Both in the construction and execution of Monetary Policy. Following on one of the data points, trade, i guess were going to talk a little bit about Monetary Policy. As part of that discussion, the fed has started to talk about that being the role of its Balance Sheet. Well talk about that in a little bit. So randy, i think all of you know both of these folks. University of chicago, former governor at the fed, now with the university of chicago. And john foust, a number of years at the fed, now at john hopkins but on leave back to the fed. You just cant quit the fed. So were now in the third longest economic expansion that weve had. One of the questions is will policy change which has been discussed both in monetary and fiscal policy extend that expansion or not. In light of the discussion about the Mortgage Backed component of the feds Balance Sheet, ive been looking we at fannie mae look at the tenyear treasury all the time. That actually started to rise back in july with the ecb Holding Steady post brexit in the second half of july and then with the d. O. J. Saying that it was going to reassess negative rates at the end of july. The tenyear started a gradual rise at that point and of course it accelerated with the president ial election and it peaked at about 2. 6. I think right now its about 2. 48 or Something Like that. So the fed hiked in december and it looks like now the market is prepped for a rise in march. Well find out about that before too long. So lets start, if i could get each of you to address first whats your view of current Monetary Policy, how is the fed doing, how have they been doing up to this point. And then what should we expect Going Forward from here, how fast will they go, how far will they go or should they go. Whats your view on up to the present and then what we should think about Going Forward. Maybe well just go across the panel here. Great. Im absolutely delighted to be back here at nabe where many years ago i had been on the board and was delighted to be a part of that. And i can see that the conference has grown Even Stronger and even bigger so im really delighted to see that. I wish the economy had grown Even Stronger and bigger than it has, but i think we have had a fairly consistent recovery if not an exciting recovery. Part of that is because of the fundamentals. Ultimately Economic Growth comes down to the number of hours worked and output per hour. Because of demographic reasons its going to be harder to get as many labor hours as we had in the good old days, and productivity has been puzzlingly slow, not only in the u. S. But worldwide. So thats why weve been getting about 2 growth or so. The inflation rate obviously has been consistently 0 below the feds target of 2 for expenditure index, although were starting to move there gradually. So i think the fed has done basically what it could to try to provide the necessary conditions for growth, but Central Banks cant do everything. I think theres often a thought and especially post crises that Central Banks should be able to do everything. They should be able to create jobs, create inflation. They should be able to create whatever growth rate they want. And they cant do that. They are one important piece of the puzzle but theyre only one piece of the puzzle. I think the fed has been trying to make sure that we avoid the deflation outcome, avoid deflation expectations. The key thing that Central Banks can do, they can then try to provide some increase in inflation and Inflation Expectations which the fed very gradually and gingerly has done. Now were starting to come closer to our 2 level. And so i think the fed has made reasonable progress on that. No surprise, the fed has made it very clear that unless something really radical happens between now and next week, that they will raise rates in march. I think that would get them on a math to raising rates further this year. So rather than having one rate hike at the end of each of the last two years, were going to start a little earlier, giving us an opportunity for more rate hikes. Well see how the economy evolves. Well see how inflation evolves. But i think most things are pointing to continued reasonable growth, not extraordinary growth but reasonable growth at least in the Short Intermediate run, continued slight increases in inflation and Inflation Expectations which i think really mean that the fed needs to continue on the path that they said that they are going to be on for two or three rate increases this year to try to stay ahead of the challenge of inflation. We also said where are they likely to continue to go over the next few years, thats of course an important question that people at the fed and i think john has been helping them to think through this. Where is that magical star, where is this neutral Interest Rate of in the long run where would the Interest Rate be if there were no fed, if there were no interventions. Where would the economy go naturally. And i did some work with some former central bankers from charlie bean and christian, one of my former colleagues who works in emerging markets. There have been complaints that Interest Rates are so low due to Central Banks behaving crazy. If you look at the last 30 or 40 years worth of data, you see Interest Rates falling subtly, both nominal and real rates since the 1980s. They come down very gradually. This is all before the financial crises. The question is what was driving that broader change, not just in the u. S. But worldwide. Its emerging markets, developed countries. We argued that it was the role of china, china being very high savings economy being integrated into the world economy, effectively shifting out the supply of savings curve, so this has some elements of the global savings glut explanation to it. So all the things being equal, shipped out in the supply of savings is going to be driving down Interest Rates, china has become more integrated and a larger economy with very high savings rate, 40 savings rate, astonishingly high in some cases, so thats going to shift down the supply of savings. The question is whats going to happen Going Forward. China is in a demographic transition. They just passed their peak working age population. Coming back to demographics. And so theyre going to start to age rapidly. They had this one child policy. Theyve now relaxed that but it doesnt look like theres much of a response in terms of fertility and thats 20 years off before its going to have any impact on the population. So were going to see a rapidly aging workforce, much like japan from 30 years ago, the worlds second largest economy growing rapidly, a rapidly aging workforce. They had a very high savings rate around 15 to 20 . Their savings rate is now 4 . I dont think the chinese are going to go that low but its suggesting that were going to see fundamental forces independent of Central Banks driving rates back up. And exactly where they will go, this analysis isnt precise enough to be able to tell us that. I think what it suggests is were going to have offsetting forces, not just forces from Central Banks wanting to start moving rates up but fundamental economy forces beyond Central Banks that will be driving rates back up. Will they go back to where they were in the 80s . Probably not because we still have more savings coming in. Even if china is saving less, theyre still going to be saving a lot and theyre a large economy, but well probably see rates move or so the fundamentals push rates back up from the zero area that theyve been in globally probably back up to at least 1 or 2 real, whereas in the past many of the longer rates have been higher than that. So economists put decimal points in their forecast to demonstrate their sense of humor . Yes. I guess i have no sense of humor. Exactly. It doesnt make much, does it. Decimal points being their best joke. You want to share your thoughts with us . I agree very much with pretty much everything randy said, and he gave a nice background about the role of Monetary Policy in the economy and during the response to the crises in the short run and in the longer run what he wrapped up with, so id like to i was at the fed a little more recently than randy so id like to focus a little more on the nittygritty, whats happening tomorrow to fill out that fill picture. So i guess its clear to pretty much everybody the feds gone out of its way to signal that another rate increase is likely in march. And the thing thats kind of surprised me is that people have decided that this is a surprise, that its quite strange that theyre doing that, and then as always the case, when youre surprised thinking about the fed, you assume theres been a tech tonic shift in thoughts of the fed and that everything is going to be different Going Forward. So thats always nonsense. Let me explain the nonsense in this particular case. I think and by the way, i put this kind of analysis along with my colleagues at the center for financial economics at Johns Hopkins on our website is sort of a Public Service and you can all google that and try and read these little pearls of wisdom if you like. Let me say my perspective on what the feds been doing, say, for the last three, four, five years, about three of those that i was advising the chair during. And thats, you could encapsulate it in essentially one little bit of wisdom which is normalized policy as rapidly as is prudently possible. Prudently possible is obviously a loaded phrase but i think its important to think that way, that the fed is very much inclined towards normalizing policy and would like to do it would just as soon be back to normal. So whats the problem, why do we have a rate increase once a year . Well, the economy has made it pretty clear over the last couple of years that as fast as prudently possible is unbelievably slow, and thats up until recently. So let me compare the situation right now to the situation around the time of the march fomc a year ago. So a year ago december, in december, they did the first rate increase. They published a forecast that showed robust growth, inflation rising, and four rate increases in the next year. Let me be clear, i think they would have been perfectly happy to deliver four rate increases had they gotten the robust economy and the rising inflation that is inflation rising back towards 2 . But what happened by the time of the march fomc . Well, immediately in the new year, Financial Markets all around the world went crazy with volatility, as you may know. China, japan, europe all seem to be faltering economically. Japan pushed rates negative and took another bunch of other significant steps. The ecb lowered rates again, accelerated their asset purchases, looking pretty grim. About that time the u. S. Faltered pretty significantly in the beginning of the year as well. So what happened to the four rate increases . Well the economy said no. And the fed listened in and we didnt get the rate increases. So lets compare that to whats happened. In december the fed raised Interest Rates 25 basis points. Were getting to the march fomc. The stock market has boomed. The u. S. Macro data has been at least fine. Theyre always kind of mixed but theyve been at least fine. The Previous YearInflation Expectations by some measure have been slipping, now theyve been rising and inflation has been moving back to 2. Thats true not only in the u. S. But also in europe and in japan. So it looks to me like you could make a pretty good case that if we had seen that in the previous march, that they would have seriously considered raising rates then too. Theres no shift here. We dont need any intrigue or fundamental shift in leaps about the economy to realize why a rate increase might be likely. Would it have been as likely as it is now a year ago . I dont know. The economy has moved on a bit, so its a little stronger. But still it wouldnt have been odd to see a rate increase, and that would have been perfectly consistent with these four rate increases they put in their survey of Economic Projections if the economy grew robustly with inflation rising. So in december of this year they were a little more reticent and put three rate increases in. What do i think . If the economy continues like this or booms like this, said for quite some time they will to deliver four or more. Thats a good thing. I dont think the economy probably will boom like that, and so like randy, maybe a baseline of three but thats not a statement about the fed. Thats a statement about an economic forecast. Now randy and i are both know a bit economics and about the fed but go talk to your forecaster. Thats how youll find out how many rate increases there will be. We may be good but were no better than anybody else at the forecast piece. The fed would still like to normalize policy as rapidly as pl prudently possible and theyll raise rates unless the economy says no. So whats different . The economy has moved on a bit. In other words, employment is in a better situation than it was a year ago. Those are all modest. Inflation is in a better situation than a year ago. It seems to be moving up. All those are good things and gives the fed more leeway, but those are pretty modest. Now, the main big thing thats changed, we all know, and thats the situation at the other end of constitution avenue from the fed which is whats going to happen with tax and spending and trade and regulatory policy. Now, theres all sorts of theories that the fed is raising rates in order to take some strategic position against the government that shot across the bow i heard. That kind of stuff is i just want and we think that we dont know anything about politics. So we are not good at it, but we are good enough to know the tis is this a plital environment that you could manipulate by doing something clever, manipulate to your own advantage . Ooh, we are sure that we are not goodt at that. And nobody in their right mind would try to adjust an Interest Rate by a few basis points to send some potent political signal that is going to be somehow constructing something that the other end is going to be constitutionally asking. That is insanity. There are mandates that says they are not supposed to do that, but the good sense says to run the other direction. Both of you made some reference to Global Factors as the Savings Rates traced to other Central Banks. How much of the decline was actually a function of Global Economic activity and how much will that push up on rates if the Global Economy starts to pick up. And in that context, how important is Global Central Bank coordination . So, there were longer run forces that have been driving the rates down for over a decade. That is important in that. But obviously n the crisis response, and we saw potential for deflation when many countries, and the Central Banks responded very strongly. I think that everyone has learned the lesson of freedman and schwartz that if the central bank stands idly by as the money supply is collapsing, and the Unemployment Rate is spiking, and gdp is falling. That can translate a negative shock into the great depression. It is really h inaction is which is what Freedman Schwartz blamed on the great depression, because obviously, a number of negative shocks that have been going on many years before we had the fed, but they did not turn into great depressions, because of some other stabilizing forces and the fed stood idly by. That is a lesson worldwide. Certainly slow Economic Growth is going to be something that is going to be weighing on the u. S. To export. It is going to have an impact on the short run measures of the inflation, and the headline numbers, because it will affect the commodities and prices and such, and obviously, some wild swings in the Energy Prices until recently, and that has really fallen very, very dramatic from the astonishing highs in 2007 to 2008, and so all of those play a factor, and they are all factors in the Economic Activity issue, and then the savings issue. I think that it is when i was in the fed and the crisis was first really heating up. In the fall of 2008, there was a world bank imf meeting. And president bush convened a meeting of the g20 to say how are we going to respond to this globally . This is not a u. S. Issue or single country issue. I think those are the peak years of international coordination. Many much the top lines are no longer there and they exist and are no longer actively used. And people are going in different directions. It is in negative territory. Theyre very much aware of what each other are doing but theyre aware of their local conditions and those are the ones that drive the domestic policy choices. When you think where youd like to the rates to be. Everybody likes to think of the ten year as normal, i think, but thats going to happen within the context of a world in which the twoo year rate in europe minus 75 basis points, youre paying the government a good deal of money. Good deal of money to hold your money fo