the banks. You guys need to be more careful with what you put on your Balance Sheet but also what you originate and put through to the rest of the economy. They said they are going to include in their stress test, i guess they did this somewhat last year, next year the Banking System suppose Interest Rates go up in an unexpected way, what are you exposed to . I think theyre reacting exactly as i would hope. I was thinking about the many ways which the Federal Reserve changed in the time you were there. One big change of course is that the fed now has an explicit target for inflation, 2 . This was a big project of ben bernanke as an academic. Just to prove that academics actually can get things done, hes got it through the Federal Reserve. In the beginning, you thought that was a bad idea. Have you changed your mind . Is it working . Yes and yes. I thought it was a bad idea because i thought the Federal Reserve was getting all the benefits without paying any of the costs. So people understood once we got into the 90s that the fed had at least an implicit inflation target. That Inflation Expectations in the u. S. Were anchored just about as well as in other countries. I know there were some studies saying there were small differences, but the differences were small. The u. S. Could act in a very flexible way in response to the, the Federal Reserve could response in a flexible way because it wasnt in response to incoming developments like financial changes in the Financial Markets environment because it wasnt tied to what at that time was seen as the way inflation targeting Central Banks would, which is the inflation target two years out. We could get all the advantages and not pay the costs in the loss of flexibility. It did change my mind and going through the crisis was an important piece of that. It was so important that Inflation Expectations be anchored to give us, because i was inside at the time, the freedom to act very, very aggressively without worrying about what would happen to Inflation Expectations. As i said looking at the depression in japan, i thought acting aggressively on the Monetary Policy side was critical. Print all this money, lend it out and not worry people would think, except a few people who have been proven wrong, we are going to have doubledigit inflation . Thats right. So in making that even more explicit, which they did in january of 2012, i thought was a good idea. I actually told ben bernanke before i left that he converted me over these many years, and it was the crisis and the importance of keeping those Inflation Expectations anchored to enable to be aggressive on the easing side that convinced me. I think a lot of inflation targeting countries including the uk treated their target in a very flexible way. To some extent, theres been migration towards the way the fed had looked at inflation targeting as an explicit but very, very flexible. So you can have your inflation target but also pay a lot of attention to output and employment. Is it in the 60s where you get the explicit, you have inflation and employment target . Humphrey hawkins . 70s, 77. Congress told the modern fed your goal is to maximize employment, maintain price stability and theres always in this conversation about whether thats too complicated. A, do you think having a dual mandate like that mattered over the last decade or two . And b, would you recommend changing it or not . So i think the dual mandate, i think, has mattered more in rhetoric than in action, but there has been so the fed talks a lot about that, but other central, about the employment side of it. Other Central Banks said i think are acting as if thats very, very important to them, but i think its probably made a little bit of difference around the edges in some of the actions. I think of the ecb tightening in 2008 and again in the summer of 2008 when prices were going up and again in 2011 because they have only the inflation target. I think in the end, the fed paying attention to both of those things helped the u. S. Economy. I think the Federal Reserve having think the dual mandates worked out. And the fact that there is a 2 inflation target makes me feel even better about the dual mandate, about paying some attention to unemployment as long as you have that long run inflation target so you are anchored. I dont think there is much difference between where the fed is today and where inflation targeting Central Banks are. I do think you have to Pay Attention to that 2 inflation target. I think its important that the institution recognize as it does that over long periods of time, and this is in that january 2012 statement, the Federal Reserve doesnt control the Unemployment Rate. The Unemployment Rate is controlled by the structure of labor markets. That sort of thing. The Federal Reserve cant dictate the Unemployment Rate. There is no permanent tradeoff between unemployment and inflation, as i was taught at the university of michigan in the early 60s there was. So they need to recognize that and the way over long periods of time to stable prices and maximum and the way to maximum employment and efficiency in the economy is making sure that inflation is stable and low price stability, reducing uncertainty among households and businesses they make decisions. In the short run, and right now there is no tradeoff whatsoever. Inflation is well below the target and employment is well below maximum employment. During most of the time you were at the fed until recently, the government was always running a deficit that the fed thought was a little too big and the role of the Federal Reserve chairman, i remember paul volker and Alan Greenspan going to congress saying you guys got to tighten your belts. Youre making it hard for us. Interest rates are higher than they would otherwise be. The test of this was, i think, seen as the early 90s when chairman greenspan encouraged bill clinton to reduce the deficit. It worked as everybody hope, economy got better, Interest Rates came down, we got more investments. The last few years have been remarkable in that the fed, ben bernanke, janet yellen and others said to the congress, ive got this all wrong. Youve got policies too tight, youre not spending enough, youre taxing too much now and we cant lower Interest Rates so youre making it hard for us. We have a deficit but its tomorrows deficit not todays. Thats a long windup to, how does the fed think about fiscal policy, and particularly, does it compensate for lousy fiscal policy . Should it lecture the authorities . Should it try to guess what fiscal policy is and set Monetary Policy accordingly . I think it does all three of those things. I think it has to its been given objectives for output and inflation. You have to guess, forecast, project what the path of all, a lot of variables feeding into those outcomes will be. Among them is spending and taxing by the federal government. Thats certainly part of your outlook. You have to take a guess as to what its going to be like you have to take a guess at what foreign growth is going to be, how consumers will act, any other actor in the Global Economy that comes back. Youve got to do that. At the same time, i think all Federal Reserve chairman including chairman bernanke have said to the congress, were taking this as given but we think theres a better what i to do it. You have your hand on this lever and the country would be better off with a different configuration of fiscal policy. I think the chairman of the Federal Reserve is in a unique position as being perceived as kind of the chief and the nonpartisan economist for the United States without an interest in the administration, without interest in the congress, and an interest only in better economic outcome. I think thats a powerful position. You have to be careful. Chairman bernanke came in saying explicitly, i think chairman greenspan got into things like taxing policy and whatnot that item not sure that an independent Federal Reserve should be talking about. But he has talked about fiscal policy. Hes talked about both aspects. He talked both about too tight in the near term then you havent done anything. What about how you make policy, should the fed tell the congress, look, we are at the limits of our authority and we are not going to keep buying bonds until you guys get your house in order . No. I think the Congress Knows what it needs to do. The fact that its had multiple committees and groups trying to get it done, i dont think its up to an independent central bank to use its tool to bludgeon another part of the government to do what it needs to do under its own authority. And then in bludgeoning and disciplining the other part of the government, steer away from the legislative objectives that its been given. I think the central bank is on the best path, the most offensible path where it says you told us to do these things, thats what were doing. If the Federal Reserve feels, and i agree, if it were not to have undertaken these unusual policies, that the economy would be weaker, Interest Rates would be higher, there might be a little more pressure on the congress to do something. I wouldnt bet a lot of money in this partisan environment if anything would have gotten done if Interest Rates were 150 basis points higher, but i would bet money more people would be out of work, inflation would be lower and perhaps headed even lower. Taking a chance, not doing your best to hit your legislative objectives in order to teach those guys a lesson . I dont like that. I dont think thats good public policy. Let me ask you about one more topic before we turn to questions. I came to washington 1987. The Federal Reserves communication policy was basically somewhere between nothing and mumbling. In 1987 the Federal Reserve didnt even announce after an fomc meeting what the decision was. You had to discern it from the markets. Youve been there as there have been increasing amounts of transparency. You were actually involved. You were writing the statements when they started to write them. I think ill say as an objective observer, the care with which the statements were written has diminished since you left. So first of all, has it worked and secondly, is there too much . I think its worked. No. I dont think there is too much of it. I do think there are limits on Clear Communication. I think it was very important. The first statement we put out was in february of 94 when we raised Interest Rates the first time in several years. We thought it was important that people know what we were doing and there wasnt much in that statement, if i remember correctly. It was just a couple of sentences. Give the market a heart attack. Right. But the market survived that heart attack. Economy survived three percentage point of Interest Rate increases in 94 early 95 just fine. That laid the ground work for the soft landing and continued growth. We thought it was important they know what we are doing and there not be a lot of uncertainty about it. Over time those statements grew to add more explanation why we did what we did. I thought that was great. If they understood what which were doing, the markets were more likely to behave in a stabilizing way rather than destabilizing way if they understood what the fed was up to. The statements and the way theyve grown have been a positive have helped people. Part of whats happened if i think back to the volker era and before, part of whats happened you had more and more people involved in the markets. Youve got all these new services so everything happens instantaneously. The information spreads much faster, more people are interested. In the old days, in the 50s and 60s into the 70s, the fed was talking to a small group of primary dealers whose economists had come from the Federal Reserve board or Federal Reserve bank of new york and everybody was kind of understood where everybody else was. There were still problems. As the markets became more democraticized it was necessary to talk to more people and explain to more people and explain more clearly. I think particularly in the crisis and aftermath, an awful lot of the effect of Federal Reserve policy has been in the communication. So conveying that you intend to keep Interest Rates low at least until unemployment is below 6. 5 . That sounds good in theory. If you look at the past year, it seems weve seen down sides of this. Its hard to commit to a future when youre not sure what it is. The longer the statement gets, the harder for all 19 members to agree to it. How would you judge how well theyve done a communications in 2013 . I think there were some stumbles, obviously. Particularly in may and june. To some extent we are seeing at least for now the outer limits of the communication. Just for the purposes, just for the reasons you gave. You dont know whats going to happen. You dont fully understand whats going on in the system, all the economic relationships between growth and employment, and employment and inflation. So there are lots of surprises there. I think the disagreements within the committee which are good, you form, congress forms committees. In order to get multiple points of view, diversity within the committee, that is the strength of a committee structure, but it impedes Clear Communication when its not clear where the center of the committee is, what its going to do. All those things limit the extent to which you can talk about what youre going to do next because you dont really know what youre going to do next. I think the Unemployment Rate issue is nice illustration of that. Fed put 6. 5 Unemployment Rate on this as we wont tighten until we go below that. They started correctly saying thats not the only metric we are going to look at. Well look at all kinds of metrics for the labor market. Thats absolutely the right thing to do. In may and particularly if june, july there was this thing about a 7 Unemployment Rate that was forming a metric for the tapering. There were Communications Challenges and people misread them. Maybe they misspoke. I think part of what you were seeing was the dynamics going on inside the committee being reflected in the communication outside. I hope the fed recognizes that it should be as clear and predictable as it can be legitimately, but trying to go beyond where that legitimate border is is very hard in trying to go beyond that could constrain the flexibility, which as you noted was one of my concerns some time ago, and could mislead people. I want to turn to the audience. Is there anything along this line you wish i asked you i hadnt you want to opine on . The Due Diligence question by the wall street journal reporter. I thought it was a courtesy to the interviewee. No. Im sure the audience will come up with it. Tell us who you are and remember the questions and with question marks. We cant see very well. If you dont have a question, ill keep talking. Craig again . You have to ask a different question. The guy with the mike ought to go somewhere else, i think. Sorry about that, don. Im craig torres from bloomberg. Here is an interesting question, don. If you dont say so yourself. Every forecast period the fomc has looked for stronger growth in the year ahead or two years ahead. Weve all seen the charts. Actually, the u. S. Economy is moving ahead now four years after the recession below the trend line of 2007. If you look at qe3, the tenyear yield has gone up, Savings Rates stayed the same, investment spending isnt all that great. Its had some effect on housing, i grant you that and maybe on employment. Heres the question. How do you give a diagnosis of the economy . It looks like the recession precipitated habits by businesses and corporations. I mean, sorry, households and corporatio