Fed Chair Jerome Powell Speaks at European Central Bank Forum on Central Banking

Thierry Bracke: (01:21)
Welcome come back to the ECB Forum on central banking. Please do continue to share your comments on social media under the hashtag ECB Forum. And now it’s my great pleasure to introduce the editor of the Financial Times. Roula Khalaf, who kindly accepted our invitation to moderate this year’s distinguished policy panel. Roula will be joining us from the FT’s headquarters in in London. So good afternoon and over to you.

Roula Khalaf: (01:57)
Hello, and thank you for the invitation and thank you to the audience for joining us this afternoon. I am in lockdown London. It’s been more than nine months since the coronavirus pandemic. It hit Europe and the U.S. And after a period of recovery over the summer, many economies are shut once again, as countries battle second or third waves of the virus. The economic cost has been tremendous, but perhaps not as severe as some had feared that’s because the response to the pandemic has been forceful and fast. The monetary response was extraordinary and it was supported by a massive fiscal response. Where do we go from here? What is the fallout from a health emergency of uncertain duration? And what does it pretent for monetary policy?

No one is better positioned to give us answers than my three panelists. Jay Powell, chair of the federal reserve. Christine Lagarde, president of the ECB and Andrew Bailey, the Governor of the Bank of England. First, let me start by asking you about some good news we’ve had recently. The election of Joe Biden in the U.S. and the prospect of a vaccine that will be available before the end of the year. How does that change the economic outlook? To what extent does it change the economic outlook? Chair Powell over to you first.

Jerome Powell: (03:40)
Sure. So from our standpoint, I think we can say a couple of things about the status of our recovery. First, it’s been faster and stronger than we expected. Second, it’s slowing a bit, and that’s understandable given that the outsize pace of the gains in May and June. Third its been uneven. So it’s been better for people with higher incomes than for lower income, still 20% higher unemployment, among people in the lowest quartile. And it’s also incomplete. So we still have 10 million people here who are out of work. So I would say that the main risk we see today… We do see that the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of disease here in the United States.

We’ve got new cases at a record level. We’ve seen a number of States begin to reimpose limited activity restrictions, and people may lose confidence that it’s safe to go out. We’ve said from the beginning that the economy will not fully recover until people are confident that it’s safe to resume activities involving crowds of people. You mentioned the vaccine. So that is certainly good and welcome news for the medium term, although significant challenges and uncertainties remain about timing, production, distribution, and the efficacy for different groups. And from our standpoint, it’s just too soon to assess with any confidence, the implications of the news for the path of the economy, especially in the near term. And I would say with the virus now spreading, the next few months could be challenging that year. You also asked about the election and of course, Roula, you will not be surprised to find that I’m very reluctant to comment on the election.

I won’t be surprised but I’d be disappointed.

I won’t comment directly or indirectly, other than to say that this is a good time to take a step back and let the institutions of our democracy continue [inaudible 00:05:37] our jobs. At the fed here, everyone should know that we will continue to do what we do every day, which is to serve all Americans and support the economy during this difficult time.

Governor Bailey, I’m going to ask you to comment on the same question and you are a bit freer than Chair Powell, to comment on the U.S. selection.

Andrew Bailey: (06:01)
I’m going to politely take the same line on the selection. And of course we follow it with great interest and intensely. And we’ll just watch and see how it plays out. On the vaccine though…. I mean, let me support and reinforce what Jay said. It’s good news, obviously, it’s encouraging and we need encouraging signs, but it’s true. As Jay was saying that it’s of course not here yet, in terms of the implementation of it. We conditioned our forecast, which we published last week on the basis that it would progressively be improvements in the health situation and treatments of COVID. So this is obviously news sort of supportive of that.

But the one point I would emphasize is that this year we have seen, I think the highest levels of a sense of calibrated uncertainty in the economic outlook, certainly in the life of our current monetary policy arrangements, which is nearly a quarter of a century. And what is important is that I think gradually as we get more news on the vaccine situation, I hope that not only will it obviously give encouragement and hope, it will also start to begin to reduce that level of uncertainty over the outlook for the future. And we’re not really there yet, [inaudible 00:07:21] but that is important I think for the monetary policy, because we are having to make monetary policy in conditions of extreme uncertainty.

President Lagarde, I can’t see you actually on my screen right now, but I know that you’re there. How encouraged are you by the vaccine and how encouraged are you by the U.S. election?

President Lagarde: (07:51)
Roula, you don’t miss much by not seeing me and I can see you and I can hear you well. So it’s perfect. Look, that’s the way I look at it. We were nine months ago, as you said, facing a sea of uncertainty, everything was uncertain. And as a result of that forecasting, the outlook for the economy was more than an art, it was really exceptionally difficult as exceptional was the economic crisis that was a result of the health situation that we inherited. But we are clearly seeing a little less of uncertainty on several fronts. The fact that the U.S. election has now taken place has removed some uncertainty. The fact that Brexit is progressing has probably attenuated the anxiety, but not remove the uncertainty yet. And the fact that a vaccine has been announced and seems to be 90% efficient and likely to be approved in early 2021 is also removing some uncertainty.

So from that sort of huge big river of uncertainty, we see the other side now and what I think is going to be critically important going forward is that the policies that have been in place, which have been extremely helpful, both monetary policy and fiscal policy help bridge over to the other side of the river and continue to support the economy so that there is as little long lasting damage as possible. But I don’t want to be exuberant about this vaccination because there are still uncertainty about the logistics, about the transportation, about the rolling out, about the fabrication, about the number of people that will be vaccinated in the course of 21, so that we can reach the herd immunity, which will then give us more certainty from the health point of view, which in turn will facilitate not only our economic forecast, but the decisions that will be made by economic agents going forward in terms of consumption in terms of investment, in terms of jobs of course.

I think your word of caution is important because we saw the market reaction to the vaccine use, of course, but just anecdotally the mood seems to have changed at least around me or the people that I’ve seen that suddenly people see an end to the pandemic, but saying with a macro outlook and with you President Lagarde. You said yesterday that the second wave poses no less danger to the economy than the first. And I’m just wondering, because surely there’s been some adaptation economies, businesses have adapted, supply chains have adapted, and we now all know how to work remotely.

Yes, you’re right. We have learned from the first wave and there are things that we can do better that we can anticipate better. And certainly governments have learned, particularly in this part of the world in Europe, that a complete lockdown is probably not the most efficient way to deal with the second wave that we are facing. But what I was referring to is a little bit different. It’s the risk that consumers, investors, business owners do not regard that anymore as a one-off. As this big hurdle that we had to jump, those two months lock down, but that it continues to be a lasting motto with recurrence or recurrences of pandemics with recurrences of contagion waves, with new lockdown measures.

And as a result of that, the behaviors, the decisions be impaired that people go back into yet more saving off a precautionary nature, that those businesses that have managed to last and to sustain themselves, thanks to the various loans and availability of financing eventually decide that it’s no longer worth the effort and give up. So that’s the risk that I’m concerned about. And of course, the [inaudible 00:12:29] that can affect the labor market as a result of waves that would last long, and that would really disrupt the economy.

Governor Bailey, I wanted to ask you realistically, how much power can still come from stimulus, whether it’s QE, negative rates or guidance, given the already extremely low rates of expected real future interest rates?

Well, I think the first thing I’d say on that is we have had to, I think, change the way in which we think about monetary policy operations. If we can remember it, we used to have a world where there was essentially one instrument and the decisions were around sort of the setting of that instrument so rates, in other words. Now it’s changed and of course it’s changed in the post-financial crisis world, but it’s changed even more in the course of this year that. Not only do we have to think about how we calibrate an instrument, but we have to think about what instruments we’ve got in the toolbox and then which ones we bring out to news and that’s a very different world.

So we’ve had to innovate during the course of this year. And so the thing that I think is most interesting about the question is that when I look back to what we were saying and answer your question back in February, [inaudible 00:13:52] which seems like an [inaudible 00:13:53] sort of period of prehistory now. It was radically different from what we’re seeing today. Back in February, we were [inaudible 00:14:01] in our case saying, we can see a real sort of constraint on policy. We didn’t think pre COVID that we were particularly net to that constraint, but we were aware of it.

Now we’ve gone way through that constraint in the last nine months. And we’ve had to innovate, we’ve had to innovate in the world of QE, have to innovate in the world of guidance. By the way, we’ve had to innovate in QE, not only in terms of the scale of it, but also thinking about the pace of it and thinking about what actually, what is it that we’re responding to and what state of the world are we in and how do these tools work because they are state contingent. And we’ve also had to do, I think, to borrow a phrase from the U.S. actually we’ve had to think about what I sort of tend to call QE for the financial sector and QE, or quantitative measures for main street, as it were.

So many of us have introduced, new instruments in that field directly in response to that. So my answer to your question really is we’ve had to innovate and we would have to go on innovating, I think in terms of looking really hard and imaginatively at the tool kit that we’ve got. So I’m optimistic on that front just on the basis of how we’ve had to respond this year, but of course, going back to what were saying, I fervently hope that as we begin to see progress on the medical funds, that will become less of an issue.

I want to come back in a minute to the long-term consequences for monetary policy, but first I just want to turn to Chair Powell. And I want to ask you about the coordination between monetary and for spend between the monetary and fiscal response, which has been impressive, certainly in Europe. Why has the fed been less successful in pressing Congress and the White House on fiscal stimulus?

So I think we’ve said from the very beginning that this crisis in particular is one that will require a response from all of government. And that’s because it’s really not a typical downturn. This is a downturn where a full employment economy suddenly experienced mass unemployment due to this external shock, really a natural disaster and monetary policy works through stimulating aggregate demand. And that’s important now, but ultimately there was a job to replace lost incomes there. And I would say that our Congress stepped in and there hasn’t been a faster or stronger response from Congress to an economic emergency, really, since the great depression. The Cares Act and the other laws that they passed really more than fully offset [inaudible 00:16:52] income in the aggregate. Now, there will be people for whom that is not true, but it was quite a strong response. And you see still high levels of savings on the balance sheets of households and…

High levels of savings on the balance sheets of households. And we’ve sort of not experienced the downside cases that we were quite worried about of mass insolvencies of companies and businesses, and so far. So, so far so good I would say.

The second, really the most important leg of all of course is the healthcare leg. As I said earlier, there’s no full recovery without confidence that it’s safe to undertake all activities. And we had our part to do which I think we’ve done.

So I would also say though that the path forward is going to be challenging for a number of reasons, and I’m sure we’ll get into some of them. And that my sense is that we will need to do more in that Congress may need to do more as well in fiscal policy. The actual particulars of that are up to Congress and not up to us, but I do think it’s likely that more will need to be done in time. But I would say that our response to date has really been quite strong.

President Lagarde, I want to talk to you about coordination and cooperation. During the financial crisis, there was a sense of greater coordination on monetary policy. How would you describe the coordination in response to the pandemic?

Roula, if you are talking about the coordination between us, between the national central banks, I would say that it has been spectacular. I mean, both Jay and Andrew will remember vividly those days and those nights when we had to collectively respond and put in place that portion of the global financial safety net that we can offer, which has to do with the swap of currencies. And that was particularly the case in the early days of the crisis in mid-March when clearly there was this there’s dash for cash that translated into short-term dollar needs on the part of many participants in the markets. And the three of us plus three other large central banks reactivated the swap lines that we had between us in order to make sure that they would be plenty of supply of the currency that was most in demand. So we did that.

And as far as the ECB is concerned, we also reached out to other national central banks in Eastern Europe and Central Europe in various places and reactivated preexisting swap lines. We also opened some special repo lines with other banks and set up a new instrument as well that is a European repo facility that is available as well.

So I think that amongst us, we have been extremely engaged, active. We coordinated, we faced the storm together, and we really closed ranks. If what you’re talking about is coordination between monetary authorities and fiscal authorities, certainly in the Euro area, there was, contrary to what I saw myself during the great financial crisis when I was on the other side in the fiscal front, we saw a much more efficient coordination, a prompt response on the part of both the fiscal authorities, and certainly we were very quick and big in order to respond to the situation.

So I would say that on both accounts, amongst central banks and between here in the Euro area, between the Central Bank and the national as well as the European authorities, really a much improved coordination and cooperation.

We had asked the audience beforehand to submit certain questions, and several of them have raised the issue of cooperation. And one of the questions is whether central banks should be coordinating their action during more normal time, rather than during crisis. What would you say to that?

I would say that there is a lot of cooperation, exchange of views, forum, places where we try to coordinate as much as possible and deliver on our respective mandates. We have different mandates. Let’s recognize that, but we have a lot in common as well. And whether it is within the financial stability board, within the BIS and Basel Committees, I mean, we do talk to each other a lot and we do compare notes and we try to cooperate as is appropriate in accordance with our respective mandate. That’s the way I see it at least.

Before I turn to the longer term consequences, let me ask you Governor Bailey, but also Chair Powell to comment on this. There was quite a bit of criticism that lower rate policies are creating unhealthy asset bubbles. And there’s a question about whether they need to be accompanied by tougher financial regulation. Governor?

Well, first of all, I mean, I think it’s important to understand that the channels through which particularly quantitative easing work. So I don’t think we should be surprised at the general movement of asset prices in response to that. It is part of the transmission effect. But you’re right that what we have to watch is the financial stability consequences of it. And as Christine was just saying, I mean, there’s been an enormous amount of work over the last decade or more, in a sense under the [inaudible 00:22:59] of the Financial Stability Board to tackle these issues.

Now, when I think… If you look at the questions, what have we learned from the last eight or nine months on that front? I think I would divide it into two parts. Without wishing to… This is going to sound complacent, but it’s not intended to be. But what I will say is that I think on the banking side, I think we have… This is the first major test of the post financial crisis reforms. And I think so far that the banking system has stood up to the task. And although it sounds a very sort of cliche thing to say, I’ll say it. I mean, what we wanted was a banking system that supported economies, not economies that supported the banking system, which unfortunately was that experience of the financial crisis. And I think we have seen that actually. So I think the reforms we’ve put in place, the kind of cyclical policy approach that we’ve put in place so far, I think, has stood up.

Now in the non-banking world, if you go back to March… Jerry referred to the dash for cash earlier. We have and did see things that did cause us concern, but more particularly, actually, and this goes back to Christine’s point about the use of swaps, for instance, required very major interventions, major interventions domestically, major interventions internationally through the swaps and so on. And it has pointed to areas where there are concerns.

The FSB again, is leading that work, very important work, on non-bank financial institutions, really asking two big questions. One is what do we learn about fragilities and systemic fragilities here, given that the non-bank world is so much bigger? Secondly, given that the central banks had to intervene so substantially back in March in the context of the stresses in financial markets, what do we conclude from that in terms of the improvements we can make both in the regulations side in that world, but also in terms of the way in which central banks operate? Because it took us into new areas. It gave us new challenges in terms of the non-bank part, non-bank financial world.

Chair Powell?

I would broaden the question a little if I may just to say that if you look back over the last 30 years, what you’ve seen is since inflation became more or less under control, you’ve seen a series of very long expansions that have not ended because of high inflation and central bank policy tightening, but instead have ended through the buildup of financial imbalances and ultimately through financial instability. And I think we finally internalized that lesson as a result of the global financial crisis and went to work to dramatically strengthen and make more resilient the banking system, and also many other aspects of the financial system.

So I think you asked about low rates. The fact of low rates is actually a small… We are now an era of lower rates, but really that trend was in place beforehand. So we’ve been at that for a decade now, and I would agree with everything Andrew said. I would add that I think the first draft of history is that our banks have done well in this crisis so far. I would emphasize so far. It’s not at all time for complacency. And as Andrew said, what we will do now is look across mostly the non-bank financial intermediation sector, where there were some issues. And I think that the FSB and all of us are looking carefully at what we might learn from that and what things we might do.

So I do think we took away from the last crisis, a very strong focus on financial stability. We have a division here. We have a public framework for assessing financial stability. We published a financial stability report earlier this week we did. So our framework is out there for public comment. We monitor on an ongoing basis and all of that is a complete sea change from the way we approach these issues before the global financial crisis. And I think it’s very much on us in this era of a blow for long rates to keep at that and we will.

President Lagarde, how vulnerable do you think are company’s balance sheet and bank’s balance sheet particularly to a prolonged downturn? I think a lot of bankers that I talk to are relieved that the first wave wasn’t as dramatic, but we have yet to see a lot of bankruptcies, a lot of job losses. Do you think that they might be complacent?

Well, Roula, two things. One is, as I said yesterday, I think it’s critically important that we can maintain the financing conditions that have been operating well in order to sustain the economy so far and to stabilize it and to make sure that companies can borrow and benefit from almost the lowest interest rates ever at the moment, that households can get mortgages at the lowest ever interest rates at the moment. So continuing to provide those financing terms at that level over a sufficiently long period of time. And I think that the level is important, but the maturity over which those terms will be available is also of critical importance. And as this crisis is continuing from one wave to the other, as the lockdown measures are hammering the economy from one set of lockdowns to the other, it is really, really important that financing be accommodative and that the maturity be sufficiently long so that the refinancing by the corporates be at terms that can be expected and that will support the economy.

As far as the banks are concerned, I would completely subscribe to what both Andrew and Jay have said. Through the last 13 years, particularly past the great financial crisis and the great efforts undertaken by the Financial Stability Board, by the regulatory authorities around the world, the banks are much more solid. They are much more capitalized. The leverage is much more under control. The liquidity ratios are imposing sufficient caution on the banks. And as a result of that, as Andrew said, they operated as facilitators, as solution finders, as opposed to being at the core of the problem as was the case 12, 13 years ago.

But I would say that in the current circumstances, and I would completely second what Jay said when he said so far, I think it’s also necessary that banks be very attentive to their current balance sheets and to particularly the health of the corporate accounts that they finance, because it is clear that in some sectors in particular, there will be difficulties. There will be bankruptcies. There will be exit from certain sectors and that it will take time for those that exit to actually reenter some somehow and somewhere in a different area of business.

So in the meantime, clearly some impairments will have to be acknowledged. Some non-performing loans will have to be provisions. And I think it’s in the interest of the banking sector and of financial stability at large, to do that in a reasonable, sensible, transitional way so that there is no NPL shock that we would fear if it was to happen all of a sudden. I have to say that the measures that were taken from a fiscal point of view, in order to provide moratorium, in order to provide those particular schemes that attenuated the hardship of the crisis, have been a great shield, but that shield will eventually be lifted at some stage. And I hope that that happens gradually as the provisioning takes place gradually as well.

Governor Bailey, I wonder if you could answer the same question, but put it more in light of the B word, Brexit. How comfortable are you that the financial sector is ready for Brexit? And if I could also ask how worried are you about a no deal Brexit?

Well, on the financial sector, we’ve done a very substantial amount of work with the financial sector or over a number of years now, and we’ve published the assessment of the state of that preparatory work regularly in our financial stability reports. And I do think the financial sector has taken it very seriously. I think an enormous amount of preparation has gone on. So if I had to sort of in a sense calibrate our view on that, I think the financial sector has been able to do a lot more preparation. Whether they’re are further decisions on equivalents or not, I think that financial sector is ready as it were in that sense of what will come.

I think it’s been harder for quite a large part of the non-financial sector, because obviously there is the uncertainty about the question of the trade agreement and that uncertainty remains outstanding. And that is much more of a material issue in terms of preparations. It’s in many ways, quite binary, obviously, for many firms in that sense.

Now we do a lot of work in thinking about our view and obviously our forecast or the economy, and also our work on financial stability to assess preparedness. And obviously a lot of work has gone on not withstanding the uncertainty. We said that in the report we published last week, we said we’ve as a sort of a broad approximation, we though around about 70% of affected firms had done a lot of preparations. I have to tell you that when you ask them, they do have a tendency to say the following. They will say, “We’re as ready as we can be.”

I’ve heard one too.

You probably heard that one as well. Now that, of course leaves you wondering, so what do they mean by “can be”? And that is an issue clearly. Now let me just say this. I mean, I’ve said it many times and I’ll say it again. The best outcome here is there is a trade agreement, all around. I’m not making particularly a UK point. I think the best outcome all round is a trade agreement, and I really hope that will be one. I’m encouraged that those discussions and the processes is going on. And that would of course help, but let’s be clear, of course. Any trade agreement now is a change from what we’ve had up till now, because the UK is leaving the customs union-

… from what we’ve had up until now because the UK’s leaving the customs union and leaving the single market. There will be an adjustment process. Now I would hope that if there is a trade agreement, there will be a spirit of goodwill around it and that some of the inevitable changes of processes that will disrupt things in terms of adjustment can be managed more smoothly. I’d be more concerned if there isn’t a trade agreement, frankly, and we default to the sort of WTO terms because that might denote also that spirits of goodwill might not be there, frankly. I think there’s every reason now to hope as I encourage the trade agreement to happen, but it’s obviously not for us to determine that outcome of that sort of thing.

Would you use hope, encourage? Would you use the word expect? Are you expecting a deal?

No, I’m not going to pre-judge because I’m not part of the process. I’m not going to pre-judge where it’s got to. I’m going to stick to hope and encourage. Those are good verbs, I think, for this context.

Okay. Chair Powell, recent change is that the fed will now treat the employment mandate as a broad based and inclusive goal, which recognizes that macro policy has to work for the margins of the labor market. Could you tell us what’s led to this change and what the likely impact will be?

Sure, a couple of things. One, I would say that the longstanding disparities in income within groups and between groups are a feature of our economy. In fact, inequality between groups and within groups has been increasing. We’ve noted that that’s something that holds back the U.S. economy as a general matter. We focus more on those than we have in the past and called those things out as ways for the U.S. economy to grow so that everybody can take part and contribute to and benefit from broad prosperity. The more recent thing actually is that we were able to observe very low unemployment by historical standards for an extended period of time. Unemployment was between 3.5 and 4% for two full years and we didn’t see eye inflation.

We didn’t see high wage inflation. We didn’t see high price inflation. We didn’t see any sort of notable problems in the labor market misallocation and things like that. What we did see was that in the seventh, eighth and ninth year of the prior very long expansion, the benefits began to flow more to people at the lower end of the income spectrum. That was wages. That was a record gaps between, for example, white and black unemployment. It was labor force participation critically, which is an area where the United States has lagged many other advanced economies. We saw labor force participation rising well above what the trend had been so we saw great benefits. That was one of the things that motivated that you pointed to one change in the monetary policy review that we just did. What we said is that we’ll react to shortfalls in employment from full employment and that we regard maximum employment, which is our statutory goal as a broad and inclusive goal. That’s meant to pull both of those thoughts in, and those are two key aspects of our new framework.

President Lagarde, you have a different mandate, but I did want you to comment here because one of the things that we’ve noticed in this crisis is that the burden has not been evenly shared, and there’s been a disproportionate impact on minorities, on women. I think that’s something you’ve talked about before, a widening of the divides in wealth and in economic mobility. How worried are you about lasting damage and can monetary policy play a role?

Roula, you are completely correct in referring to the uneven consequences. It’s becoming very clear as we are collecting numbers. It’s the women who have been affected quite significantly more than men. It is young people who’ve been affected significantly more than the average worker. On those two categories in particular, it’s likely to actually leave long lasting scars. Why do I say that? Particularly for the young people because there have been research now to show that when young people are not given access to the job market or lose access because they are on short term because they are on internship, it stays with them for another 10 or 15 years. The jobs that they have 10 or 15 years later is at a lower paid, it’s less qualified. The scarring effect is empirically demonstrated, and it is clear that in this particular crisis, young people are more effected. It’s obvious.

For the women, it has a different consequence in a way because it’s largely attributable to the sectorial aspect of the crisis. When you look at those sectors that are most affected, you talk about tourism, accommodation, transportation, the retail sector, which are sectors that employ largely more women than men and generally at the lower end of the wage scale. Those households typically are those that have a propensity to consume that is higher. If you take that out of the market, clearly the consumption is not going to be pushed up by those wage-earners that have essentially left the labor market. They’re not either employed, nor are they unemployed. They’re discouraged. They know that it’s not going to pay back if they go back into the labor market. Yes, I’m concerned about that although it is not our mandate. Our mandate is price stability.

I think that it’s one of the reasons why on this particular crisis, it’s so important that fiscal can be a very active agent in order to address the current situation, in order to maintain the income of those who are losing their job for a period of time and in order to provide for the training and the skill sets that will help them get to the other side of the river with an ability to get a job probably in a different sector.

Governor Bailey, you’ve talked about the new economy, the economy of the future. What are the changes that you see?

Well, like Jay and Christine, I do think that the effects have been very uneven. Of course in a way that’s not surprising. I mean, we’ve seen a very uneven recovery so far, and that reflects the fact that obviously those parts of the economy and those sectors that involve close human interaction are much more heavily affected. Those sectors, undoubtedly, as Jay and Christine have said, have a much greater concentration of low paid workers in them and also distributions with gender and ethnicity as well, and that’s very troubling and important. Now I do think if we come back to where we started this discussion, I mean, I do think that obviously the more rapid the sustained recovery from this, the less the longer term scarring will be because more firms will be able to come through, more activity will revive.

That’s a good thing. That’s why we’ve … I mean, we’ve tended to take the view that scarring will, I’m afraid, be a feature of the economy, but it won’t necessarily be as large as some forecasters think it is because I think some of them, I suspect, rely too much on history. If you go back to certainly the 80s and the 90s where you saw much larger scarring and much more sustained scarring, that was because it was very much a sort of structural move out of heavy industry, out of heavy manufacturing into services, out of things like coal mining, where you had far capital scrapping, far more long-term unemployment. I’m more optimistic on that front in that I think this will probably be movements within sectors as much as between sectors, but it is still very serious. I don’t want to play it down at all. I agree with Christine and Jay on this. [inaudible 00:43:10] policy, it has a role, but let’s be clear. It’s not not something that we can do either alone or be the primary focus on, although I do think also that very large amount of what we all do to understand economic analysis, to understand our economies has, I hope, wider benefits in terms of framing, thinking about how to address these issues.

Just looking at the future, what we do know, Chair Powell, is that this crisis has accelerated certain trends, digitalization, for example, and this will lead to certain changes in economies. There are firms that will never recover from the crisis. There are potentially sectors that may never recover from the crisis. We won’t be traveling as much, for example. What worries you most about the longterm impact?

I would agree that what this crisis is in the process of doing is it is accelerating a lot of preexisting technological change. Technological change raises productivity generally and over long … Technological change raises productivity generally. Over long periods of time, those gains tend to be broadly shared. But in the short term, that may or may not be the case. I, along with many others … We’ll leave social media out of it, by the way, in terms of adding to productivity. I’m not sure I would say that for social media. But for other kinds of technology, I would say it. In this particular situation, I would worry that the changes … We’re not going back to the same economy. We’re recovering, but to a different economy, and it will be one that is more leveraged to technology.

I worry that that is going to make it even more difficult than it was for many workers who, as Andrew just mentioned … It’s a relatively low paid public facing workers in the service sector who are bearing the brunt. This is largely minorities and women or skewed toward minorities and women and relatively low paid. Those people are going to struggle to get back to work in their old jobs or, in many cases, in new jobs. I mean, I think you’ll see more telework. You’ll see probably the acceleration of automation. All of that was in the process of happening, but you’re going to see much more of it. I guess that, for me, the main takeaway from all of this is that even after the unemployment rate goes down and the economy is … And there’s a vaccine, there’s going to be probably a substantial group of workers who were going to need support as they find their way into post-pandemic economy because it’s going to be different in some fundamental ways.

President Lagarde, would you like to comment in on this?

Yeah, thank you, Roula. Because I think that it’s a coin that has two sides. Yes, sectors will be affected and will be transformed and there will be losses and liabilities and damage. But sectors will also be transformed in a positive way. If you look at, for instance, medical services, which typically were not heavily digitalized and where the personal contact was still regarded as the prevalent way of providing medical services, this is radically changing at the moment. I’m sure that Jay has those numbers as well, but it was something like 11% of Americans who used telemedicine. It’s now moved up to almost 50%. Of those 50%, most of them are quite happy with what they’re getting and they’re happy to actually continue with it. In the same way, payments have been also significantly transformed, closer to home in a way where a lot of digital payments are accelerating, are pushing us in the direction of exploring alternative modes of payments.

There will be transformation that will be beneficial. There will be sectors that services that were not available, that can be now provided from anywhere to somewhere, to use the David Goodhart analogies. That can be extremely beneficial. Plus being a little bit from my corner here in Europe, it will accelerate digitalization, which is an area where Europe was a little bit lagging behind and where clearly much progress had to be made. To the extent, and this is supported by the training that is necessary, the skill setting, resetting, however it’s called now, I think that it will be beneficial for productivity in Europe in particular.

If I can comment back there, Roula-

Please, yes.

It’s really interesting. Just to reinforce what Christine has said. We’ve had certainly a story of low productivity growth for 10 years now. That is part of the story about low interest rates, structurally low interest rates. I don’t want to lessen the challenge of transition, but I really reinforce what Christine has just said, that there are opportunities there. It’s interesting if you look at productivity across sectors because retailing is actually one of the sectors that in recent years has had stronger productivity growth where we’ve seen structural change. Christine’s right, I think, to sort of point to opportunities as well.

President Lagarde mentioned digital currencies. We have a question from the audience. Several members of the audience are asking how central banks see the prospects for central bank digital currencies and also whether this would risk crowding out cash and non-cash electronic payments. Let’s start with Chair Powell.

Here at the fed in the United States, we’re committed to carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency, which we all call it a CBDC, for the U.S. economy, for our payment system and also for the international implications. We’ve been actively participating with Andrew and Christine and other central banks. I bought at the BIS to look at this and we feel that it’s been a very productive collaboration. We haven’t made a decision to issue a central bank digital currency, and we think there’s quite a lot of work yet to be done as we engage with public constituencies here in the United States and around the world before making a decision. Also the dollar is the world’s principal reserve currency and I assure you that we will approach that question with great care.

From our standpoint, the main focus is on whether and how a CBDC could improve what is already a safe, effective, and dynamic domestic payment system. We actually do still have strong demand for cash here, which is I think is different than some other jurisdictions. We really would need this to be done in a way that does not preempt the use of cash or the use of other private digital currencies or non-central bank digital currencies, such as the FedNow payment thing that we’ve announced. The last thing I’ll say is we feel an obligation to be on the frontier of research on technology and policy development on this. But as the main reserve currency, we do feel it’s critical that we get it right as opposed to try to be the first. In a way where we’re the incumbent reserve currency and so we’re going to be very careful and-

Reserve currency, and so we’re going to be very careful and engage quite extensively on this before we make a decision.

President Lagarde, there’s an expectation the ECB will be first.

We’re not racing to be first. And we believe that digital Euro will not be a substitute for cash. It will be a complement to cash. And clearly, it’s not a nicety. It’s not a tantrum. It is something that, if it is a cheaper, faster, more secure for the users, then we should explore it. If it is going to contribute to a better monetary sovereignty, a better autonomy for the Euro area, I think we should explore it. And if it is going to facilitate cross border payments, which are very laborious in quite a few corners of our big world, then we should explore it. So that’s the reason why we have launched a consultation in mid-October that will be completed in mid-January. And at that point in time, we will make the decision as to whether or not we go forward with a digital Euro.

And my hunch, but this is a decision that will be taken collectively, is that we might well go in that direction, which does not mean that the digital Euro is going to be available right away. Because obviously, we are going to have to address all the issues of anti money laundering, financing of terrorism, privacy of users, and all the information, the appropriate technology that will carry that digital currency. And this is a project that will probably take us two, three, four years before it is launched.

Just to give you an indication, the PBOC, which is the central bank of China, started exploring this about five years ago, in the same way, Facebook, which is exploring a private stable coin, has started about four years ago. And their Libra is certainly well advanced, but it’s also a good reason for all of us to be very attentive to the way in which monetary policy can be secured and monetary transmission can be safeguarded. So those are the reasons why we are moving ahead and diligently, not incautiously. So we will be prudent. We know it will not replace cash, but my hunch is that it will come.

There has been, of course, a lot of central bank resistance to Libra, which doesn’t look to me like it’s going to go very far. But I was interested in what you said about autonomy. Is that a main driver for the ECB?

No, I think the main driver is to respond to our customers. What do the people of Europe want? How do they want to pay? How do they want to use payments? And it is clear that in some of the Euro area countries, member states, the use of cash is significantly declining to the benefit of digital payments. If you look at a country like Sweden, for instance, if you look at the Netherlands, it’s moving extremely fast. So we cannot be [crosstalk 00:54:37].

And the pandemic has accelerated this [crosstalk 00:03:39].

Yeah. The pandemic has definitely accelerated that. Instant payment and digital payments have increased significantly over the course of the last few months. Yeah.

Where does the Bank of England stand?

Well, first of all, by the way, that’s a real paradox of cash, which is that there’s no question, and we all observe this, and probably a part of it, that the use of cash was declining before the pandemic, and it certainly has during the pandemic. Although I agree with Christine, that I don’t think it’s ever going to go away. On the other hand, the amount of cash in circulation, the amount of the public demands from central banks has continued to rise. So that’s a paradox. I think the important thing I would add to this is, the private stable coin proposals.

For me, a critical public policy issue here is that people, I think, have a right to expect certainty of value in the instrument they use to make payments. And so they should not have to worry about the value of the instruments in which they’re making, they’re exchanging value for in payments. Now, I have to say that I think that means that the bar is set very high for private stable coins. And I don’t think they’ve met that bar. They haven’t met that bar in my view. And it may be that the answer to that bar is actually central bank digital currency, where obviously you would get that… That certainty of value would be assured because that’s what central banks provide.

Now that question is yet to be answered, but it is, to my mind, a critical question. But if I could finish, there’s a number of other very big questions that follow from that, which are more into the heart of central banking, which is that if you introduce that instrument, how does it affect monetary policy and financial stability? Because it will do. It will do, both in normal times and in stress times. And we’re going to have to do a lot of hard work to think through the implications of that. And we will do. We will do.

I want to turn to climate change, and I know there’ve been many questions about that. The ECB is more active, of course, on the green bond sector, and you are looking, President Lagarde, at your mandate. How is the strategic review going, and where do you want to land?

That I won’t say, but it’s going well. And clearly, as part of the key elements that we’re exploring, it won’t surprise you if I mentioned the level of inflation and the aim that we have, the horizon that we’re looking at, and the relation between inflation and the economy, and the tools that we will use, or the combination of tools that we will use in order to steer demand when it’s needed.

So those are the sort of key planks of our strategy review. But we’re looking beyond that, at some other elements that actually are directly relevant to our price stability objective. And the one that I’m particularly keen on is climate change. And I’ve heard many criticism as to why would we look at that, and why can’t central bank stick to their mandate and completely ignore those other issues.

Fair point, except that those matters actually affect price stability. If you have repeated major weather catastrophic situation, if you have repeated drought, it is going to affect our aim inflation in an indirect way. If we have carbon taxation, it is going to impact our aim in an indirect way. And clearly, if there is so much uncertainty associated with climate change and the risks resulting from that, that people actually change their saving behavior, it is going to move down the natural interest rates. And that matters to us, clearly, in the way in which we would define our policies going forward.

So if only for those reasons, not to mention the issue of appropriate pricing of assets, given that externalities are not necessarily well taken into account, if only for those two reasons that I have just mentioned, we must look into the climate change issues, in the way in which they relate to monetary policy and impact on our price stability objective. So that’s what we will be doing.

No more detail than that.

It’s pretty good, what I gave you.

I’ll have to ask my correspondents. Chair Powell, the Fed acknowledged the financial risks of climate change in the financial stability report. Does that signal more cooperation on climate change between the Fed and the likely Biden administration?

Again, I’m not going to… That would be me commenting indirectly on the election, which I won’t do, but I will comment on the climate change aspect of it. So we do think that central banks and that we the Fed have a contribution to make here. We also think that climate change is clearly an issue that requires a broader societal, across government, across the private sector response. So we’re just part of that.

Jerome Powell: (01:00:15)
But from our standpoint, we think that the public will expect, and has every right to, that we will make sure that the financial system is resilient against all sorts of major risks, including climate change. And in our financial stability report that were released earlier this week, pardon me. We noted the connections between climate change risk and financial stability. So I do think we take those on board. We’ve been working with the network for [inaudible 01:00:45] the financial system. We’ve been attending those meetings. I think we’re in the process of applying for membership there now. So there’s been significant collaboration, mostly behind the scenes.

But central banks around the world are working on this, and what we’re really working on is how do we incorporate climate change risk into all that we do? As Christine mentioned, it has potential implications for monetary policy, for bank regulation, for financial stability. And we’re at the, I would say, very early stages of just trying to work through what that means for our goals. I think it follows from our assigned legal mandates, though, that we do this work.

Roula Khalaf: (01:01:26)
Governor Bailey, quickly, because I still have one question to all three of you, and I’m running out of time.

Andrew Bailey: (01:01:32)
Very quickly, I would agree with, with Joe and Christine on this. I’d just add that I think as we think, as we were thinking about investments in the recovery from COVID, then thinking about how we can do that and pursue climate change is very important.

Good. Okay. I usually like to end my panels on the note of optimism, but today I started with optimism. So my last question is one that I discussed with Martin Wolf, our famous economics commentator. And when I said to him, “What would you ask the panelist?” He said this. “Given where we are today, what frightens you most?” We’re going to start with Governor Bailey.

Well, I think what we’ve lived through this year with a huge shock to the economy. It’s the biggest shock since, we think in the UK, since the early 18th century. Entirely unpredictable in terms of its start. It has changed course with incredible speed. You think about the way in which COVID has moved around this year. Now Joe, I hope we hope we can take the optimistic view that you said earlier, but I think we’ve had to get used to saying, we are living in a world of huge uncertainty and unpredictability, and that is… I don’t like to see the people in this country, who we have a duty to in respect of our public policy objectives. And it’s a very important duty. I don’t like to see them in that position. It’s one that makes me very uncomfortable, and we’ve got to do everything we can, but it’s a very, very difficult place to be in.

Chair Powell?

So for me, it would be the risk that there is some longer run damage to productive capacity of the economy and to people’s lives who have been disrupted by the pandemic. And it’s women who are, not by choice, out of the labor force. It’s kids who aren’t getting the education they should be getting. It’s small businesses, that there may be generations of intellectual institutional capital that’s being destroyed. And it’s just workers who are out of work for a long period of time and losing their connection to the labor force and really losing the life that they had. So that is the thing that I worry about the most.

President Lagarde, you have the last word.

President Lagarde: (01:03:59)
Okay. Two things frightened of. One is the silliness and the hubris that could activate some people to start another war. We just celebrated the 101 anniversary of the first world war. And the thought that we could go back into something like that is just horrifying to me. So I hope we’ll be wise enough to stay away from that and have the means to diplomatically avoid that. And the second thing that frightens me, it looks a bit silly, but it’s not that silly. It’s the mink. I’m not sure you’re all I’ve heard about the Danish minks and the millions of them that are being killed at the moment, because it really… It’s a sign that the virus, which came from this [inaudible 01:04:52] to man, went from man to mink, and is now going from mink to man. And that would be a devastating piece of news because it would mean that any vaccination that is being discovered at the moment would effectively not work on that new transformation of the virus. So I hope we are good enough, wise enough, and can jointly take responsibility to put a stop to that.

Well, with worries about minks and wars, I’m going to have to bring this panel to a close. But just to tell you, we are writing a lot about what’s happening with the minks. So do turn to the FT, and you’ll read what you need about it. Thank you so much for this panel and goodbye.

Goodbye. Thank you,

Thank you.

Thanks, thanks very much.

Thank you.

Speaker 1: (01:05:49)
Thank you.

Thierry Bracke: (01:05:50)
Chair Powell, Governor Bailey, thank you, President Lagarde for certainly diverse, rich debate, which we all enjoyed very much. Let us now turn to another special moment of today’s program.

Speaker 2: (01:06:10)
So that’s when I go.

Kristy Jansen: (01:06:11)
Hello, my name is Kristy Jansen. I’m 28 years old, and I’m from the Netherlands.

Antonio Marsi: (01:06:16)
Ciao. My name is Antonio Marsi. I am-

Fed Chair Jerome Powell Speaks at European Central Bank Forum on Central Banking

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