[CC may contain inaccuracies] He has said recently that the Fed shouldn't react to elevated inflation even as it causes pains for Americans because Neil
you've said it many times it's going to prove temporary. You know what we're hearing more and more as a Sherry and Heidi my
colleagues were just discussing former Fed officials even some current Fed officials being concerned not about overreacting but
about under reacting to this surge in inflation and the fact that maybe it won't be as temporary as you thought. How do you
respond to that. Well we're all paying very close attention to the data and the
higher prices that we're seeing in the economy are real. These are real pain points for families that have to pay them. And so
no one is making light of that at all. My main point is we shouldn't overreact to what is likely going to be a temporary
factor. Let's just take the supply and demand one at a time. If it's a supply side and its supply chains that have been
disrupted because of the pandemic you know barring some introduction of some new wave or some new strain of the virus
those supply chains should work themselves out some taking longer than others on the demand side which many people have
argued. This is really about a demand shock. A lot of fiscal stimulus. We know the path of the fiscal stimulus. Fiscal
stimulus provides a one time boost and then it tapers off and it itself becomes a drag on the economy. So unless Congress passes
a massive new spending package that's not paid for there's nothing that I'm seeing in these fundamental factors that leads
me to think that this is a long term change in inflation or inflation expectations. We are seeing pressures that are real
but most of the evidence in my mind seems to be that they're going to be temporary even though they are real and people are
having to pay it. But the challenge is if we overreact by saying let's just change the path of monetary policy to try to deal
with a one time effect that could lead to a worse long term outcome for the economy. Well the supply chain shortage is
constrained by a blockages whatever you want to call them. They don't seem to be going away. If anything they seem to broaden.
They seem to be lasting longer. What you see in the data. Because many Fed officials including the White House
administration officials are saying no it's not. This isn't inflation. Surge is a lot about the supply chain. But their
problem. What makes you say in terms of data not just a forecast that it is getting better and it's going to get better.
Well looking at just give some examples and it really is very sector specific. So a year ago you couldn't get toilet paper
when you went to the grocery store. Now when I go to the grocery store the shelves are full of toilet paper. Lumber prices
skyrocketed. Lumber prices have now fallen back down to earth. I just read a report before I walked in here that Malaysian chip
factories are now coming back online to try to supply auto companies. I also recently learned that all the major auto
plants in America have restarted. I'm not suggesting that we're out of the out of the woods yet at all. But many of these
sectors are working themselves out. Some are going to take longer than others. How about demand. Larry Summers a former
treasury secretary well-known economist has been concerned for some time that the Fed is not going to move fast enough. And is
going to let inflation get so high that the Fed has to move way too fast to pull it back in. He's talking about things like you
know you've got demand driven inflation prices rising because of a strong economy. Pete some people going back to work. And it's
not just things like commodity prices former housing prices in a hot market and things like that although they're contributing to
it too. What is the risk that this doesn't go away that it does become entrenched.
Well this goes back to him. I read Larry Summers put out a piece earlier today. It goes back to what's the economic theory that a
one time boost of fiscal spending a one time boost of demand it leads to higher prices yes. Does it lead to higher inflation
which means ongoing year after year after year continuing price increases. I don't really understand the mechanism by which
Larry Summers thinks that this one term one time fiscal stimulus leads to a change in the path of inflation. Unless he's saying
well inflation expectations are going to become unanchored. You know the Federal Reserve is never going to allow that to happen.
All of my colleagues and I are paying very close attention to the data. And if we thought that long term inflation
expectations were becoming on anchored we would certainly adjust to make sure that that did not happen. If you look at long term
inflation expectations in market indicators they are not looking like they are coming on anchored or very high at all. We're
seeing a boost of inflation expectations over the next one to three years maybe even up to four or five years. But that's
really judgment about the next couple of years. So we're paying very close attention to the data. I just again say if it if it
even if you believe it is purely demand driven a one time boost of fiscal stimulus. OK explain to me how that leads to long term
inflation. Fair enough because I think the question people are asking is far broader the fiscal stimulus. And when you talk
about inflation expect expectations rising. They have risen for things like the New York Fed Inflation Expectations Survey the
University of Michigan Consumer Sentiment Survey. Their longer term measures are rising as well. What about a change in
behavior from this businesses in the for four years. I can't raise prices because someone will have a lower price. That has
changed. People wouldn't pay a prior higher price because they knew they could go to a discount store and find a lower one.
That has changed too. People are willing to pay whatever they can to buy a car for example. Is there a risk that the
expectations are changing that changes behavior and the Fed has a longer term inflation problem than they thought.
It's certainly possible. I don't want to rule it out and say it's impossible. Of course not. But remember to think about the
of the economy that we came out of before the pandemic. For a decade we were struggling with low inflation low inflation
expectations not just in America in Europe in Japan in advanced economies all around the world. That was driven by things like
demographics technology development low productivity trade. Have our demographics changed because of the pandemic. No. If
anything they've gotten worse. And so you know we're paying very close attention to the data. But I don't want to just believe
that you know Japan's low inflation problem is that is that in the past now they're never going to have to deal with that
again. I find that hard to believe. And so the key here is from my perspective as a central bankers not to overreact. We want to
pay attention to the data. We want to look at the evidence and we want to make our adjustments prudently not just overreact
because Twitter is hyperventilating. Well again I would I would suggest to you that it's a lot more than Twitter
hyperventilating although there is definitely a problem of pain that people across the country are feeling. And when you look at
the consumer sentiment survey from this Friday Richard Curtin you know I'm sure you know him. I know him. He's been doing this
survey since 1976. Consumer sentiment fell to a 10 year low in early November. The statement he put out is because of the
rising prices and the growing belief among consumers that no effective policies have yet been developed to reduce the damage
from surging inflation. Again someone who's watched this for a long time I'm not an authority here. You what. How do you
respond to that. You don't see a problem. No I do see a problem. I mean he's paid the higher prices are
real people are paying them. It is causing pain. There's no question about that. We're also seeing higher wage growth
especially for the lowest income Americans net of net of inflation higher wage growth for the lowest income Americans. We
still have four to five million American tour out of work who would have been working had there been no pandemic. So let's not
lose sight of the fact that this pandemic has killed several hundred thousand Americans or more. We still have four to five
million Americans who are out of work who otherwise would be working. There is a lot of pain there too. So just to say well
we just need to focus on inflation and ignore the labor market. That's only half of our mandate. And so we need to pay attention
to both sides of this. People who are out of work who would like to work but they're afraid because of Covid because at Delta
they're suffering too. And we cannot lose sight of them. Well let's take a look at the labor market because I think it's
another reason why people think this is an economy that is producing inflation could produce more. For example you
mentioned the millions who still don't have work but there are there are 11 million jobs that aren't filled right now because
partly because of those reasons. You say people don't want to go back to work. Record quit rate. Another sign of a hot labor
market. Jobless claims are now back nearly to pre pandemic levels. And those were very very levels before but low levels
before. And you see wage pressures. So this is I think just another sign that the labor market is
healing. It's made a lot of progress and we're seeing pressures there that could persist and again get entrenched in
expectations entrenched in consumer behavior and business behavior.
Well you know I've heard since I've been at the Minneapolis Fed since 2016 year after year after year I heard one thing from
businesses historic worker shortage historic worker shortage. And you know what happened. They found more workers to hire. And
the unemployment rate fell down to three and a half percent. Even though people said that was impossible. Labor force
participation continues to climb. Employment to population ratio continues to climb. So I don't have a ton of sympathy when I
hear businesses say they can't find workers. I know we're in a unique situation right now trying to come out of this pandemic.
We still have four to five million people who ought to be working who I believe will be working if we give them the
chance. But we have to get control of the virus. You know in this discussion Kathleen we spent almost no time talking about
Covid. Let's not lose sight of the fact that 700000 Americans are dead. Right. A lot of people are still afraid of the virus.
That is the biggest issue facing our economy and the global Michael Barr IBEX. But there certainly has been a lot of
improvement there too and more improvement expected despite the uncertainty over variance. But let's look at something. Bill
Dudley former president York Fed said today he thinks that the Fed by starting the taper so slowly and not being able to finish
by June puts it in a position where it may have to speed up the taper. Let's listen. The taper is going to be completed by until
June of next year. On the current trajectory at a very slow path of removal of accommodation given the economic information that
we're seeing. So I think that by locking themselves in this way I think they've doubled down on being late.
He went on to say the inflation rate may just mean the Fed funds rate may end up a lot higher. The market's expecting one point
seventy five percent. He said it may end up at 3 to 4 percent. Is that a possibility. Is that a risk.
Well you know I can't predict the future any better than Bill Dudley can. And you know we'll see what the economy requires.
And the Federal Reserve will adjust monetary policy to achieve our dual mandate as we've all committed to doing. And so is the
federal funds rate can end up at 2 percent or 3 percent. I don't know. And neither does Bill Dudley. We'll have to see how things
actually unfold. You know one thing about this pandemic every time it seems like we've got clarity there are new wrinkles that
get introduced and new surprises that come. You know is the next six months going to unfold exactly like Bill Dudley thinks or
exactly like I think. I doubt it. We're going to get a lot more information on both the demand side and the supply side over the
next two to three quarters. That'll give us a lot more clarity on where the economy is headed and where monetary policy should
be. I want another quick question from me though on broad based and inclusive employment. Know you mentioned that people are so
out of work et cetera that employment goal versus this inflation worry everybody has. You said you're watching it very closely.
How do you how do you square that equation. How do you view that tradeoff.
Well we've said that we're going to take a balanced approach if those two were intention. So up until the pandemic heading up
until this current environment there was no tension. There was so slack in the labor market and we were under shooting our
inflation target which meant it was easy to say we need to take an accommodative stance. Now there appears to be intention
because there are still 5 million Americans or so out of work and we're seeing these higher prices. So that's why we have to
read the data very carefully and not just take a snapshot of where we think it is right now but where the economy is going to
be over the next one two years to try to adjust policy on that arc. Are you. Any chance you're gonna be on board with one or
two rate hikes in 2022. That's what the bond markets pricing in now at least after they see the inflation numbers. Bond markets
have been very volatile. The inflation jitters are hitting them too. What about the possibility of more rate hikes which you up
until now have said probably not till 2024. You know again I just got to watch the data. We're going to get
a lot more data on the labor market and on inflation over the next one to three quarters while we're ongoing while taper is
ongoing. That's going to provide us a lot more information about where what the underlying dynamics are rather than some of these
short term movements. OK let me ask you about something very very near term. Tomorrow the 10th Racism the Economy event
sponsored by the Minneapolis Fed along with the Boston Fed and the Atlanta Fed racism the economy looking at financial services
what's on the table. Well we want to know as we've talked about the Fed as a maximum
employment mandate as many Americans as possible participating. We've had this series this 10 part series looking at racism
keeping people out of fully participating in the economy and really achieving maximum employment. This installment is looking
at financial services. You know there are people who don't have access to banks who don't have bank accounts who have to turn to
payday lenders. How do we break down these barriers so that people can be linked to the financial system be able to take
advantage of the products and services that make the economy function more equitably and be able to fully contribute to the
economy. So we're bringing on board experts from non-profits from academia from the industry to try to shine a light on what
are the barriers what needs to change. How do we make the financial sector more inclusive. You know when you look back
against these past nine conferences what what surprised you most about this whole broad issue of racism in the economy.
You know how much is there. If we were just willing to open our eyes you know people point things out to me now. And it was
there the whole time. If we had just been looking for it and there are these structural barriers affect people who are
excluded but it actually affects the whole economy. You know when businesses are saying we can't find workers my gosh it's a
worker shortage. And then I go to another meeting in a low income community where people don't have jobs. We need to break
down those barriers because it'll actually be in as interest in the economy's interests overall. If we can put everybody back to
work. And so it's there for the taking. If we are willing to be honest about what we're seeing and make the changes that we need
to make some people say well you know this is great for the Fed. Look at
this. But there's not really much the Fed Reserve can actually do in terms of policy or taking steps. Do you see something. Do
you see things particularly when it comes to financial services wealth jobs that the Fed could do can do to make a difference.
Well one example is the Community Reinvestment Act. The Fed under Governor Brainard leadership has taken a lead in to reform
the Community Reinvestment Act and modernize it working with other regulators and how banks apply that into their communities
that they serve. That's one example. Another just as understanding maximum employment. I mean a year ago the Federal
Reserve adopted a new framework for how we approach monetary policy. And we said we're going to take a much broader view of
what maximum employment means. Just looking at that headline unemployment rate that gave us a misleading signal that gave us
the wrong signal in the last expansion. And there were a lot more workers out there who it turns out wanted to work. And if
we understand that better we're going to do a better job achieving our dual mandate again which is better for the economy
as a whole.