Monetary Policy Normalization: Audience Q&A

Cletus Coughlin, senior vice president and chief of staff to St. Louis Fed President James Bullard, moderated a question-and-answer panel on monetary policy normalization that featured Christopher Waller, senior vice president and director of research at the St. Louis Fed, and Stephen Williamson, a St. Louis Fed vice president and economist.

Presentation (PDF)

• Part 1: Introduction
• Part 2: The Bank of England
• Part 3: Why the Fed Was Founded
• Part 4: The Tools of the Fed
• Part 5: Monetary Policy around the Great Recession
• Part 6: Normalization of Monetary Policy
• Part 7: Audience Q and A

Transcript:

Cletus Coughlin: What I'd like to introduce now—joining Steve for the Q&A is Christopher Waller, who is our senior vice president, and director of research. So he's following in the shoes of Homer Jones. As such, he oversees the staff of research economists, as well as a whole bunch of efforts with respect to providing data and economic information services, as well as economic education efforts. He's also the chief monetary policy advisor for the president of our bank. Chris joined the staff in June of 2009. Previously, he was professor at the University of Notre Dame, and he held the Gilbert F. Schaefer Chair of Economics. His principal research interests are, not surprisingly, in monetary theory, political economy, and macroeconomic theory. So he, too, similar to Steve, has had numerous publications in the top-ranked journals, and he's an internationally recognized expert in monetary theory and macroeconomics. Now, recently he was told that he looked like Jon Bon Jovi. So I don't know about that, but if he—

Christopher Waller: He hasn't aged well, apparently.

Cletus Coughlin: I don't want to say that. But if you break out into "Blaze of Glory," or "Lost Highway," or something like that, I'm leaving. But anyway, welcome Chris and Steve, and they'll answer your questions.

I'll moderate this, so why don't we start far right, and we'll work our way over.

Question: Given the emphasis on the dual mandate, and specifically an appointment, I'm wondering how the Fed takes into account the variance between unemployment as it's given as a rate that we track, and the actual number of people who are out of work, that have left the employment search, if you will. Because in recent years, it seems that that number has got a great spread, and I'm wondering if that's part of the formulation. If Congress says, your mandate is unemployment as we define that, well that's fine. But I don't know how it works in the real world, if you've got a lot more people not in the workplace.

Stephen Williamson: Yeah, so as you saw, our mandate is maximum employment. And Congress wasn't exactly clear, telling us what they meant by that. So you could be extreme and say, "One way to have maximum employment is close all the grocery stores, and you have to go be your own farmers. You'll all be fully employed." I don't think that's quite what they had in mind. So it's easy, as I think Cletus stated in the beginning, because of—is maximum employment working 50 hours a week, 52 weeks a year? Probably not. So this is where we have this problem. But we have a much better idea of what we think the unemployment rate kind of normally would be in a well-functioning economy. So what we've kind of done is we've kind of interpreted the maximum employment mandate into something that tells us—that we can talk about, in terms of unemployment. It's just tricky to kind of define what maximum employment is, because it could obviously be something crazy.

Question: What I meant though, is the people who aren't even being measured in that 5%, or whatever.

Stephen Williamson: Hmm. So we worry about some of that. So we look at a lot of different labor market measures. There are unusual things going on in the labor market. So it's—a lot of long-term unemployed. That's very unusual. And labor force participation has come down an awful lot. Racial employment to population is very low, relative to history throughout the lot in the recession. So we pay attention to all of those things. Because Chris said, there is kind of this focus on the unemployment rate, in part because it's—there's some ways in which we think it gives us a fairly good fix on how tight the labor market is. But we recognize there are unusual things going on there; we pay attention to these other aspects of them.

Christopher Waller: And clearly, there are differences of opinion, as to how to interpret a 5.4% unemployment rate, in terms of discouraged workers and all the other things. And we do, once the deliberations around the table at FOMC attempt to factor all those things into the individual voting of the members around that table. And so we are looking at a wide variety of different measures of labor, in addition to the unemployment rate.

Question: Yeah, I wanted to talk about one of your graphs up there. The (inaudible) science and technology, where the currency in circulation above has gone up just slightly, but the reserve went up dramatically. I'm looking at a copy of the Federal Reserve balance sheet, and there's a line item in the liabilities section called, "Other products held by proprietary institutions $2.5 trillion." Where is that on your chart? Is that in the reserves?

Christopher Waller: Does it have reserve specifically listed on there?

Question: Well, it has Federal Reserve notes and circulation, reserve purchase agreements, and at the bottom it has other deposits.

Christopher Waller: That's the reserves. That's the reserves. Banks, as Steve said, banks have a checking account with us, so their deposits are our liabilities. They call them their reserves, but those are deposits with us.

Question: Contradictory to our earlier conversation about all this funding, the asset purchases. You were saying, printing money, or—

Stephen Williamson: No, loosely—there's a question in how you define what money is. Sometimes we talk about something called outside money, which would be the total, which would be effectively all the—roughly, all the Fed's liabilities. Currency, plus reserves.

Question: Is that the definition of monetary base?

Stephen Williamson: Yes, exactly.

Question: Okay, so monetary base is currency in circulation.

Cletus Coughlin: Can you use your microphone, please?

Question: Oh, I didn't even realize. The monetary base is the currency in circulation, plus bank deposits? That's the definition of the monetary base, right?

Stephen Williamson: Yes. Yeah.

Question: You use that monetary base to define the asset purchases?

Stephen Williamson: Exactly. Yes.

Question: So in effect, we are using a bank deposits to fund the purchases of Treasuries and mortgage-backed securities, and that more impacts securities?

Stephen Williamson: Yeah. So as I said, the initial purchase—whenever the Fed purchases the assets, it has to fund that with—by issuing liabilities. So first round, it's issuing reserves to finance the purchase of the assets. And then what happens to the reserves after that depends.

Question: So the bank deposits are earning 4% interest, correct?

Stephen Williamson: Yes, exactly.

Question: When did that start?

Stephen Williamson: October, 2008.

Question: 2008? It's kind of coincidental that right in the midst of the great recession, that they started paying a 4% interest rate.

Stephen Williamson: No, it's not a coincidence. No, no.

Question: That was part of the plan.

Christopher Waller: The law was passed in 2006, to be implemented in 2011. It was accelerated out.

Stephen Williamson: Yeah.

Question: So right now, we have two and a half trillion in deposits from banks, and prior to 2007, it was only 20 billion.

Stephen Williamson: Yeah.

Question: So 20 billion to two and a half trillion?

Stephen Williamson: Yep.

Question: So that's why I think inflation is being held in check, because we didn't really print money. We used those deposits to fund the assets.

Stephen Williamson: Yeah.

Question: So that's why we're not getting the inflation that we would normally get if you just printed $4 trillion?

Stephen Williamson: Right.

Christopher Waller: The question is, why are the banks just sitting on it, right? If they lent it out, you'd see inflation.

Question: (Inaudible) 4%, when they could lend it out at a much higher rate?

Christopher Waller: Right. So the puzzle is, in many ways, why are the banks just sitting on it?

Question: Once they change their mind, if you raise the Fed fund rate over 4%, or at, or three quarter, won't those banks start pulling those?

Christopher Waller: That's why we would raise the interest on the deposits, to keep them locked in.

Stephen Williamson: That's part of how you do the inflation control, is you can use the interest rate on reserves to keep—so they'll hold onto the—

Question: So the reserves would also increase, as your rate, as the Fed rate—

Stephen Williamson: Yes. In fact, it's part of what drives the increase in the Fed funds rate. Increasing the interest rate on reserves, when you have all these reserves outstanding, the interest rate on reserves is part of what's governing market interest rates. Because from the bank's point of view, from the point of view of the banks, you can either lend to the Fed now at a quarter percent. Or you can lend on the Fed funds market, right? So the—as the interest rate on reserves moves around, it will affect what the market interest rate is.

Cletus Coughlin: Okay, let's—please use your toggle switch for the microphone.

Question: What is the theory as to why this recession—the recovery from this recession has been so slow, compared to '82. You show on the graphs, it's very, very poor. We covered the 2% GDP. What is the theory about that? Does it have to do with technology and displaced workers, or something else, please?

Christopher Waller: Well, there's actually two effects in that picture that Steve showed you. One, there was just a level drop in GDP and that it grew close, but not quite at the rate. As Steve said, in a normal session, we would have dropped, and we would have accelerated very quickly and got back to the old trend. We're now on a much lower trend, so there's two puzzles. Why did that level drop occur, and we never got it back? And two, why are we also growing slower now, after that drop? The slow growth in a large part is due to—we're in a phase of very low productivity growth. And it's not clear to us why that is, but that's what the data is telling you. Just productivity is very low right now. The level drop, you know, the way we would have—the way I would explain it, is when economists, households luck out. Because you see the same thing with consumption spending by households, or spending on goods and services. In most recessions, it just hardly moves. It just goes right on through. GDP's moving, but consumption just goes like that. Consumption does exactly the same thing, so our standard theories say households looked out into the future and said, "My wealth is permanently lower. My job prospects are permanently lower. The economy is not as good. I'm going to have to restrain my consumption." And then spending falls off, and output stays down. So it's something about the way households are looking out into the future, for the last five or six years. And they're not—they don't seem to be too optimistic, and that's a theory, not a proof.

Stephen Williamson: Yeah, I think related to that is we had, you could argue, was a bubble before it got deflated. And so in some sense, certain asset values were overstated. They weren't—I'll call it really real. And that's part of the return, too, of what might be a more realistic view of one's wealth. And as a result, that's going to have consumption impacts. The blue shirt?

Question: Thank you. So with respect to being (inaudible), effect does it have on technical policy?

Christopher Waller: We all look at the dollar, in terms of deciding policy. That's the Treasury's job. They deal with the foreign exchange rate. We can sit and examine what that potential impacts are on the economy, but we don't take it into explicit consideration when we set interest rates.

Cletus Coughlin: Way back.

Question: In regards to the balance sheet, the Fed went into the mortgage-backed security market, buying a lot of that. Were they offloading from the banks? Are these performing loans, or are they in their own account?

Christopher Waller: That's a very good question. I always explain this to my students, and everybody else. The MBS we bought were newly issued, starting in 2009 by Fannie and Freddie. So they would take mortgage, provide funding. At that time, as they still are, they're wards of the U.S. Treasury. So any MBS we bought, as of March 2009, was against newly issued mortgages. And if you got a mortgage in March 2009, you were a top credit rating. And so everything we've bought since then has only been newly issued, performing, high-quality stuff. So all the toxic stuff that was floating around, we didn't buy that. That's a common misperception. We bought none of that stuff.

Cletus Coughlin: Okay, in back?

Question: Yeah. You can help me understand something, I think, here. The gentleman up there in the blue shirt seemed to ask the question if the assets were bought by you from bank deposits, and you said yes. I thought I understood that. And I'd ask if you created the liabilities to buy the assets, to buy the Treasuries, and I thought you said yes to that.

Stephen Williamson: I just want to take one stab at this, and a very simple example to try to get everybody to understand. If we went to Citibank, and said, "Give us a million dollars of securities," they would give us the million dollars of securities. We go into their reserve account, and we add zeroes, of 1,000 to their reserve account, which is their deposits with us. That's effective. We just electronically add the numbers. That's effectively printing money. And that's why reserves go up. From the bank's side, they sold an asset. They have another asset. It's a complete wash. From our side, we acquired securities, and our liabilities go up by exactly an offsetting amount. Technically, it's like printing money.

Question: Okay, so then when you stopped the reinvestment, instead of rolling it over when the bond matures, comes back to you, then what do you do with those funds? Since you invented the money to start with, do you try to get the money?

Stephen Williamson: We just erase the zeroes.

Question: You just erase it? So that money is no longer in circulation?

Christopher Waller: Yeah, see it's a transaction with the treasury. The treasury has a reserve account, just like the commercial banks do. When the treasury security on our balance sheet matures, then the treasury hands the money over to us. That means that we—it reduces their reserve account balance, and the reserves disappear.

Question: Basically you strip the IOU?

Christopher Waller: Yep. Yeah, exactly.

Cletus Coughlin: Right in the middle here.

Question: Regarding the slow recovery that we are in process of enjoying, I suppose, to what extent do you think that might be caused by the growing income disparity in our country, along with the shrinking of the middle class?

Christopher Waller: Well, and the thing is the growing income inequality has been going on for about 30 years. So if it's been going on for that long, it's hard to believe it's suddenly the cause of what's happened right now.

Question: I didn't mean suddenly. But the fact that the recovery is slow, but also recoveries in the past have been faster.

Christopher Waller: Right, that's what I'm saying. In the past, in these recoveries in the '80s and the '90s, and early 2000s, income inequality was getting worse but those recoveries were just fine. So it didn't seem to somehow be driving, or affecting the recovery then. So the puzzle would be, why would it suddenly now have an effect on the recovery when it didn't in these past recoveries. Even though it was worsening back in the '80s and '90s, just as it is now in the last 10 years. I don't have an answer to that. It's just a puzzle, that why would it be correlated with this recovery when it wasn't with the past ones?

Stephen Williamson: Part of what we understand about income inequality and the reason—so we kind of date it back to some of the labor economists. In 1980, thereabouts, part of it's an increase in the skills gap. You know, the gap between, you know, wages between people with a college education, versus otherwise. So you can trace some of the increase in income inequality to technological change and the greater demand for very high skilled people. And so it could be—you said, some of what we're seeing now, say in terms of, like, the large number of long term unemployed. Some of that could be due to this skills gap. Possibly some of that got masked in the run up to the recession, problems to do with housing markets. Sort of a booming economy on false pretenses. And then that goes away with the recession, and then it kind of reveals this underlying feature of the economy, which is this big skills gap and the effect of it. That's part of what we understand, I think, about what's going on. But it's like ongoing research to try to figure that out, understand the reasons for it.

Cletus Coughlin: Okay, we've got two. I'll take the first one, and then we'll get back to you.

Question: Similar, we're all Fed chieftains, and we're sitting around the table, and we're saying, "Okay, this may be time to kick off normalization in monetary policy." What are the key factors that we're going to talk about that's going to trigger that decision? What are the elements that we've reviewed to make that decision?

Christopher Waller: Well, I think the FOMC, as Steve emphasized, has made very clear that this is going to be a data driven liftoff. And the data we're looking at is the labor markets, inflation and GDP. Those are the critical things. So to kind of give you an example of how this—we communicated this to markets, you know, the initial view was somehow the markets were pricing at a June liftoff. But then the data came in much slower in the first quarter, and revisions are coming out tomorrow. It might even be worse than we thought. And now the markets have taken the fact that that's our guidance, not a calendar date, they've now priced in a later liftoff. And we haven't really said anything, other than we're going to follow the data. This is the data we look at. You can look at it too, and start trying to guess whatever. We're not going to pick a date, and say, "No matter what happens, my God, we're lifting off on that date."

Stephen Williamson: And I think the other part to this is that we have to attempt to divine the future, we have to anticipate what's going to be the case. Because we—if we wait until inflation is two-and-a-half percent and the unemployment rate is 4%, quite likely we're way behind the curve. And then we've got additional problems to deal with. And so somehow, and that's why the Fed is stressing, you know, as it attempts to foresee what inflation is going to be, do we think inflation is going to reach our 2% mandate in the medium term? Until the committee reaches that decision, well, they probably aren't going to move. And so it becomes a very, you know, in hindsight, we can say a lot of things. But unfortunately, we have to make the decisions with a view as to what we think is going to happen, and without perfect information as to what that future is.

Question: Given that you're dealing with what has been defined here as a seven-year process, this isn't quick.

Stephen Williamson: No.

Christopher Waller: That's right.

Question: It's going to take a generation.

Christopher Waller: And if you'd ask people five or six years ago, would we still be at zero today? You would have got almost unanimous no way. Well, we're here.

Stephen Williamson: The Japanese said that, too.

Christopher Waller: Yeah, yeah. Unless they get particular insights into the Japanese that we have become Japan, or something.

Question: Yeah, that's related to my question. I want to leave here feeling good that the problem's around the corner, 10 years into the Japanese recession, or whatever, then people in the Japanese government, sitting around talking about how liftoff was going to happen any day. So how are we different than the Japanese, or what have we learned from the Japanese. And then the second question I have, we talked about, why aren't banks lending money and come August 1, we're going to have the Dodd-Frank Wall Street format kick in that will further hamper the ability to make loans to consumers for houses. How will you react to that, as a pervasive impact on the economy?

Christopher Waller: Yeah, so I'll give my two cents, and let Stephen give his. But you know, Japan, if you look at the data in Japan and the U.S., it's very different. I mean, Japan, when they—I hate drawing with my finger, but it's all I know how to do. But their GDP per capita went up, and then it just kind of flat lined. Ours kind of went up, took a drop, but then continued to grow on, after that. So actually GDP per capita, the level is above where we were the pre-crisis era. So I mean, we're growing. We're growing 2.5%. They haven't really grown anywhere near that. They have a very aging population in Japan; over 25% of the population is over 65. That's not the case. Even though the baby boomers are aging, and we're having a greater share, we're nowhere near the demographics that Japan has. And they don't have immigration. So they're just increasingly aging population with a smaller workforce. And we're not in that kind of situation.

On the other thing, in terms of the banks not lending, I mean, there's a couple—I have my own couple of explanations that when banks hold reserves, they really don't have to hold any capital. The bankers can tell me this in the room. But they don't have to hold any capital. But if they take a dollar reserves, and convert it to a loan, they got to hold roughly nine to ten percent capital. That's a tax on lending. And then the Fed has said, "By the way, we're going to normalize and reverse all this. So you go lend all this out knowing that we're going to reverse it, and then you're going to have to reverse your investments." So you say, why not just sit on it, wait for them to undo this? Especially when we said this a couple of years ago. It's been longer than we thought. How the Dodd-Frank stuff, we'll sit and see. You guys want to comment on Japan?

Stephen Williamson: Yeah, the Japanese experience, it's very different. The real side of the economy, they went through this awful period in the '90s. So it's not so comparable. Sometimes people have this idea that Japan was—this low inflation experience was somehow, or I don't know. Somehow related to the real performance of the economy, which I don't think is right. So there's some kind of—I showed you the chart, to show you an experience. What happens when you stay close to zero interest rates for a long time? The comparison with Japan isn't—you can't say it's parallel to what we're experiencing or that we're sort of turning into Japan, in terms of the real performance of the economy exactly.

Cletus Coughlin: I'll pass on that.

Question: You haven't mentioned fiscal policy as a factor here in how this is going to play out. I'd like your comments on that.

Christopher Waller: You know, there's a lot of debate about whether—the federal government ran very large deficits for a very long time. And part of that, that was to try to provide some stimulus to the economy. I mean, the fiscal authorities can stimulate the economy just like the Fed can try to do. So we ran these deficits. But at some point, you have to give those back under control, which has been happening, mainly because the economy has been growing. So the deficits have shrunk dramatically as a fraction of GDP. There's a lot of discussion of the views about whether certain economists have argued that the government, with the low interest rates, and this kind of slow recovery we're having, that the federal government should be going out and doing a lot of spending on public goods. Public investment. Rebuild our infrastructure, which is actually in many sectors very decaying and decrepit and needs to be rebuilt at some point. Do it now, when interest rates are low. There doesn't seem to be a whole lot of action in that direction, coming from Congress. But at the same time, it's never really clear. If Congress spends and goes into a deficit, those are future taxes that we all have to pay. It's not clear how stimulative it is, if I see you're spending this, but I know I'm going to have to pay for it later. I'm not necessarily going to go out and spend a lot of income. I may save it to pay off the future taxes. So fiscal policy, we're not exactly sure how well it's going to work in all this.

Stephen Williamson: The other issue, of course, is as we normalize—as rates go up, then suddenly all that—the debt that exists from the treasury, then suddenly becomes more costly to finance. And so that's going to put some pressure on the fiscal system as well, as we go forward.

Cletus Coughlin: Okay, why don't we go way back?

Question: Dr. Waller, I'd like to go back to your theory on personal consumption slowdown, which sounded pretty good to me. But I'm wondering if you have any data that you've researched as to the causes for that. You alluded at one point, to household debt being paid off. Are there significant correlations there that would explain the slowdown in personal consumption?

Christopher Waller: Yeah, so like I said, when people make spending decisions, they're looking out at their future income and wealth decisions. And for example, one of the things that concerns me as an economist is there's a lot of evidence that new labor market entrants, typically college graduates, high school graduates, when recessions hit, they drop in terms of their starting incomes. And they don't make it back for 10 years. So these younger generations have now come out for seven or eight years, they're staring at lower income streams, going into the future. They've realized their income and wealth future is not as good as everybody else. Their consumption tends to drop. They watched their parents get hammered on their houses. We're seeing the new homebuyers just aren't there. They're saying, "I saw my parents get killed. I'm not going to do this. I'm not going into debt." So we're not getting a lot of new household formation in the 20-somethings. And we all know when you buy a house; you got to buy the furniture. You have to buy a lawnmower. You buy all this other kind of consumption. That's just not happening. So these effects, and this is back to the earlier question Steve addressed, this great recession had some very serious damage on the labor market. And that damage on the labor market is going to show up in stuff like consumption and spending in the future.

Stephen Williamson: There's evidence about financial crises in general, there's this regularity in the data people studied. You know, they kind of isolate crisis events, and tend to find that the recoveries are long. Unusually long, from a recession driven by a financial crisis. Some of that could have to do with credit markets, and debt. And people, so-called deleveraging that affects consumption behavior.

Cletus Coughlin: Why don't we go back?

Question: With respect to the low interest rates today on bank deposits, consumer bank deposits, do you think that the low rate which—I suppose I have two concerns. One, those people who live on the interest they make on the bank deposits are not getting much anymore, unless they take higher risks, which is in and of itself a problem. But in addition to that, do you think that the low interest rates, per se, might have an effect on peoples' tendency to make personal purchases, which would affect the inflation rate. How much of that might be a factor, does your research show?

Christopher Waller: The thing is that normally within the Fed, we lower interest rates, we raise interest rates. And we know that these have adverse effects on different groups. We always think that typically these are temporary things. They're not very long-term things. We lower rates, and raise them. We kind of keep them around, on average, 4 to 4.5%. I think we all had the perception that this was going to be a similar thing, but we've been low, and been low for a long time. So now these kind of disparities, particularly for those on interest incomes, is starting to really glare in their face that this isn't something temporary, and I'm really taking a hit on this. Part of the thing I worry about, Steve and Cletus can chime in, is there is concern that these low interest rates aren't caused by the Federal Reserve. That there's global market pressure dowered on interest rates for potentially a lot of reasons.

Could be Chairman Bank, he talks about this global glut of savings, which are going to force down interest rates. Larry Summers talks about a dearth of good investment, which is low productivity and low-return investment, so we're not going to get paid a lot. So there's this question of how much of this lower rates for a long time is caused by the Fed, as opposed to just more general world and global forces? A fear I have is we try to liftoff, and the rest of the world shoves us back down. I mean, you look at ACB, the Bank of Japan; they're all trying to force their rates even lower. So they're trying to push them down, and we're trying to go up. It's going to be a tug of war. So it's not going to be necessarily easy for us to say, "Just raise rates, and make all of our lives better. We're on fixed incomes, or living on interest income."

Cletus Coughlin: Your point's well taken. I heard it from my mother, and I hear it from my aunts and uncles. My mother's now passed, so I don't have to listen to that anymore, but that's not necessarily a good thing. But it's the fact that it lasted so long is the real kick to those that live on the fixed incomes, and want to hold relatively safe investments. Well, those safe investments are yielding, as you know better than I, very, very low, low rates of return. Let's see—have we—

Question: Do you believe to some extent that globalization of the employment market has had a detrimental effect on wage stagnation and the long-term employed in this country?

Christopher Waller: Well, I would say from just basic economic theory, when you open up markets, if there's wage inequality then jobs are going to move to wherever the lowest labor, and you're going to get some equalization of that. The bad thing is, those who had high wages may see some stagnant. But from a world global perspective, those in the low end come up. I just always want to stress, one of the things a lot of development macroeconomists have said is that globalization has raised over a billion people out of poverty around the world. A billion, right? So yes, there may have been some consequences for more of the developed world, but for the rest of the world, raising a billion people out of poverty is actually a very good social welfare. Now, those who were being hurt are saying, we don't care. Right? But as economists, that's kind of how we think. But this led to a very significant fraction of the world population being lifted above the poverty line. Better than anything else you could do to do that.

Question: Did that have a long-term effect on employment in this country?

Christopher Waller: Well, as these wages became—we're seeing this now. Wages in China are coming up pretty dramatically. And you're starting to see on-shoring again. So we're starting to see U.S. businesses bringing stuff back from China, and back from the emerging markets, because the U.S. is now much more competitive in terms of these things. So hopefully with some of that will lead to better economic performance in the future.

Cletus Coughlin: And this does lead into the income inequality issues, and concerns, and so that as an economist, I would suggest that what we want to do is increase the skill levels of those lower skilled people so that they can earn more money that way, and that's the solution as opposed to any other types of restrictions on movements of goods, or movements of people, and other types of things.

Question: The Federal Reserve have a policy on that?

Stephen Williamson: No.

Christopher Waller: We can only add zeroes to reserve accounts. That's the only power we have. We can't cure AIDS, we can't cure hunger. That's what we can do.

Question: Your employment mandate, as well?

Christopher Waller: That's right.

Stephen Williamson: That's right. You know, in terms of these issues of inequality within the U.S., how inequality's developed over time. On a world scale, inequality has gone down. China and India, in particular, they're so large and you know, you can have a growth rates, they're really high. At a world level, inequality has gone down. But then there are all these things that matter for the U.S., in terms of how we compete internationally in various types of labor in these different markets. Things changing all the time. Technology changing all the time. The world moves quickly.

Cletus Coughlin: Okay, I think we have time for two more questions. Go there. Yeah?

Question: We have close to 5% unemployment in west Saint Louis County, but the north part of the city, it could be 20, 30, 40, 50%. We have students there that—half of them don't even graduate high school. We see all these problems that we're having in the inner cities right now, with riots and turbulence. The other things is, how does this—California just went to a $15 minimum wage. What is that going to do to inflation if everybody goes to a $15 minimum wage?

Stephen Williamson: Oh, yeah. We think of minimum wage wouldn't affect inflation. It's a level effect on a particular segment of the labor market.

Question: But would it affect employment?

Stephen Williamson: Oh, traditionally, so in econ 101, you teach the effects of minimum wages. You stick a floor in a market, and you're going to affect quantities traded, and so on. The econ 101 analysis is that it may not have the effects you want it to. You know, you want to help some people, and if that's the goal, and some—the traditional elementary economic analysis, tells you—you may not be helping the people you want to. You raise wages for some people, but you may create all these effects where you're actually reducing employment for poor people.

Cletus Coughlin: Yeah, for the lower skilled, what you've done is effectively driven their wage to zero because they're unemployed.

Stephen Williamson: Yeah. The usual analysis is that if the goal—you have this policy goal, and you want to help poor people—we think there are more efficient ways to do it.

Cletus Coughlin: Okay, we got one more. All right, right in front.

Question: How big of a fear is something like deflation when it comes to normalizing the monetary policy? I mean, right now it's—is it 1.6, and I think your stated goal is 2%. How big of a factor is that, when it comes to the normalization process?

Stephen Williamson: Deflation isn't something to fear. Sometimes you hear this. You look at that Japanese experience, and there are some bad things going on in the Japanese economy over the last 20 years, since the '90s, say. But it didn't have something to do specifically with the deflation. So from the Fed's point of view, inflation below 2% is bad because we told you to expect 2%, and we think it's good that if everybody expects 2% and we deliver it, we think that's a good thing. Because market's work well when people have certainty about inflation. It makes credit markets work well. You can take out a 30-year mortgage, and you know what the—you know in terms of the interest rates adjusted for inflation, what you're going to be paying out on the mortgage over 30 years, for instance. But it's not like the deflation is some specter, you know, that if we get into negative territory, it's some disaster. It's not.

Cletus Coughlin: Okay, well once again thank you very much. I know we haven't calmed all your fears, but this is as best we can in terms of a realistic description of what's gone on, and what we see going forward. Thank you for coming.