Because it happened in my district. And i said its what he said. This came from loretta lynch. Its a lie because it happened in my district. Coming up on cspan3, a discussion on Monetary Policy and the u. S. Economy. Then house and Senate Members discussed legislation to assist with the treatment and prevention of opioid addiction. After that, the d. C. Bar hosts a review of the recent Supreme Court term. And later, a look at how the media can improve education. Next, a discussion on Monetary Policy, the economy, and the impact of the uk brexit vote on the global economy. Federal reserve board member Daniel Tarullo spoke at an event hosted by the wall street journal. This is just over an hour. Good morning. Thank you all for coming. And of course thank you, governor tarullo. A couple of quick programing notes. Were going to talk up here, the three of us for about a half hour. Then were going to open it up to people in the audience and to the audience watching on livestream and via cspan. If you want to submit questions from afar via twitter, im jake schlesinger. Im the journal finance regulation editor. This is jon hillenwrath. Since were the wall street journal, were going start from the right. So john, take it away. Were going to get right into it. Lets start with the news. The british voted to leave the European Union. There has been a fair amount of turbulence in financial markets. How do you assess how the Global Financial system has absorbed that shock and more specifically how the u. S. Has absorbed it. Jon, i think the Global Financial system was reasonably well prepared for the initial shock. Even though the vote itself was unexpected in many quarter, the bank of england had done an enormous amount of work overseeing the uk banks to make sure that they were in a very viable liquidity position. Our banks had u. S. Banks had run internal stress tests to try to predict the kinds of developments which they might encountered in the immediate aftermath of the vote. And there, as i think you saw notwithstanding flight to quality and the down push in equity markets, it was something that the Financial System was better able to absorb than in some instances of turbulence in the past. But as people have said from the outset, that was just the initial reaction. And a i think were all going to have to watch to see over the medium term how macroeconomic developments play out. The one thing that we can be certain about is that is there a good bit of uncertainty as to what the future holds for the precise relationship of the uk to the European Union in terms of the kind of exit agreements that they will negotiate. And when there is uncertainty, as everyone knows, there is an inhibiting effect upon Investment Decisions and maybe household decisions as well. How much of that turns out to be the case . Well, well just have to see. And i know that Central Banks in the uk and in frankfurt are very much focused on developments and responding as appropriate to developments. In terms of the u. S. , again, i think things to this point have gone about what we expected as sort of the medium scenario. But, again, that was just the first chapter in developments. And we will be monitoring developments, the macroeconomic developments closely, as we would in any case. So weve heard a number of officials in the last few days talk about taking a wait and see attitude. This was just the first stage. How long is it going to take to really get your hands around the affects of that particular event . Are we talking about weeks . Are we talking about months . I dont think we know. But in some sense, jon, the impact of brexit as it as it transmits to the economy is just going to run in to the impact and effects of a lot of other developments as well. And so for us, it will be a matter, as it always is of surveying economic developments more broadly. The uncertainty point, you dont know how long thats going to last. Indeed, we dont even know the magnitude of the effect. I think were pretty sure about the sign, which is that there will be some inhibiting effect, particularly in the uk and the eurozone on investment and household behavior. I think Governor Carney has indicated he thinks the risk to the economy in the uk have increased. But none of us really knows the magnitude of it. And i doubt that there will be a moment where people say, well, we dont have to brexit is done. It will probably be something that just attenuates over time. So lets talk about the u. S. And Monetary Policy, that and regulatory policy, the two things that a lot of people want to hear you discuss. The fed raised shortterm Interest Rates in december. Weve been talking all year about when youre going to do it again. And keep waiting. What are you going to need to see in this economy and in the Financial System for that matter to get to a point of comfort to raise Interest Rates again . Well, let me first say, and i think this is important to say, when you use the second person, im taking that as a second person singular. When you say what do you need to say . Im going to speak what i need to say. I think people understand it you dont speak for the federal i do not speak for the fed. Only chair yellen speaks for the fed as a whole. But i think its useful to give a little context here. I dont think of this as a normalization process. People sometimes write about it, talk about it. Using the term normalize or normalization. And i dont believe that there is some target that the Federal Reserve should be moving towards. What the right level of Interest Rates is depends upon the manifold factors that are affecting the economy in the shortterm and over the longer term. So for me, it is a judgment as to how taking a prague hat tick look at things, how we can best pursue the dual aims of maximum employment and price stability. Now in current circumstances, what does that mean . Well, i think first its worth focusing on the maximum employment goal. The statute, the Federal Reserve access would preserve maximum employment, not some abstracted concept of full employment. But maximum employment that is consistent with price stability. And i think as weve seen that even though, for nine or ten months now, some people have said were at or close to full employment. And yet during that period, weve created eight or 900,000 jobs with the Unemployment Rate essentially stable, except for last month when the Participation Rate brought it down. That tells me that there was more slack in the economy. That tells me that we have the opportunity to create more jobs, that is obviously good for those 800,000 or 900,000 americans. Its almost surely good for those who are more on the margins of the labor force. Its almost surely good for groups like African Americans and hispanics who have traditionally had higher Unemployment Rates. So i looked at this as an opportunity for greater maximum employment in a context moving to the second point in which inflation is not at or stated target, not near our stated target, and hasnt been so in quite some time. This is not an economy that is running hot. This is not the late 70s. This is an economy that has been moving forward in a gradual recovery modestly above trend for some time now. But as i said a moment ago, surely not running hot. And its also an economy in which we probably are not actually providing as much stimulus as people may think. The neutral rate of interest has surely come down a good bit since the precrisis period. Probably because of slower productivity, slower demographic growth, probably a bit because of the global environment. But for all those reasons, the neutral rate is lower, which means were not as far away. And finally, i think as many people have observed, the risks we face present us with an asymmetric set of tools. Were the economy to pick up more rapidly, which would be i think a Welcome Development we have the tools to respond appropriately. But were things to slow down, we obviously would face a more limited set of tools. And so for all those reasons, i have for some time now, this is not a brexitdriven issue, for some time now, i have thought that it was the better course to wait to see more convincing evidence that inflation is moving towards and would remain around the 2 target. So you dont sound like an individual who is anywhere near being comfortable raising Interest Rates again. Well, certainly to this point have not seen that kind of evidence. But i think, you know, for the audiences benefit, jon and i were talking before the session got started about correlations which may have prevailed for some period in the past, which maybe arent prevailing anymore. Various labor market correlations, things in markets and the like. And i think under those circumstances, one needs first not to have some sense that is there a normal rate of interest to which were moving, but also i think one has to have a sense of being sensitive to the things that do happen. And i hope that i will remain and expect to remain sensitive to indications that perhaps things have picked up, that things are picking up. And if i saw developments suggesting that inflation really was moving. Core inflation has risen. We were talking about this earlier. Yeah, its risen modestly. It was off 1. 2, which is well below where we need to be. Yeah. But i would want to be more convinced that the underlying rate of inflation was around 2 , not simply that, the fact that oil prices are not declining anymore has taken some of the downward pressure off. Its moved from 1. 2 to 1. 6, 1. 7. Thats not convincing to you . Thats not enough . It is a its certainly a sign as many expected that the removal of the downward pressure which the rather substantial drop in oil prices had would have the inflation, the core inflation rate coming up somewhat again. But its not enough to this point to convince me that the rate is headed in a nontransitory way to around 2 . What that but that evidence may well be forthcoming. And thats why i know this is a bit of a cliche. But i think we should all mean it. Thats why i dont i dont want to say i dont see it now. Maybe in three monday. Maybe in six months. I think you just have to be sensitive to what happens from meeting to meeting. So you said earlier youre not one of the normalization guys. Youre not in that camp. You do, though, probably more than other fed governs have a sensitivity not just to the macroeconomic growth, but issues of financial instability. And there ra lot of people out there who say that the longterm period of near zero rates creates tremendous instabilities, wrecks financial market, distorts asset prices, makes price discovery difficult. How do you strike that balance, and what do you say to those critics . Well, you know, i think, jake, you have to separate a positive observation from a normaltive recommendation. As a matter of fact, does a low rate interest environment that lasts for a long time create conditions that might pose risks to Financial Stability . Stated that way, i think the answer is probably yes. Whether it does or not in a particular instance, you have to watch. But you can see the logic of it. But thats a different matter from them saying as normative ly you should raise rates. In the first place, if markets do regard economic prospects as only modest to moderate going forward, then raising shortterm rates is almost surely going to flatten the yield curve, which generally speaking is not good for financial intermediation, and in some sense could actually exacerbate Financial Stability concerns. So as i say, i think the observation is a reasonable basis for paying more attention to Financial Stability issues. But it doesnt translate into therefore raise rates and all will be well. So you voted to support the feds rate increase in december. Were these Financial Stability issues at all on your mind when you voted to support them . I mean obviously as you correctly said a moment ago, because of the regulatory role i play, and Financial Stability board issues and all the rest, im regularly thinking about Financial Stability concerns. I didnt think then and dont think now that that kind of phenomenon developments that are contemplated in jakes question are in a manner that causes me immediate concerns. That is i dont theyre worried about bubbles right now. Well, no, im not i mean, there are always going to be asset prices that may be above historic norms. I think everybody should be a little bit humble about thinking you can identify in each market where a price is sort of out of line and think that you can then dial it back. What we should probably be looking at is to see whether across a broad range of assets first prices are above probably significantly above historic norms. But secondly, when youre thinking about Financial Stability, you really do want to look at how the assets are being funded. Because to the degree that there is leverage, particularly shortterm leverage, youve got greater risks. To the degree that there is, there may be money lost if assets prove not to have the value that the market currently assigns to them. But that is the way a market economy is supposed to function. So we want to move it into the regulatory arena. My colleague ryan tracy wrote a story about you recently. We put up a paragraph from that story which describes you as the most powerful man in banking. Trying to sell newspapers here, jon. So my question for you, this is a judgment that not only exists in our reporting, but among a lot of people in the banking community. So my question for you, should a regulator in washington be the most powerful man in banking . Well, now thats first off, i mean, as i was semi facetious, but semi serious in saying i think you guys kind of come up with these things to make the stories interesting. To the degree that, you know, what we have all done, and this is not me. This is the United States government with the three banking regulators, the market regulators. Certainly the congress in passing dodd frank, all of my colleagues on the board, i think we all set ourselves to a fundamental reform of our financial regulatory system in the wake of the crisis. And perhaps by sheer longevity, since ive been here since early 2009, im you know, my name ends up in more things that have been done because ive been here during that period. Ive been occupying this role. But this is not this is not a set of decisions that i made. This is a set of decisions that flows out of a collective judgment by the congress, the executive branch, the president who signed the bill, and our regulators now that we needed to make a basic set of changes in how we regulated the Financial System. So tell us so where does this go . And let me take this out of our words and put them into yours and help us understand where you see the ultimate goal of the end vision. In that story where we interviewed you, you said, and i quote, i think it likely that firms are going to have to change in some cases their size, in some cases their Business Model, in some cases their organization. I dont think youve seen all the adjustments that are going to be made at firms when were doing stuff like that. And like that you were alluding to changes in the stress test that are coming there is going to be a further round of adjustments. What did you mean by all of that . Well, oddly enough, just what i said. What you called it. Firms have already made some adjustments. In some cases its been reduction in the size of their Balance Sheet. In other cases, its been a shift in the composition of assets, moving from riskier to less riskier assets. And i think, jake, not just for regulatory reasons, but for market reasons, for Business Environment reasons, many Financial Institutions are still in the process of adapting to the regulatory business, financial environments which they face in the 20teens as opposed to the first decade of the 21st century. So the adaptations will vary with the firm. But each firm needs to make a judgment and i believe is making a judgment as to how its Business Model should evolve given the regulatory requirements, particularly on capital and liquidity that have been put in place. And as you point out with respect to the stress test, the further changes that were likely to make over the course of the next year. Soso when you say what exactly did i mean, i dont mean we dont have anything specific in mind. And in a sense, thats the point. The point is we should put in place a set of regulatory requirements which are designed to make the firm safer and sounder and the Financial System more stable. And then allow each firm to make its decisions on its Business Model working within those regulatory requirements. But i think help us figure out how far along in that adjustment process we are. If you kind of treat 20062007 as the starting point of one and sort of the end point of the utopian ideal of an American Banking system as 10. Are we at a 5 . Are we at an 8 . How much more dramatic are the changes yet to come . Well, i dont think i want to assign a number on a spectrum. But certainly we have come a long way since 2005. How about baseball innings . Youre a big baseball fan. What inning are we in . You know, the thing about baseball, jon, as you know, there is no clock. And the fifth inning can be the longest inning of the game. And six through nine, you know, six throug