Oh brother oh brother oh brother oh brother hello hello hello and welcome to the specialty stream of I Guess the MTC show and this is going to be a hot crossover event with Mr Jerome Pal the chairman of the Fed, the guy that makes the money printer go Burr he is, uh, about to be live in fact I just want to make sure I have the right stream up uh right I do well I kind of do. he's not talking yet and they have closed captions on All right. Uh I have the volume on I'm waiting for him to speak live. um when he is talking if you have questions about why the Market's getting merked right now.

Uh, just so you know, it is fully because of the Bond auction where they sold about 50% Not so. Bueno In fact, here's a look at the market right now. Um, hang on. they're starting to talk a little.

Do you guys want Jerome Pal right above my head? Do you want to see him I could put him right above my head if that makes your life better in any in any manner. Thumbs up You do? You want to see Jerome pal? You want to see what Daddy Pal's up to these days I can make it happen I'm not scared I see some murmurs in chat. You're probably like dude, he's scared to do it I ain't scared I'll do it I'll do it. uh window cap sure I'm doing it okay.

Call me crazy. why don't we get started? Yeah, we should get started. but of course this is a a moment many of us have been uh, waiting for. This is the our Policy panel in the Annual research Conference and the theme for this policy panel is uh, a theme that is going to resonate with with all of us.

Of course, monetary policy challenges in uh, Global Economy. Now we, as we all know, in recent years, the global economy is has been going through a major inflationary episode pretty much every country everywhere with a few exceptions have seen inflation rates that they had not seen in many decades. Um. This has been accompanied by a number of additional shocks as well: war on the European continent, an energy crisis, Rising trade geopolitical tensions, and of course, uh, in response to this surge in inflation, central banks in many many Uh places have, uh, tightened monetary policy also to uh, an unprecedented degree in in a long, long time.

um, including in the US but in in many other places as well. Now the good news is inflation is on a downward path in in many places, even though it remains still quite high and above desired levels. And um, many central banks now appear to be near or at the peak of their aring cycles of they are communicated. uh about that.

Uh, so while we're not home yet, is an important time important time to to take stock and this panel will uh, aim to shed some light on the tradeoffs and the challenges that policy makers face today. Um, as the monetary policy response been sufficient, has it been effective, What can we say about spillovers and more broadly is Uh the Central Bank toolkit uh fit for the task at the current juncture. Now to help us think some of these very complicated ISS phenomenal panel today where you cannot think of a set of people would be more qualified to share their views on on these questions. So I'm going to introduce them briefly in the order in which they will speak.

We'll start with first with: Jay Powell We're very fortunate to have Jay with us. Jay is chair of the Uh Chairman of the Federal Reserve System since 2018. Arguably many would say the most powerful policy maker in the world Uh, he served as a member of the Board of Governors since 2012. Uh Prior to the Federal Reserve board, J worked in Investment Banking.

He also served as under Secretary of Treasury for domestic Finance in George W Bush, Uh each Bush Administration Um Amir Yuron Uh has been governor of the Bank of Israel since 2018. That is for almost as long as Jay tenure as a chairman of the FED. Before that, Amir was professor of Banking and Finance at the Wharton School of Business at the University of Pennsylvania and he's a world renowned expert in macroeconomics, monetary Economics, finance, and Uh Financial economics. and we're particularly delighted to have Amir with us today.

um Gita Gut Uh requires no introductions I Think, especially in these walls. but she is the first Deputy Managing Director of the International Monetary Fund previously GA had my job as Chief Economist and head of the research department and prior to joining the IMF, she was the John Swanstra Professor of International Studies and of Economics at Harvard Universities Uh with Uh a world class record of research on exchange rates, trade and investment International Financial Crisis, Monetary Policy Deb Emerging Market Crisis Uh a very, very long and distinguished list and then Uh. Last but obviously not least, Uh Ken Rogov Ken is Uh, the motivation for this year's annual Research Conference in his honor and we're very happy to have him today and tomorrow and currently the Morit Boas professor at Harvard University also a former Chief Economist at the IMF in 20012 2003. Another turbulent time.

Uh Uh for the Global Economy Ken has written several extremely influential books and of course, many, many research articles on debt and Financial crisis. He has written what remains to this day the reference Uh Textbook Uh Graduate Textbook in International Macroeconomics with with Ken Rogov in 1996 Um is known for with Mor Upsel in 1996 is known for his pioneering work on exchange rates Central Bank Independence Sovereign Debt Financial Crisis among Uh many other topics and Ken as long ranked among the most cited economists I I checked quickly and I think is Repc ranking which is something uh us for academics or former academics we we check carefully very often I think his repe ranking is number 11 which is totally astonishing and his uh Google Scholar count is you know, off the charts astronomical um and for those of you who don't know um I have to all mention this Ken is also an international uh chess Grandmaster Now we will start uh with short interventions uh from each of the panelists for about 10 12 minutes followed by uh a quick discussion between them and then we will open uh uh for discussion with the audience. There are mics in the aisles if you at the point which we reached that stage in the panel. If you want to ask a question, please line up behind uh the mics and then you will have a chance to do that I will only ask that uh since our time is counted that you keep your questions brief and you also keep them focused on the topic of the panel which is monetary policy challenges for the global Uh economy.

Now with this, let's start with Jay um I believe Jay will talk about the nature of the inflation process in the US and the appropriateness of the monetary policy response. it's up to you Jay thank you very much much Pierre Olivier It's Uh, it's great to be here, particularly in honor of Ken whom we're We're proud to count as a member of the FED family. Um, so my assigned topic is uh, Us Monetary Policy in the current Global Inflation episode. So I'll begin by briefly addressing the US Outlook and then I'll turn to three broader questions raised by the historic events of the Pandemic era.

So to begin: US Inflation has come down over the past year, but remains well above our 2% Target My colleagues and I are of course, gratified by this progress, but we expect that the process of getting inflation sustainably down to 2% has a long way to go. The labor market remains tight, although improvements in labor Supply and a gradual easing in demand continue to move it into better balance. GDP Growth in the third quarter was quite strong, but like most forecasters, we expect grow growth to moderate in coming quarters. of course.

pal by refusing to treat climate change. fossil Fuel pal. Thank you very much Fossil Fuel pal. Fil Fuel Finance Fossil Fuel Finance Fossil Fuel Finance Get him pal.

Just close the door. Close the door. Did he say just close the door? No way. No no.

Did he just say that you are putting us? Thank you very much. Thank you very much Thank you. Just close the door. He said it.

He said it. He let him, knew what was up, He knew what was up. Dude Chaos I Don't know if I have to tell you. Cut it.

Oh, he already said on it. Cut it. Uh, upload it and we're going to upload it to drive. We're getting that out.

We got to be the first on this. Close the door. Come on brother. You hear that.

Did you hear that? You hear that? Oh, you're on. You're on it. Just close the door. That's what I like to say.

Just just close. Just close the door. Just just just close it. Just close the door.

That's that's what you learn at business school is just just close the door dude. Uh-oh she. uh oh. now Piper's uh oh Piper she's getting angsty here.

I Guess uh for the ju. Just close the door d you guys would have NE uh oh, she's going wild dude. she's going spring break. All right.

Stop with this. She's uh oh, she's mobile. She's mobile folks. What are we do? Oh man, she's going all over.

hey hey, this is supposed to be a com stream You're not supposed to. Just you're not supposed to be closing the door like that dude. She's just. she's just closing the door.

So where's the speech? Um well. it just got interrupted by client or climate protesters. Um, it just. it just happens like that.

You know. Uh, this is I didn't really have content prepared for this. I Guess I should have been prepared. But folks.

well Piper no longer cares about the Piper Cam so that's a thing. She's gone dude. she left. She left us like pal left us.

It's just. um, um, it's all gone. Man, it's all 100% gone. Uh, you can talk about MC I could talk about AMC but what's their? they're duding it.

Close the door. That was the speech. um yeah that that was it that was in entirety. Uh so I can talk about AMC uh Adam Aaron Told us that delusion is good and it pushes the shs up.

He's deluding AMC again and guess what? it's going down. it's it's. almost as if like what I said was going to happen was is happening ape is. it's a scam.

it's back door delution. Voted to get deluded to infinity and the stocks going down. but no, it's dark pools. It's dark pools.

Matthew but Matthew the dark pools are pushing it down it. It's not exactly what you said was going to happen and is now happening. It's not that you work for Ken Griffin because you understand basic supply and demand and that means you work for Ken Griffin What What it? What can I say about it I am screaming from the mountaintops. You're going to get got by Adam Aaron you already got got by Adam Aaron and the people I'm telling got got are like no we did not get got no we no we didn't no he didn't That's what's going on I feel like a crazy person.

What else can I say about it? It was. It was clear like as soon as they created Ape and well publicized that they were creating Ape before it even went live I went out I'm on public interlude Uh, of course climate issues are important and they're appropriately addressed. but as I mentioned, we'll try to keep right when they came back. Piper came back.

Topic for today: Stop. Okay, so policy challenges for the global economy. Thank you. She's back.

She knows when the show is on. Are you putting on a show for free? Make them subscribe to your only fans at minimum? Yeah, yeah. If you do something good, make him pay for it man. No.

I don't hold on. let me check. Let me check. Let me.

Che We might have to go Now we're back to this. We might have to. We might have to go to something All right. In the meantime, where are we? I'm told it it's already 11 I'm not.

Oh no am I seeing it. options. Oh pal, do you want to turn the mic or how are we doing this thing? Not at all not. Don't worry about it if you're joining right now.

Welcome to the show. Okay, where was I you were closing was coming down door. Uh, the labor market remains tight. although improvements uh, in labor Supply and a gradual easing in demand continue to move it into better balance.

GDP Growth in the Third quarter was quite strong. but like most forecasters we do expect to moderate I Never really asked you that be greatly appone Quickly went over to Twittered this balance to the labor market and in bringing inflation down which could warrant a response for monetary policy, the Fomc is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time. We are not confident that we've achieved such a stance. We know that ongoing progress toward our 2% goal is not assured.

Inflation has given us a few head fakes along the way. If it becomes appropriate to tighten policy further, we will will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening. We're making decisions, meeting by meeting based on the totality of the incoming data and their implications for the outlook for economic activity, inflation, and inflation as well as the balance of risks as we determine the extent of additional policy firming that may be appropriate to return inflation to 2% over time and we'll keep added until the job is done.

So with that, let me turn to the three questions uh, that I posed that have Arisen from the receding but still elevated inflation we're experiencing today. The first question is with the benefit of two and a half years to look back what we can say about the initial causes and ongoing policy: Implement Implement Implications of the current inflation After running below our 2% Target over the first year of the pandemic, Core Pce Inflation: Rose Sharply in March 21 economic forecasters generally did not see this coming, as shown by the February 21 Survey of professional forecasters which showed core Pce running ader below Target over the subsequent three years. So the real-time policy questions for policy makers were what caused the high inflation and how policy should react. And at the outset, many forecasters and analysts, including Fomc participants viewed the sudden upturn in inflation as mostly a function of pandemic related shifts in the composition of demand A disruption of Supply chains and a sharp decline in labor.

Supply The resulting supply and demand imbalances led to large increases in the prices of a range of items most directly affected by the pandemic. especially. Goods In this view, as the pandemic abated, our Dynamic and flexible economy was likely to adapt fairly quickly. Supply disruptions and shortages would diminish labor Supply would rebound aided by the arrival of vaccines and the reopening of schools.

elevated demand for goods would shift back to Services Inflation would ease reasonably quickly without the need for significant policy response. Indeed, although monthly core Pce inflation spiked in March and April of 21 beginning in May, it declined for five consecutive months, providing some support for this view. But of course, in the fourth quarter of 21, the data clearly changed amid waves of new Co 19 variants, with only gradual process in restoring Global Supply chains and relatively few workers rejoining the labor force. That lack of progress combined with very strong demand from households contributed to a tight economy and a historically tight labor market and more persistent High inflation.

The committee signaled a change in our policy approach and financial conditions began to tighten. Of course, a new shock arrived in February of 22 when Russia invaded Ukraine uh, driving up prices of energy and other commodity prices. By the time we lifted off in March, it was clear that bringing down inflation would depend both on the unwinding of the unprecedented pandemic related demand and supply distortions and on our tightening of monetary policy which would slow the growth of aggregate demand. Allow Supply time to catch up.

To today, these two processes are working together to bring inflation down. The Fomc has raised the Federal Funds rate target by 5 and a quar percentage points, and we've reduced our Securities holding by more than a trillion dollars. Monetary policy is in restrictive territory and putting downward pressure on demand and inflation. The unwinding of pandemic related supply and demand distortions is playing an important role in the decline in inflation.

For example, wage growth has steadily Fallen since mid 2022 by most measures, despite continued robust job gains reflecting a Resurgence in labor Supply thanks both to higher labor force participation and a return of immigration to pre-pandemic levels. While the broader Supply recovery continues, it's not clear how much more will be achieved by additional supply side improvements going forward. It may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth growth of aggregate demand. Turning then to my second question, for many years, it has generally been thought that monetary policy should limit its response to or look through Supply shocks to the extent that they are expected to be temporary and idiosyncratic.

Many argue as well that in the future Supply disruptions are likely to be more frequent or more persistent than in the decades just before the pandemic. A second question then is what we've learned about this standard. Looking through approach. the idea that the response to the inflationary effects of Supply shocks should be attenuated arises in part from the trade-off presented by those shocks.

Supply shocks tend to move prices and employment in opposite directions, whereas monetary policy pushes each in the same direction. Therefore, the response of monetary policy to higher prices stemming from an adverse Supply shock should be attenuated because it would otherwise amplify The Unwanted decline in employment. In addition, Supply shocks have most frequently, most frequently come from the volatile food and energy categories, and they've passed through quickly. While food and energy prices critically affect the budgets of households and businesses, the policy tools of central banks work more slowly than commodity markets move, So responding aggressively to quickly passing price increases could exacerbate macroeconomic volatility without supporting price stability.

Our experience since 2020 highlights some limits of this thinking. To begin with, it can be challenging to disentangle supply shocks from demand shocks in real time and also to determine how long either will persist, particularly in the EXT ordinary circumstances of the past 3 years. Supply Shocks that have a persistent effect on potential output could call for restrictive policy to better align aggregate demand with the suppressed level of aggregate supply. The sequence of shocks to Global Supply chains experienced from 2020 to 22 suppressed output for a considerable time and actually may have persistently altered.

Global Supply Dynamics Such a sequence calls on policy makers to use policy restraint to limit inflationary effects. Policy restraint in this case is also good risk management. Supply Shocks that drive inflation high enough for long enough can affect the longer term inflation expectations of households and businesses. Monetary policy must forthrightly address any risks of a potential de anchoring of inflation expectations as well anchored expectations help bring inflation back to our Target The sharp policy tightening during 2022 likely contributed to keeping inflation expectations well anchored.

My third question then is the level where interest rates will settle once the effects of the pandemic are truly behind us. By 2019, the general level of nominal interest rates had declined steadily over several decades. As the pandemic arrived, many advanced economies had below Target inflation and low or mildly negative rates. raising difficult questions about the efficacy of interest rate policy when constrained by the effective lower bound or the Elb as we call it.

Over two decades, an extensive literature had identified a number of possible changes to the widely used inflation targeting regime, including negative policy rates, nominal income targeting, and various forms of makeup strategies under which persistent shortfalls in inflation would be followed by a period of inflation running mod moderately above 2% Today, inflation and policy rates are elevated, and the the effective lower bound is not currently relevant for our policy decisions. but it's far too soon to say whether the monetary policy challenges of the Elb will ultimately turn out to be a thing of the past. The prolonged proximity of interest rates to the Elb was at the heart of the Monetary policy review and the changes we made to our framework in 2020. We will begin our next 5-year review in the latter half of 2024 and announce the results about a year later.

Among the questions we will consider is the degree to which the structural features of the economy that led to low interest rates in the pre-pandemic period will persist with time. We will continue to learn from the experience of the past few years and what implications it may hold for monetary policy. These are just just three of the many questions raised by these challenging times. And of course, we're very far from a complete understanding of the answers.

Again, it's great to be here today and I look forward to our conversation. Thank you thank you thank you very much! Jay and I think we're really off to a excellent start with H with your remarks, let me now, uh, turn to you. Off to an excellent start. Um, Israel is a small open economy faces very specific challenges like the US and many other countries.

It's seen an increase in inflation in recent years and Bank of Israel has been uh acting on it. In addition, like other small open economies, it faces Potential spillovers from monetary policy decisions taken elsewhere by Major central banks with a potential impact on on currency and and capital flows and we'd love to hear views. so Amir Floor is yours. All right? First, it's a pleasure to be here in a conference in honor of Ken ROV.

We all cherish and follow his distinguished contribution in Academia and and practice, um, sort of in a sharp turn as we're all aware uh Israel is currently at a war following the October 7th in human brutal attack by the terrorist organization of Hamas. This is crucial time for Israel's security and we thank all those who support us. Our hearts are with the innocent victims of the war and our hope is for it to end with the safe return of hostages and with peace and security. And now I'm going to turn out I Want to turn now to address the issues and questions presented.

Uh for this session, An important question is to what extent can a small open economy like Israel or for that matter, any Soe conduct its monetary policy independently, or should it rather follow the steps of the major economies? Another question is what are the spillovers from the policy taken by the major econ economies to small open economies, and how do those impact local conditions? The answer to these questions depends on the development of the economy, its specific areas of exposure to the global economy, and the particular shock it might need to react to. Generally, local monetary policy cannot be entirely disconnected from that in the major economies, yet local circumstances justify and require setting policy that is tailored in accordance with the economy structured and needs. Key considerations will include interest differentials, foreign exchange, and the effect on domestic activity in particular exports and on inflation and on financial markets. As we all know, our planet has become a small village.

The Coid Experience demonstrated the spillovers that can result from a common shock. Monetary policy was generally similar in many countries because the initial Health shocks as well as many supply side difficulties were similar. Also, we benefited to some extent or from the common monetary framework such as inflation targeting, and that meant that monetary policy in different economies was predicted to act in a similar manner. Having said that, the differential Health shock and related steps, fiscal policy differences, and exposure to supply side effects and commodity prices led to somewhat different policies, consequent inflation and activity outcomes.

Consequently, there was more heterogeneity in monetary policy exiting code coid than upon its entry Israel was fortunate in that sense, with relatively small share of Tourism sector and a relatively large high-tech sector which actually benefited from The increased dependency on remote work. These circumstances led to a wedge between Global monetary policy and the required domestic monetary policy. This slide shows that for these reasons and others, inflation in Israel is in the lowest fertile of rates in the Oecd. In particular, headline inflation in Israel was low because its natural gas supply and prices were shielded from Global developments.

The next slide shows the Swift recovery of the Israeli economy from the coid crisis. The level of GDP exceeded its long run Trend already by the end of 21 and stayed somewhat above this trend by Q3 23 and we'll come back to this recovery ability of the Israeli economy. An additional key attribute in Israel that affects potency and effectiveness of monetary policy is the large share of mortgages that are directly tied to the Bank of Israel. Therefore, raising rates influences the stock of almost all homeowners, not just new ones.

This is another cause for possible differences between Global and local monetary policy decision. the Bank of Israel was one of the first central banks to respond to the increase in inflation. As a first step, we shrink the unconventional tools employed during Coid that is QE FX intervention and special funding to commercial Banks relative to its rate of inflation, Israel has been among the first movers. This is another evidence for only partial dependence of S.

Soe on policy taken by Major central banks. Here, you could see the Uh relative time it took to get into a restrictive Zone. The policy the Bank of Israel has, in fact, set in recent years is consistent with this approach. We are aware of the fact that domestic monetary policy cannot deviate too much from Global conditions, but at the same time we recognize that policy should be set according to specific shots to our economy taking into account its fundamental attributes and you could see over different some Cycles are shared and some are not.

Let me show you some specific shocks. We learned over the years that there is a strong connection between the S&P and NASDAQ indices and the Shekel dollar exchange rate. This is because Israeli institutional investors react continuously to changes in the value of their foreign denominated portfolio. This slide shows shows this pattern very clearly.

The orange tracks the blue. However, as can easily be seen since the beginning of 23, this this strong connection has weakened. This was the time period that potential changes to the judicial system ignited a widespread civilian opposition. Similarly, the you the Israeli and US US Stock markets who tend to move together also displayed the weakened connection according to the assessment done at the bank.

If the exchange rate were to follow the NASDAQ in the way the pattern with the NASDAQ index according to the previous Uh periods, the shek would have been about 15% stronger relative to the actual foreign exchange rate. In September 23, you see it in the Gap. At the end, given our estimates of the foreign exchange path through pass through to inflation, this amounts to about 1 to one and a half% additional inflation. This demonstrates again the power of local significant developments that might have on financial markets, on inflation and therefore on policy.

I. Want now to move and discuss current developments in relation to monetary policy. An important part in the analysis is of course the initial conditions. The Israeli economy is strong and stable.

It has robust and healthy econom IC foundations. We are a global leader in Innovation and Technology. The Israeli economy has known how to function and to recover from difficult periods in the past and to return to Prosperity rapidly. I Have no doubt that the same will be the case this time.

You could see the growth rate after different military events in the past. Importantly, over the years, Israel has shown responsible fiscal position as demonstr rated by the declining path of the debt to GDP ratio Israel Entered the war with a very solid fiscal stand. Our debt to GDP ratio is just under 60% and a budget deficit which was expected to be 1 and a half% in 23 following a surplus in 22. There is no doubt the war will have fiscal implications and generate budget pressures according to initial projections of our research Department which of course and I cannot emphasize this enough are accompanied by extreme uncertainty and assuming the war is primarily concentrated in the southern border and last till the end of this year, GDP Growth is likely to shrink by about 1% in 23 and 24, and the debt to GDP ratio is likely to rise to somewhat more than 65% by the end of 24 as costs are larger than it was initially projected.

As I mentioned in my opening, Uh, Israel has been in a war for a month now. Above and beyond the vast human security and political consequences, there is no doubt this is a major shock to the economy to households, workers, and businesses. Economic Policy Fiscal and monetary which we and the Boi lead takes the necessary actions in order to alleviate the difficulties accompanying these challenging times. With the outbreak of fighting, significant depreciation ation pressures were seen, which were reflected in early trading in foreign markets.

The Bank of Israel responded rapidly. Already on October 9th before trading open, we implemented a plan to sell up to $30 billion of reserves and to put into operation swap transactions totaling up to $5 billion. Within the framework of the program, the bank is acting in the market to moderate the fluctuations in the value of the Shekele and to supply the the liquidity required to continue the orderly activity of the markets. The initial high level of the Bank of Israel's Foreign Exchange Reserves at about $200 billion, 40% of GDP gives us ample space to act to achieve this.

Target In addition, the bank also put into operation a Shekele report transaction plan and a monetary program folk focused on small businesses in parallel, and that's the other side to the approach. From the beginning of the war, the Bank of Israel rapidly formulated a uniform and agreed upon framework that was adopted by the commercial Banks and was expanded to credit card companies as well. The framework is focused on those serving in the Army Reserves the population of On the Borders and the families of the victims and hostages. These populations will be able to defer for three months payments on mortgages, consumer credit, and small business credit without without costs.

Many of the banks have extended these steps a very welcomed outcome as they are stable, resilient, and have ample Capital buffers. In our interest rate meeting on October 23rd, we kept the policy rate at 475. This is consistent with the bank, foreign exchange activities, and inflation. Endeavors This array of policy steps that were taken by the bank in the last month reveals the sufficient and necessary Independence that the bank in Joys and that it has the adequate set of monetary tools that can ensure Financial stability.

Avoiding a reduction in the rates is in line with operating in the FX Market to moderate large depreciation fluctuations. Moreover, the steps taken by the bank Visa The banking sector allow in practice some monetary easing, but targeted at those who need it most without compromising the need to deal with increased risk. Premia In Financial: Market Let me say, one month in, we can cautiously say that the policy mix we applied contributed to the stability not only of the FX Market but also had positive spillovers for the stability of local financial markets. The developments in the markets also indicate that the public understands that the Boi enjoys the required Independence in order to take the necessary steps.

At these times, Inflation expectations, as you can see in the slides for the short term and the long terms have remained substantially stable and are Target and are stating that we will be back in the inflation. Target The exchange rate has depreciated a lot, but by now is back to the level prior to the war. Let me. Uh, so you could see the red line This depreciated more than previous military events, but it's now back to where it was fiscal.

Let me finish here here. Fiscal policy is, of course Central and crucial for the ability of the economy to overcome this crisis and to resume growth in the medium and long term. The government is working on various fiscal support plans which the Bank is playing a key role in advising in its role as Economic Advisor to the government. The Bank has stated the importance of finding a responsible B balance between supporting the economy and maintaining a sound fiscal position.

While it is clear that overall fiscal needs will increase, the bank advice is and was to utilize the 23 budget yet demonstrate fiscal responsibility by introducing several important adjustments and cuts in less necessary activities in 23 and 24 budgets. I'll finish here I Have no doubt that as always, Israel will prevail and has the right ingredients to spring back to its great economic potential. We all hope for calmer and more tranquil times. Thank you, thank you, thank you very much.

Uh, Amir Um, we will now move um to G Now of course, in light of what both Jay and Amir have told us, I think uh, the question in front of us uh at the font is you know how to think about the challenges for Central Central Banks and whether central banks have the appropriate toolkit at the current juncture and I think everyone will be uh, very grateful to hear your views GA thank you uh, so much. And firstly, uh, as a former student and colleague of Ken I'm really glad that we're able to honor Ken Roar's tremendous contribution to Academia and to the policy world through this conference. So U as P Leia said, what I'm going to talk about is some of the challenges that monetary policym faces in this current inflation environment: I Think it's fair to say that we are living through a period of heightened uncertainty. We know that there are multiple shocks that the world has faced and unprecedented shocks.

The Pandemic Wars conflicts The uncertainty that I want to emphasize though here is about how the current episode of monetary policy tightening has not been your typical monetary policy tightening episode and that generates its own source of uncertainty about how to go ahead. So what exact EXA LLY do I mean by that? So yes, we have had inflation go up quite dramatically in many parts of the world, and central banks have appropriately raised interest rates quite sizeably. Uh, in this last year and a half couple of years, and we've seen inflation decline. All of this is standard, but if you look at if you look under the hood I Think what is highly atypical is that this decline in inflation has not come along with a rising rate of unemployment, significantly increase in the unemployment rate, or a significant slack in the labor market.

This is atypical because usually the way we think of policy affecting inflation is to reducing aggregate demand, and then that shows up in the labor market through higher unemployment. Now this is true. If you look at the US, you look at the Euro area UK but also several Emerging Markets Uh, including Mexico if you look at emerging Europe and several others. So, what has helped What has what? How have we gotten a bunch of this inflation decline? Much of the work has been done by improved Supply and here I'm talking about the decline in Energy prices and food prices that have helped bring down headline inflation.

The Improvement in Global Supply chains have helped bring down core Goods Inflation. The business that's still left is when you look at Services inflation where variables like wage growth play a very important role and core Services inflation or more services. inflation more generally remains elevated. So in that sense, the job is not done.

Uh. But this can be tricky in terms of communication because on one hand you see inflation all headed in the right direction. Uh. But the on the other hand, you realize that this last mile will likely be the toughest.

So if you look at measures of core Services of inflation, let me just give you a couple of numbers. The US is now at 5% The Euro area is at 4 and a half% These numbers are well above Central Bank Targets. Okay, so what does that mean in terms of Uh policy going forward? The first point that I'm going to make is that that means that it's important to avoid premature easing of monetary policy either through action or through words. Now this is going to be a challenge because we are living in a in a difficult Uh period.

In terms of reading the signals, we are going to see labor market markets uh, have greater slack. We are going to see unemployment rates go up, so that's going to be a difficult message to stand by and say that Well, we have to make sure that we get the job done. The other reason this is going to be a challenge is because we have lived through a period of inflation that's been high and the Persistence of inflation makes it more difficult to then see through Supply shocks. Something Something the Jay mentioned which is that we still live in this environment where there are numerous Uh potential shocks that can hit the world economy, including the terrible conflict that's in the Middle East that Amir talked about.

If it were to spread into a more regional conflict, we could see a sharp increase in oil prices that will then affect headline inflation numbers, and in an environment where inflation has been high for a while that can dislodge short-term inflation expectations. and our research has shown uh, that it's very important What? what's happening with short-term inflation expectations Because if you can keep that close to your target then that makes the job of Central Bank is much easier in being able to bring down inflation while at the same time. uh, not needing a big loss in terms of output, so it improves the odds of a soft Landing. The other challenge that comes up is what's happening with long-term rates.

We've seen long-term rates in the US go up quite significantly in the last, uh, several weeks. it's bounced around a bit. but still, these are much higher numbers in the past than in the past. So this raises a question.

Which as a policy maker, does this mean that then you can that you don't have to do the next interest rate hike if that's what you were thinking about doing. Because now you're getting the effect. Uh, that's working through higher long-term rates. And here again, this is tricky given the uncertainty.

So let me just explain which is it depends a whole lot on what's driving the higher long-term rates. If the higher long-term rates are being driven by expansionary fiscal policy, then in fact, a higher longterm rate should actually signal a need for even more monetary policy tightening to offset the expansionary effect that it's having on the economy. Uh, in the US where you're seeing most of these interest rate increases, the US deficit fiscal deficit is around 8% this year, and it's projected to be around 7% over the next three years. Now There is a question mark of how stimulative that is on the economy, but with when you have high levels of deficits, that certainly is something for for a central Banker to also, uh, incorporate when they try to make their forecasts about the path of inflation.

My second point about what it means for policymaking in this environment is that central banks must be prepared to respond to renewed infl Financial stresses, especially if inflationary pressures persist. So again, there is the last mile that has to be done. But if inflation remains far more stubborn or further it goes up in some more because of other shocks then that will require interest rates to say even higher for longer or even increase. And we could be then in a situation where you have an inflation problem while at the same time growth is slowing sharply, that's stagflationary viment that one could have, and one certainly should not rule that out in that scenario.

Again, some of our research has shown that we would have a large number of weak banks that represent about onethird of global assets ass mostly located in advanced economies, and in China that would be a that would be a very difficult place to be in, which is why it's important to prepare in advance. This is the time for strong supervision, robust stress tests, and it's also important for banks to be able to augment their Capital buffers at a time when they're making currently very high profits. Bank Should also be prepared to quickly access Central Bank facilities if needed so that we don't have a repeat of an SBB phenomenon and much more efforts need to be made to address the risk, the risks in the non-bank sector. The third Uh point I'd like to make about policy in the current Uh Junction juncture is that policy makers have to be prepared for more crossborder pressures from increased Divergence across econ economies increased Divergence in policies across economies.

So let me give you an example if you in: if you compare 10e yields in China in its own currency to 10 year yields on Us treasuries for the first time, it's the numbers have flipped around so we actually have Uh eels in China treasuries. 10e treasuries are now around slightly less than about close 2% lower than the eel that you can get uh on us treasuries. Now that obviously puts lots of pressure on exchange rates and so I'm going to conclude with a few thoughts on what it means for a central Banker especially of a smaller open economy that's facing pressure from weakening currencies in this environment where yields could look very different of for a while. This is based by the way on a lot research that we've been doing in the fund.

It's called the Integrated Policy Framework. Okay, so first what does this mean for Uh exchange rate interventions I Think the important thing for Central Bankers to keep in mind is first that the exchange rate movement is being driven a lot by fundamental shocks. So it is being driven to an important extent by interest rate differentials. Which means that in such an environment, exchange rate flexibility has a very important role to play and it helps you with Uh adjusting.

But of course, on the other hand, what can happen is in an environment of heightened uncertainty, you could see exchange rate movements entering zones that then pose a risk in terms of financial stability concerns, especially if you have shallow FX markets. And there's also this risk which I often hear that you might have exchange rates going past some psychological thresholds which then can lead to non-fundamental Behavior Uh in these markets. So in this environment, of course, in these specific cases, Uh FX intervention can play a useful role, but this is going to require judgment and this is the hard part which is telling apart. When is it truly fundamental and when is it non-fundamental for which intervention should happen.

I Think the basic Uh policy has to be not that the only thing that matters is if you see a sharp movement in the exchange rate, a sharp movement of the exchange rate can truly reflect differences in fundamentals. but it has to be a sharp movement in exchange rate that then interacts with some friction in the economy. Uh, and you can be you should be able to. You can see that through say, deviations and uncovered interest parity or covered interest parity.

That then tells you that the shock is getting Amplified through uh frictions for which you certainly interventions can help the SEC and the last bit uh on FX policy is just to remember that there is no free lunch. Countries have a certain amount of FX reserves. If you use it, deploy it uh at a time when it's not really needed and prematurely then that of course means that you're going to have less to use. you are in a more difficult period.

So with that I have 30 seconds just to conclude and just to remind everybody in terms of the three points I made. which is firstly, the job of bringing down INF is not done in many countries and that requires that you to avoid premature easing of monetary policy either through action or through how you communicate. Uh. Second, it's important to potential Banks to be prepared to respond to renew Financial stresses and also to buffer the financial system.

And third, for policy makers to be prepared for more crosswater pressures because of increasing divergences in Poli policy stances across economies and I'm going to stop there. Thank you Market is not like in this conversation slicing yesterday's thank you GA Um and I will now turn uh to Ken now of course Ken your own work Uh, both. Uh, when you were in policy, but as an academic over many, many years, you've touched on all of these issues. Um, and I think you know As many people have met mentioned already today, your both sets of contributions, academic and policy completely irrigate our own thinking on on this matters.

And so I think um, we're very eager to um to hear your views on all this. So first: I want to thank the IMF Uh for hosting this conference and particular this panel. Pierre Olivier Amir Uh, Jay and ga uh for participating. uh uh, Jay I certainly appreciate how valuable your time is.

and Amir I don't know how you found time, uh to come here. Uh, but thank you Um, it is an extraordinarily difficult period and in terms of shocks and I know when you're giving the World Economic Outlook Uh, Pier L We probably always say that, but one of the things you're celebrating my 70 years I've been around the block and it this is pretty bad. I mean I think you'd have to go back to the 70s to think about. uh, period.

that really compares to this and it even if you don't Encompass the global Financial crisis but just have the P pandemic and I don't know how to say this. you know, apolitically. but the rather radical shifts in US policy from one president to the next uh, and the various simp applications of that uh, the uh pandemic war in Ukraine now war in the Middle East uh and uh. this really uh, fragmentation of globalization uh is really, something, uh, extraordinary and is a very difficult period I Think that has implications for a lot of things for policy for macroeconomics.

However, before I get into that I I Want to say I can think of there is sort of one silver lining and I almost hesitate to say it because if I'm identifying something the IMF seems to have done right, then it may immediately go wrong. But um, the uh, you know the thing uh, that has surprised me and it surprised me a lot is how we've had the pandemic Global recession Rising interest rates, inflation and we have not had had a major Emerging Market debt crisis I Forgive Me Argentina Um, uh, we we just haven't had it the way that we thought we would. You can go onto other markets, it's really, uh, stunning and uh, you know again, the you know we don't know what it's around the corner, but I I actually would give uh the IMF a little credit here. Uh, and there was all this uh for years talk about the Washington consensus and the evils of the Washington consensus and you may not have followed it, but there were many Alternatives notably the Buenos consensus between the presidents of Venezuela Argentina and Brazil uh back in the early 2000s and much praised by many Uh Progressive economists and Uh, without going into details, I would say the way people characterize the Washington consensus was something of a caricature.

It wasn't. You know, it's sort of picking extreme versions of each policy. And yet, if we look at why haven't Emerging Markets had a uh, financial crisis? It's in a sense they've adopted at least in the macro sphere, and probably particularly in the Central Banking sphere. Uh, some version of the Washington consensus.

Now one was to have a lot of Reserve that's really not in the Washington consensus, and the Japan and the Asian economies deserve credit for that. Uh, and now everyone's imitated that that in a dollarized world, it provides a lot of resilience, but there certainly other elements. Uh, regulation's gotten a lot better. and uh, I Have to say, whenever I had to sit in on meetings about regulation when I was IMF Chief Economist I was sort of bored, uh by them.

But you know, actually it's one of those things where you do your homework and it really pays off. For example, matching forcing Banks and Emerging Markets to match their dollar assets and liabilities. Uh, something really important. And not not just that, but the knowledge that many uh, merching Market central banks have about what's going on in their economies, the data that they keep track of uh, certainly Central Bank Independence which I'll talk about uh, in a minute, much more.

Uh, that's been an extraordinary development and allowed many of these things uh, uh to to persist. So um, anyway, that that has been uh, a silver lining in a very difficult uh situation. So I'm going to pick up on a couple topics: I Want to start with uh, interest rates and I'm not going to talk about policy, but just talk about where where where do we think long-term interest rates are going? Uh I think like any Financial variable, it's actually very, very hard to know we breaking down. But I think if you take a very longterm view, long-term real interest.

R Gave a paper at this conference last year about it. Done other work with Uh Barbara Rossy and Paul schmelzing. Um, you you see that over the long run there is a very gentle decline. but it's much more gentle than we've seen over the last 40 years.

and there's been, uh, sort of a lot of work trying to rationalize what happened over the last 40 years in terms of demographics. Produc Day 297 I this is an extra leg that's just Bu is trading at nothing. so just you know, some of what seems like a structural change is just another kind of big shock that comes along. We've had periods where interest rates have been low, periods where real interest rates have been high around this trend, and typically when you see a really big shock for first like after 2008 where uh Global rates fell uh, you know, by some measures up to Global in uh, 10-year inflation index rates over 3% you should never have expected that to be permanent.

And of course, the same might have been true how much it rises here. It's difficult to tie the trend exactly, but what is certainly true is long-term rates typically are very volatile. That was somewhat masked during I think this period, particularly of the zero bound which uh, the chair of the FED has talked about where the Central Bank just couldn't do anything and that provided I think took, uh, took away some of the volatility. Uh, I I My own uh guess is that we'll be looking at significantly higher interest rates, certainly at least like they were a year ago.

and I'm talking about forward looking real interest rates and perhaps higher for the rest of the decade or more. Again, there's volatility around this. and I'm talking about the long rate, not the short rate. Um, and yeah, I think there are many reasons for this, but one is De Globalization Uh is probably puts upward pressure and fragmentation on Uh interest rates, both in terms of risk Premia Uh, and in terms of uh, where savings goes.

uh. Another another thing I have to say, unfortunately, is there's uh. In addition to the green transition, we are looking at a decade, two decades of much higher spending on defense globally. Uh, and uh, you know I' I've been to conferences at the IMF not so long ago.

Olivier knows this. not him, not him as a speaker, but we were jointly organizing one where one of the speakers insisted. Well, we never have to spend anything on defense again. So uh, you know the interest rat's low.

Everything's a free lunch. uh and we should, uh, take advantage of that I Unfortunately, that was very sanguin and uh, we're in a more difficult uh period there. I've mentioned the green transition uh. inequality is something which has put probably downward pressure on interest rates, but there's strong pressures in the other direction.

Let me say a few words about Central Bank Independence which I think I more it has been uh in incredibly important to maintaining stability that we have and it's something that's become very important uh worldwide. I Have to mention when I was at the IMF as a very Junior Economist I Don't know what it's like now, but you were only allowed one chair in your office for you because who would want to visit you? that was what people. That was what people said. uh, but I I wrote a paper uh in inspired by Paul voker on uh, how how uh, Central Bank Independence might um, help with the inflation problem of the day and I wrote about the original title.

title of the paper had inflation targeting in it, but it has inflation targeting in it and uh, looks at uh, intermediate targets uh and uh I I Will finally also say I mentioned this morning about how hard it is to get papers published when you're junior I couldn't get this one published I submitted it uh one place I sent it was to the JP where Barrow sent it back by return mail saying look, there's not going to be an Institutional solution to this problem uh, it's a super super game I got it rejected by IMF staff papers at the time. um but I I think uh, I think it's it's certainly something where, uh, you know it's become uh, very successful. um I I I will say that Um, you know, in sort of trying to apply it, you have to have some humility. Uh, you can't think there's some rule that just explains everything.

Your inflation targeting rule, the world changes and models, let's face it, are particularly bad at turning points. If your model is predicting that tomorrow is going to be sort of like today. we do really well at that in those models, but and they can, you can. They're very complicated versions of that, but they're all the same.

But when you have when you have a big turning point and we might have a turning point now, uh, because of many factors, it's uh, it's it's uh, it's more difficult. Um, so let me just talk about a few of the pressures on: Central Bank Independence uh today and I it's a fast moving thing and so I'm not even sure I'm nearly up to date, but during the zero Bound era, people say, well, you don't have anything to do to central banks so you should solve inequality. You should solve the environment, You should solve racial Justice and on and on. And you can see this in Central Bank Banker Speeches I haven't uh checked uh Mir's or Jay's uh, but you can see this.

They're under tremendous pressure to address these issues and people say well, you can walk and chew gum at the same time. But there's a question of whether they have the instruments to do that the most. They're regulatory instruments, but they're very second order. In most countries, they're the central bank's not the only one and the interest rate is a very, uh, blunt uh instrument.

Uh, we're certainly and you know it's possible with these in inflation. Having experienced inflation and these different times, it will change. Um, the I cannot overstate these pressures that I just mentioned on Central Bank Independence So let me give you uh. sort of conclude with give you a couple data points on this of all.

Friend of mine retired recently from being the head of research at a regional fed I won't name it wasn't on the East Coast uh and said and said uh, you know I was the last one working on monetary policy in my department you we have nine or 10 people. they work on all these other issues in INE equality, the environment, the weather. uh but they're not working on monetary policy and uh I'm sure that's changed but I don't know um and uh the um uh C Certainly the other data point I would put is uh, the American economic Association does a survey every 10 years with pretty similar questions and okay I don't always trust surveys but since this one says something that I want to say I'm going to cite it uh they but they you know they pulled five or six hundred people at the Aea convention every year and in uh, there were a few questions but I'll just pick on one. uh in 2000 they asked um, you know, should uh uh the main uh, the who should take the lead in short-term stabilization policy the Federal Reserve or fiscal policy and in 2000 it was like 75 25 monetary policy I don't know where the 25 came from but they had that and then it flipped in 2020 which is really hard to get your head wrapped around when you think about how political fiscal poliy I mean look at what's going on in the US right now I mean the idea that they're going to com they're going to be able to perform surgery on the macroeconomy.

uh, scary. There are lots of things fiscal policy should do and there's a big shock. It's uh, it's it's uh, it's different. uh I I have to mention one other question which I just have time for that they asked was should the main goal of the Central Bank be stabilizing inflation or and then they list uh, jobs you know, jobs which actually is in the Mandate do a whole bunch of other things and so in.

you know, in 2000 we'd still had the inflation. Inflation was the answer. Again, it was about 70 525 and it had completely flipped that. Well, don't worry about inflation, you know, by 2020.

Uh so um I think that was before we'd hit this turning point and uh, maybe it'll be different going forward Anyway, thank you Cat Funny, thank you Ken That was absolutely terrific as we expected, so we've not been disappointed. There's been no turning point on that at least, and as we've seen today, uh, there are some ways in which central banks are asked to do much more than just monetary policy. Uh, let me maybe open it up to the panelists and see if anyone wants to react to uh, the points that have been raised by others before. We then take questions from from the floor so anyone wants to Ka please um bu am if I may u you briefly mentioned about like to buy commercial thank you intervention uhoh and I oh she's on the move.

My speaking that it's it's a pretty tricky thing to tell apart when when to intervene and when not to she's gone now. Great to hear from you how you she's ready party I Think One lesson that we learned um through economic history is that when financial crisis intermingle with real crisis or other events, you can think of coid as a Health crisis went into an economic crisis and through a lot of the work of the FED we sort of averted a financial crisis. but we know those are the deepest. Those have a magnifying effect when the two interact and that's why when this event had started.

um, it was and we could already see There was a lot of uh, things going on in the In Asia and other places regarding the shekele. uh, that was the logic you want to. um Ensure Stability You want to make sure the markets function you don't you don't Target a particular exchange rate, but you want to moderate uh things such that uh, the markets function, there is liquidity and that's uh, that that was our our goal and I think you know as of now as I showed you the exchange R sort of through events. obviously it's related to the events that are actually happening uh, in in in Israel as well, but it it gave it time.

It didn't drift into panic mode and that was the role of uh and still is the role of FX Intervention When you have risk Premier go up. That's the number one concern there there was. There are people when it happened immediately say you should, you should lower interest rates uh help the economy. No, the two go hand inand together.

The idea was to stabilize the exchange rate The Exchange R Uh, Stability had periphery effects on the bond market and the stock market. In Israel they continue all to function. We came with the other prong approach with the targeted things for the households and that was the way uh, we sort of aimed at it. So if I can and in the meantime, if you are planning to ask a question, I will ask you to go and put yourself behind one of the mics so we can directly move to the questions afterwards.

But before we turn to that, let me actually follow up with one One question for I mean Amir and and Jay um, I mean Jay I There's this incredible resilience in the US economy. Is that uh uh, you know G Mentioned we've had this decline in inflation and the economy seems to be powering ahead. Growth is is really at a very high level. Consumption is very, very strong.

Um, there is this question about whether transmission of monetary policy is different this time around. Now you've in your remarks, you've alluded to the fact that the sequence of shocks ' had is quite different from the typical business cycle or um. and so I was curious and I would like to ask the same question to Amir because in the context of the tightening of policy that you have done in the Bank of Israel Uh, and maybe some of these, uh, resilience that Ken was talking about. building a stronger monetary policy framework building reserves Etc Whether there is a sense in which the tightening operates in slightly different ways, there are longer delays, shorter delays.

How how do you view this from from your own? Vantage Point Go ahead. so. I would say a couple things. Um, clearly the the US economy has been stronger than expected, it's been more resilient, and uh, this year is just remarkable.

Really, You know so many forecasters had an had a recession this year and it's nothing like that. It's going to be close to 2 and a half% growth this year, but that's that's really that's Pro in my thinking, probably significantly, a function of strong demand. I I Think monetary policy is generally working in the ways that we think it's it should work, which is in sensitive spending: asset prices, exchange rate. um I Think there are some aspects of the US economy where you can argue that it's a little different and that would be for example: uh, households who who are in low rate mortgages are are not selling their homes, but they're also not.

They're not feeling the effects of higher rates because they they really don't want to get out of those mortgages. Same thing with companies. Uh, any company that had access ACC to fixed rate borrowing and didn't use that uh in the last 3 or four years would be f