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tv   Financial Stability Board Chair Randal Quarles on Global Financial...  CSPAN  April 2, 2021 11:08pm-11:59pm EDT

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>> good morning everyone in welcome back to the institute for internationalrs economics. i am the president adam posen in our pleasure to host a virtual speech by randall k. quarles chair the financial stability
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board and a member of the federal reserve system and vice chair for the system. we will introduce randy more properly in a moment. he is a long distinguished career in the u.s. treasury and that reserve as well as the private financial market. to orient this a talk in the what we are calling america weaker macromarch madness. yesterday we hosted a talk by director christopher roberts who is a a member of the federal reserve where he spokeke on isss of central banking particularly about emergency issues and how the interaction of the treasury of that arose serve should go and there will not be any consideration of the financing issue by the federal reserve. tomorrow we are privileged even
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more enough to compare anybody but very excited to have augusta carstens march 31 at 10:00 a.m. washington time for a major speech from the central bank on digital currency. mr. carstens or i should say former governor carstens as general manager of -- and hasn't distinguished career as the governor of the bank of mexico. and to close macroweek on thursday april 1 at 10:00 a.m. we have an economic row six meeting with cabinet and coordinate it by karen diamond former assistant secretary of the treasury for economic alosi. i'm delighted now today to welcome the honorable randy
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quarles. let me make sure i get his bio right to randy is a member of the board of governors october 13, 2017 was sworn in as vice chair on the same date and the term is vice chair and october 13 of 2021 overturned as a member of the board. importantly for today's talk mr. sadberry is the chair of the financial stability board since november 22 of 2018. the financial stability board international body monitors the financial system and coordinate the national financial authority and standard setting body is the develop a strong regulatory supervisory -- prior to his appointment to the federal reserve toward open investment
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firm via the successful career with the carlisle group in washington d.c.. in the term of president george w. bush he played of writing senior roles at the u.s. treasury including undersecretary of treasury and finance and assistant secretary of the treasury for international affairs as well as international director of the monetary fund. trees in the early 90s he served as secretary of the treasury for banking and financial institutions. you can find on the web easily the pictures of jay powell and randall quarles 30ra years ago n the roles of the time and now
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they are on the reserve at this critical period read mr. corrozo said graduate of columbia and yale. let me now turn to our friend and colleague the chair of the financial stability board randall k. quarles. randy. you are muted, randy. >> they are ago, sorry. the mute button was missing on my screen for a moment. sorry about that and thank you adam for that introduction. it doesn't leave much time for this speech today but thank you for that very generous introduction and it's an honor and a pleasure to speak from the peterson institute which is a group that has driven them much of the most important economic
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issues. i've always been engaged with it. i only wish we could all be there in person so perhaps soon. a little over 20 years ago a crowdpleasing local poet on a lightly populated island in the north atlantic aid of popular raise that has entered our language are you beware the ides of march. caesar ignored it. if recent history is any indication maybe we should keep the warning in mind as well. in march of 2008 we witness a significant domino fall in the chain of events that sparked the global financial collapse of der stearns. of march the following yearna we saw a 60% drop from the year-earlier and liquidity crunch in march of 2020 were a salient echo of the other significance of the ides of
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march for the romans the deadline for settling debt. it has an unsettling habit of coming in you in our chin are natural history. in fact this time last year domestically and internationally the financial regulatory community is -- as covid-19 spread across the globe. the financial stability board moved into high gear holding weekly newsletter daily meetings withr the most senior leader the central bank and market regulators to share information and to shape this synchronized global approach to the financials debility challenges we have had great exactly why the fsb was established in the wake of the great financial crisis. it mandates to promote mental stability by coordinating the development of regulatory supervisory and other her policies and actions of the
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low-level reflecting a of recognition of the growing interconnectedness of our markets and economy. i've might focus today will be on the challenges we face going forward and in particular non-bank financial intermediation and cross-border payments. these are only a portion of the fsb's comprehensive for plant that their priority areas that significant impact on the financial landscape going forward. since the crisis of 2008 the non-bank sector has grown and evolved considerably. it accounts for half of all global financial assets and did so at the start of the covid event. with this growth has come greater interconnectedness and complexity in intermediation. even before the market turmoil of last march march that needs understandable liabilities arising from the non-beggingg sector as well as the banking sectors as well as outside of
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the banking system was critical to achieving and maintaining financial f stability. market turmoil focus their attention on non-bank finance and pushing the fsb to give further priority to work in this area. because of the way this diverse set or is structured developing and bfi perspective requires bringing together regulatoryul supervisory and market perspectives and taking a broad you a power financial ecosystem works. so ahead of the covid event of my role as chair of the fsb performed a high-level or both central bankers and market regulators to over san coordinate work on and bfi which byby march was clearly a fortune decision prevented the direction of the senior group the fsb carried out its holistic review of view march market term or which not only have different sectors were expected but how those effects are transmitted throughout the system in which aspect of the structure
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amplifies that. the holistic review underscored a vulnerability in the financial system amplifying the economic covid and in particular it highlighted the dependence of the system and regularly available liquidity and vulnerabilities that strains emerge. the money market funds to margin calls and the bond market. importantly the holistic review provided a high-level view on how the ecosystem operates intrinsic risk well under stress. in my view one of the most significant findings relates to moneyt market funds or the holistic review. g-men have extremely high demand for o liquidity combined with -- triggered the --for cash that hit the prime money market is particularly hard. in thehe united states bond mony market fund offered investors
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roughly 100000000000.30% of the fund's assets for two weeks in mid-march. this is a faster run in terms of the turmoil of september 2008. similar patterns were seen in europe particularly the u.s. dollar denominated fund and other funds of money markets such as bond runs also saw him present in the output in march. the march market turmoil is the second time in roughly a decade that we have witnessed the stabilizing runs on money markez funds. more concerning this time however is that we have taken steps to claim these events preciselyet to reduce the lack ahead of such funds. the fsb will report in july for consultation and will set a consequential policy proposals to improve money market fund resilience. the proposal should reduce the likelihood that governmentro interventions will be needed to hault future money market run
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funds. will consider the relationship between mms and sure term markets and focus on commercial paper and the impact of human behavior. continue work on other open and fund monitoring and bond market structure and liquidity will come on the heels of the deliverables. the first that the focus be on enhancing or understanding of all of relief that emanate from these risks. addressing systemic risk in a dynamic sector continue to vault is no small feat so i expect policy related discussions and recommendations will follow thee and local work and that will likely extend beyond this year. although we don't have enough time this morning to go into deep detail i'd like to note the disruption of the bond market also raise questions about the role of leveraged investors and the willingness to dealers to
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intermediate in times of stress per at work is underway to gather data and analyze human behavior to develop a comprehensive view on their impact on financial market functioning and to determine whether policy responses are necessary. turning to a different part of our work plan the march market turmoilon demonstrated the benet of central clearing brings for global stability. that centralgl counterparties demonstrating resilience during this period but given their systemic importance we continue to move work for to improve cvb resilience and resolve ability as set out in our 2020 resolution report. and coordinating with the chairs of the committee on payment and market infrastructure of the international organization securities commission and the up is the resolution steering group on shaping these details.. expect bill banda further restricting their resolve
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ability of involved in and not involve loss of naras including assessing whether new sources of be necessary to enhance resolve ability. r the fsb and others banded bodies have begun work on centrally clear to nonsense really cleared markets from the market volatility last year. he is observed margins by some ccp's may have been larger than expected andbv obviously what we need to ensure the cpb's are officially march and in the financial system. it means sufficient transparency and predictability to manage. to be successful this broad and comprehensive agenda would service the cornerstone of the fsb work program for 2020 to one and beyond duke requires commitment and resources for the international regulatory community including fsb and other standard setting bodies. further to ensure sound
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practical effective way forward these will require 10 sprints he engaged among the public or the fsb is therefore seeking the input of markets and other parties. this work alone would be an efficient agenda but i think the fsb is well equipped to address this challenge while presenting the other important elements of over broader example so let me spend time talking about a number of these objectives which is enhancing cross-border -- in 2019 figi 28 in the fight payments is a key priority and the fsb has been dedicated to it and this important work ever since. the challenges associate with cross-border payments arising have been long-standing and prior attemptsto to mate improvements have struggled to gain traction. not over 2020 the fsb delivered a multiyear roadmap for the g20 liters to endorse a way forward and committed to advancing meaningfulo change and increasig
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efficiency and c effectiveness f cross-border payments. ultimately where focused on the core challenges accessibility and transparency rate they goes without. saying making improvements for jen's underlying existing processes span multiple legal operational processing technological structural issues and those can differ greatly by region. to break down the magnitude the roadmap includes practical action designed to address specific topics which were referred to as building blocks. we are taking a comprehensive approach and engaging the public andpp private sector because boh need to be part of the solution if are going to is achieved the goals we have set for ourselves. to begin we have to decide with the improvements are that they want to see and how we will monitor progress in achievingng them. these decisions will did find a
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level ambition. accountability and shape of thea roadmap is putting the outburst of the global regional and national level. the first at the fsb is formed a task force that's responsible for setting specific want it to that targets in these targets will set the tone and pace for the work that follows and are therefore among the most important deliverable that we will complete this year. we plan to publish a paper in may and deliver a final target for the g20 in october. several groups are charged with advancing one or more of the building blocks in the fsb roadmap over the course of the year with the ntsb providing annual updates at the g. g20. we are klavern in closely with the committee on payments and market the structures which has key role given the decision of central banks and ecosystem and to study targets the fsb is leaving multiple elements of the roadmap itself advancing building blocks that are more exploratory nature for example the soundness of the global coin
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in on this particular topic listed thela issue be made recommendations for the supervision of stable coin on the national and international level. cross-border payments are are global and bald many countries outside of the g20 membership could read every to be conclusive in our approach all remaining well organized for the goals we set ourselves in that and we partner with the world bank and i in their respective missions. we will also engage a financial institution service providers practitioners and academics as we advance this work. we plan to communicate information and back public consultation conferences in bilateral and multilateral outreach for the roadmap sets a path but the reality is many
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different competing stakeholdere achieve this. so we purposely build in the roadmap opportunities to course-correct as we expect to learn more as we go. they are reporting no to the g20 summit of the public see confirmation on the next step in its immensely important ongoing work. what i discuss covers a large portion of the 2021 work plan but i'd remiss if i didn't mention a few other areas. we are of course continuing to closely monitor vulnerability from the covid events including the rise of nonfinancial sector debts and bond and equity market valuation. in april the fsb will report on key considerations involved in amending or unwinding covid support writers as appropriate. yet at this they will play an important role one combining measures again given a again given his work to support international information sharing covid-19 policies and we
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plan to assess initial lessons learned from the covid event term financial stability and to share those with the g20. the covid event is underscore the financial sectors assess ability to operational risk especially those related toon cybersecurity. the feed of technological change and a growing reliance on third-party technology-based services is increasingly introducing a risk and vulnerabilities. as he begins to address that the fsb on achieving greater conversion in areas such as regulatory reporting of cyber incident and we will deliver those recommendations to the g20 not over. next month the fsb will release the final reporter: itsel most ambitious f valuation of the effects of the great financial crisis banking reform to report into big to fail reform. it's the most rigorous and i wish and today. looking at these reforms indicators of systemic risk and moral hazards moved in the right
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direction and too big to faill r form across net and fed infected the beginning of the coded and we observed a far more resilient banking sector in the 2000 a crisis. with the benefits of the two big to fail reform eventually fail reform and an fully realize their remains further do mail in this work in the course of i wish and. for the analysis of international financial standards of fsb commitments recommendations and other initiatives will provide us with better insight into whether the packager forms are working as intendeded or conflict with ther structured efficiently and in need of refinement. one last item to mention libor. transitioning away from libor is a significant undertaking but if this be happening geisha in it for a decade. the fsb support a roadmap for clear actions in financial clients to ensure a smooth transition away from libor and this year the fsb were part of
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the day 20 and ongoing progress related to libor transition including supervisor issues related ton the benchmark attempts. we face the confluence of events over the past year that demanded international court nation in several key areas and that's that's precisely where the up f. is the was created more than 10 years ago a begin at the end of another fateful a march. .. ew today but as the fsb gives its agenda for each coming year process is -- each topic i itself through series of complex data point and i'm stepping back with the interdependence of their the various elements. the role is to orchestrate unified image and coherent approach to ensure continually monitor and address the shape and form of which we've already
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identified while allowing the government derives quickly with little notice the requires extra space. the margin for error in doingg this of cheating directives requires diplomacy as well and rigorous analysis. unlike the challenges we face over this extraordinary year, i'm proud of what my colleagues have done. my fellow public service from around the globe have been steadfast in the pursuit of unified mission to promote international ability and i think it's been laid out for 2021 and it does that. i'll be glad to take any questions. whatever you have on your mind. >> thank you so much. as you said, had a chair with your colleagues from around the world dealing with an incredible range in these technical issues and central banker.
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going to ask you to go back through some things and explain more. in particular, let's start with the hazard report. disparaging shadow banking, what can you tell us about ideas of activity space versus institutional base regulation? especially as you said, there is this compilation of different in the same space, more and more financing, how do you see that issue? >> i think that is a a great question, over the years, there has been among folks with think
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about financial stability policy, academics policy makers, skepticism a expressed about the objectives and activities based approach but i think if you look at the faultlines thrown into particular relief in march 2020 in the nonbanking sector, i think it emphasizes that it wasn't that there was any particular global systemic behavior, the failure of which we were concerned abouttr potentially triggering further instability that we could perhaps have prevented that designated as an entity rather there was a network of activities being conductedmm by
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many players, none of which were probably systemic in and of themselves but the activity clearly was stomach i think it emphasizes particularly the demand and activities based approach will be necessary. perhaps in some cases supplemented with entity designation for principally it focuses on activities and interconnectedness of many nonsystem players that will be needed for a response to instability in that sector. >> thank you. i was going to ask even before your remarks, it looks like traditional banking sector has leveraged march and last march while.
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without asking you to compromise on the forthcoming analytical report, what do you think was different this time? how much do you think is regulatory and supervisor changes 2008 that made the difference? in particular, you mentioned the idea the beneficial effects against moral hazard? for those concepts that are not supervisors, how can you tell. >> well, in some ways, the proof is in the pudding. the banking sector was a source of strength in this crisis. we took some measures at the outset because of high level of uncertainty because this was the first real test of the great financial crisis system, if you will so we took some additional measures on top of the, those of
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the system itself would have required referring specifically what we put on the return of capitol during the crisis itself but it's clear it was a wisear thing to do given this was the first test and a world tehistorical event we were facig but you had a system that was strongly capitalized, even when it took quite dramatic reserves in the second quarter which was those reserves, accounting modifications and the great financiall crisis. very large reserves under the methodology where the best estimates of the entire loss
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would be expected and they still remain highly capitalized of those reserves so there capitol group over the year and it was large reserves so i think the key reforms with a much higher capitol liquidity that requires institutions i think the wisdom of that was borne out in the strength of the crisis. i'd say as well has been some dismissive so let's put it in correct light, there have been appropriate questions asked about the modification, refinements and recalibration we been doing in the u.s. over the half years fora the postcrisis work. we said we intended to do that to improve efficiency without
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undermining resilience of the system that i think again the performance of the a system and this strong test demonstrated that we did not. >> for the capacities for congress, there is a capitol offer, was this de facto use of it? are there. in which legally -- not legally, a jury used -- so far officially, one with this take place? >> that's an interesting question, the covered event hass been evolving somewhat. in the united states at least, or capitol levels are very high so the way i took framing the
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issue, we turned our lever on already because capitol levels were the highest and our problem was going to be turning it down in a time of stress because we have done that through calibrating through cycle measures as opposed to adding that on top of it because every time we looked at the situation it's what we have, of capitol, we should be increasing capitol further at this time. i think that's how it played out. we had to take emergency measures in order to ensure, to help ensure the market functioning such as changes made to the supplemental leverage which will be helpful there and that served the function, turning down of a capitol
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buffer, if you will. had we been in the position to the capitol levels have been lower and turned on that buffer and then turnha it down. as was the case in many other jurisdictions, the reason i say my thinking has evolved, when you look at the other jurisdictionsns in a position to have turned on countercyclical after buffer going into stress and then turned it down, it proved to be that useful in creating the space for those institutions to continue to lend through their crisis. i would say it's a topic on the agenda currently the community is certainly looking at we are interested in on the use of capitol buffers and buffers
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generally because it's clear that is particularly the case internationally they turned the buffer up a and turned it down. we still don't have banks willing to eat into their capitol buffers to expand lending, they said things are going to go back to normal quickly, they will punish us if they do it. a variety of concerns that led the framework to be that encouraging monday during a time of stress, we didn't run into a lot of that in the u.s. there are lots currently, significant problem for credit demand from the borrower's butm had there been the demand we thought there might have been, one reason is because of the significant amount of stimulus that's been put into the economy
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and had the banking sector had to go through more about in terms of providing the learning support, we might have run into the same issues here so the answer to that, if we are wrestling with that but that is more color around the capitol buffer, is it really going to be expected to go forward? >> terrific, thank you for explaining that. we have ten minutes left so we are not going to go with the lightning round but there are so many topics here. one thing in this crisis a year ago, the network called international sparkly things, it reminds of the success in liquidity problems, the impact
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of covid so is there anything are thinking about to build out the institution to make it more regular? i don't mean more frequent butes less ad hoc in the future or is this something that you're happy with how do you look at this. >> not really a topic currently although i agree with you, it was critical to maintain global financial stability in the early months and we are always looking at ways to improve what we do but i myself think we have seen
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in the crisis in 2008 and march 2020 worked pretty well so institutionalizing i would say i don't think that needs to be high priority for this because of has worked pretty well. we been able to roll out pretty quickly in 2020 so i guess i'll leave it at that. >> turning again on international, financial stability as well, i'd like to ask you to comment on the issue of digital currency, the two largest, arguably largest act, a dollar, the china euro area both during central banks and pretty out there public intent to develop their own central bank.
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tomorrow have central bank is your currency. with your financial stability have on at the fsc, how do you view them stepping into this? >> let me speak about this from the fed's view, my position as governor. i think that's something technological development is something we should be on top of. we should certainly be looking at that. i think we have to be clear in doing so that we have framed the issue we are trying to address
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digital currency and i do think a lot of the efforts globally to look into this issue the fundamental question of what are we trying to do with this is not clearly answered. and i think the benefits in a country like the united states, they may exist and we should be active in looking into that but i don't see an urgent flaw in our system, the digital currency central bank digital currency say. >> onward to press you a little bit on this with my own personal use but there is a concern in which colleagues have raised
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that if we start having solid digital currency, it could money out of developed countries. and again, it's not nearly your mission, even if it seems like something to consider, is this a topic you worry about at all? does this come up in your discussions at all? >> i think it is a topic, a relevant topic, a relevant issue to consider in the broad range of issues to be considered. obviously our primary concern has to be the usefulness and benefits as well as
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disadvantages and digital currency for the u.s. but we are not unmindful of potential consequences, some are for other countries, other for the initial system itself. again, i think we just, one of the most important of the tasks coming to a clear and shared understanding of what exactly be trying to achieve and don't think that is clear or shared. >> thank you for being frank. one thing is interacting with other u.s. regulatory agencies to the financial stability. among regulations have gone
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pretty well at a time when the treasury cutback a lot on staffingre support. how do you see them developing? is a priority to rebuild that or is it push comes to shove? you worry about it? >> it's an interesting thing i hadn't even focused on that. i think it can be a useful mechanism, particularly useful for -- and i support whatever
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direction she wants to take in, i suspect she will be more active or take on a broader range of topics and i think it will be useful but i think it's particularly useful in peace time and the nature of the organization is very large, it fills the entire system and got a lot of, there are lots of folks there with varying levels of l engagement on a particular crisis action so in a time of crisis, i don't know an entity like t that that management mechanism, there's going to be a lot more on bilateral agency to thagency action, core group of agencies most involved with thel
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core generator of a particular crisis but in these times, ensuring that you are looking at broad financial sector thinking about what risks there might be have regulation or supervision can be refined or improved to enhance resilience of theo system, those are questions like are you a designating a non-bank activity? that's not crisis response. by then, it's way too late to think about that activity, you have to be doing that before to ensure that you are ready for weakness in the activity designating particular entities so i think in my view it's a useful organization but more of a peace time organization crisis organization. crisis management from last year
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was largely. after. >> a final question, you've covered so much and you are a voting member so one question, you and your committee members develop committee members announced framework for military policy at the end of august. for you, how does the new framework have any difference in your planning as you consider raisingn rates? how do you use a framework different? also just one more thing, is it credible the community is going
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to allow and overshoot of the 2% target? does a commitment not exist? >> there were a number of things there so let me take a moment. like the i'll take this in order. the framework does change how i will respond, i am one of the optimists on the committee, very optimistic about the likely evolution of the economy over the coming years, probably near-term as well butye certainy over the coming years, over the horizon and under prior
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framework, lower optimism about the outlook and projections for lower unemployment rate as well as other views i have about possibility and likelihood of the curve over the coming decades in previous decade, would argue moving sooner rather than later beginning to draw accommodation under our framework. under the new framework, and optimists like me, and i think this is right, i talked a little bit about that in a moment, the new framework, the fact that my projections are optimistic and i see, a public would project unemployment rate will fall quickly substantially, we argue
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were beginning to act now. i'm sorry, that's all. under the new framework, we wait to see that you actually see movement, that actually comesha down. the fact that i am optimists is not relevant under the new framework. he says i believe we will get there where we see the outcomes sooner than others but we s shouldn't jump the gun, let's see until we see the count and clearly the performance monetary arpolicy in 15, 20 years what argue it leads to superior outcomes. one of the major achievements of janet yellen when she was chair of the bed, and i was very skeptical of allowing
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unemployment rates to fall as low as it did and continue to fall while being gradual, not raising rates for a long time and resell the benefits to the labor market of doing that, we did not see inflation and there were many more people particularly in the lower labor in andthat were drawn benefited from that stance so i am very supportive of our new outcome-based framework and i think that will be true of the committee, i think it's very credible to expect them to be comfortable with inflation, somewhere over the 2% target. i myself don't believe we need toon have a mathematical equivalent if you go below by 20
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points, you got to go three years above by 20 basis points and the framework doesn't state that kind of mathematical averaging over time we will look to the average, i think that is a very credible commitment from the committee and i am supportive. i am one of the optimists on the committee. >> chair of the financial stability court, thank you lori your depth of knowledge, sharing and insights with us, your willingness in your use and especially current and past years, very proud to have you with us. >> thank you so much. >> this meeting is adjourned. thank you. ♪♪
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