ECB Sintra 2025 Policy Panel
Central Banking in Times of Structural Change
Complete Transcript with Timestamps
Event: European Central Bank Forum on Central Banking, Sintra 2025
Date: July 2025
Moderator: Francine Lacqua, Bloomberg Television
Panel Participants
- Christine Lagarde – President, European Central Bank (Host)
- Jerome Powell – Chair, Federal Reserve System
- Kazuo Ueda – Governor, Bank of Japan
- Changyong Rhee – Governor, Bank of Korea
- Andrew Bailey – Governor, Bank of England
Opening Remarks
[05:54 – 07:24]
Christine Lagarde [05:54]: We are facing major structural changes related to aging, digitalization, greening of the economy, and with all that we have to deliver on our mission—price stability. So if you’re interested in those issues, come to the ECB forum in Sintra. We will debate all that and more.
Event Host [06:27]: Welcome back after lunch. I’m delighted to announce one of the highlights of the ECB’s Sintra Forum—our policy panel. The world economy is undergoing a period of rapid and intense change. The questions for our next panel will cover what these fundamental shifts mean for the future of monetary policy. We are honored to have an exceptional lineup of officials to answer them. We are also honored to have Francine Lacqua, anchor and editor at large at Bloomberg Television, to be guiding the conversation. Francine, the floor is yours.
Francine Lacqua [07:24]: Hello everyone. Clara, thank you so much for that introduction. What can I say—we have one hour and there’s a lot to discuss. So welcome to the policy panel Sintra 2025.
Introduction and Current Economic Context
[07:35 – 08:44]
Lacqua [07:35]: Now from tariff-related trade disruptions to oil price gyrations caused by Middle East hostilities, there are many questions on first of all how to handle the fallout from some of the political decisions, but much more how the economy behaves. Now one year on since the last Sintra panel and of course halfway through 2025, global policy needs to navigate risks posed both to inflation and growth—a challenge highlighted by the Bank for International Settlements in a report this week.
So let’s get started. We have one hour. Kazuo Ueda, Governor, Bank of Japan; of course our host, Christine Lagarde, the European Central Bank President; we have Jay Powell, Chair, Board of Governors of the Federal Reserve System; we have Changyong Rhee, Governor, Bank of Korea; and then Andrew Bailey, Governor for the Bank of England.
Inflation Targets and European Economic Conditions
[08:24 – 09:53]
Lacqua [08:24]: Madame Lagarde, let’s start with you as our host. So first of all thank you so much for having us all here. We had a little bit of data today this morning—consumer prices rising to 2% from a year ago, up from May’s 1.9%, but then the tariffs still loom large. So how do you see that developing?
Lagarde [08:44]: Well first of all I would note that we are at 2%—and this is the latest reading. This is also the target that we have had and this is the projection that our staff is indicating for the medium term, which is exactly what we had anticipated. So I’m not saying mission accomplished, but I say target reached.
And I think we should start by recognizing that we faced massive amount of shocks—compounded shocks occasionally—and we are now through that disinflationary process that we have conducted over the last two years. And yes we are facing a lot of uncertainty, yes we are facing the risk of fragmentation increasing, and yes we are facing geopolitical developments that are worrying generally but that also are causing two-side risk to inflation.
So we have to continue to be extremely vigilant, we have to continue to be committed to delivering on our target, and I think we are at this point in time in a very good position to do that. So we are well equipped to navigate the tormented waters that we should anticipate.
U.S. Economic Conditions and Tariff Impact
[09:53 – 11:42]
Lacqua [09:53]: Chair Powell, tariffs are not yet showing up in inflation. Is this forcing you or your staff to actually rethink what the models say about how much the tariffs will ultimately affect some of the final prices?
Powell [10:06]: Thank you Francine and Christine, thank you to you and your colleagues for putting on another great conference here today—it’s been a pleasure. I guess I would start if I may by saying that the U.S. economy is in a pretty good position. Inflation has come down close to 2%—we are at 2.3% headline, 2.7% core. The unemployment rate is at 4.2%, so we are healthy overall.
If you look, ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hope that it would. We haven’t seen effects much yet from tariffs and we didn’t expect to by now. We’ve always said that the timing, amount and persistence of the inflation would be highly uncertain, and it’s certainly proved that.
So we are watching. We expect to see over the summer some readings, higher readings, but we are prepared to learn that it can be higher or lower or later or sooner than we’d expected.
Lacqua [11:03]: But Chair, would the Fed have cut more by now if it weren’t for the tariffs?
Powell [11:08]: So I do think, I think that’s right. In effect we went on hold when we saw the size of the tariffs and where essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs. So we didn’t overreact—in fact we didn’t react at all. We are simply taking some time. As long as the U.S. economy is in solid shape, we think the prudent thing to do is to wait and learn more and see what those effects might be. And again, they haven’t really shown up and you know, so we’re, for now, we’re waiting.
South Korea’s Trade-Dependent Economy
[11:42 – 13:14]
Lacqua [11:42]: Governor Rhee, I mean South Korea’s economy is of course highly reliant on trade. Putting aside the deals that each government could do, can strike with the Trump administration, what can central banks in your position do to shield economies from the impact of trade tariffs?
Rhee [11:57]: Actually, about the tariffs impact on inflation, our current inflation is well stabilized around 2%, and we believe tariff tends to be deflationary rather than inflationary for three reasons:
One is Korea is not likely to use retaliatory tariff. Second, we import 22% of our import from China, and recently export price of China has been falling at 5% a year for several years and we believe that it will continue to do so. And at this moment, our growth rate is 0.8%, which is well below our potential growth rate, so aggregate demand pressure is much lower.
So our problem is not the inflation itself, but the growth impact of tariff.
Lacqua [12:45]: So what does that mean you’ll do going forward?
Rhee [12:47]: Actually, we have been in an easing cycle, and we cut our interest rate 100 basis points from last October, and we will continue to be in an easing cycle given our growth rate. But recently, financial stability risk has been rising, especially housing price in metropolitan area is increasing very fast, so we are keeping eye on this financial stability risk in deciding the pace and the timing of the further cuts.
UK’s Inflation Dynamics
[13:14 – 15:40]
Lacqua [13:14]: Governor Bailey, you’ve taken the view that the latest rises inflation in the UK will be transitory. Why are you so confident that inflation will fall back?
Bailey [13:23]: Actually, you may have detected I’ve tried to avoid using the transitory word because of this—oddly enough, it has a bit of a history. But to be serious, obviously, any increase in inflation is an increase in inflation, sorry to state the obvious. The reasons it’s gone up is really entirely due to so-called administered prices.
Now, as I say, that’s an increase in prices, don’t get me wrong, but it’s not telling us much or anything about the context of the economy. In other words, it’s not telling us anything much about the balance of supply and demand in the economy. So I think the key judgment for us is: are we going to get second round effects from this pickup? And of course, it’s nothing like the pickup of a few years ago, just to be clear.
And my judgment is at the moment is that the context is different, that we do see evidence. I see some signs of softening in the economy, I see signs of softening in the labor market. We are going to have to see those come through though. I don’t think we can come through into prices—I think we’ve still got to see the evidence and prices. But that background context allows certainly me to say, look, I think the direction of interest rates continues to be downwards.
Lacqua [14:33]: When you look at all the uncertainty, again, it’s a bold call given what happened to oil prices and trade negotiations.
Bailey [14:42]: It is, I mean, I would say two things on that. One, I think as others have said, it’s probably, as Jay was saying, I think it’s a bit too soon. I think really to see the price effects coming through from the trade and tariffs action. We’ve made a point of saying also, I think as Christine was saying, that these are two sided—they could go either way, could be weaker demand, we could see supply chain disruption.
And the second thing of course is that some of these effects, if you take the oil price story, it’s gone up, it’s come down, all since our last meeting effectively. So we always reach for the lexicon at this point—we’ve added unpredictability to uncertainty. I was slightly amused at the introductory film this morning with Christine saying all these words because it’s true, because not only are we getting uncertainty in the sense the range of outcomes, but unpredictable in the sense that if you get things like the tariff action, history really isn’t a particularly good guide to that actually. You can’t really draw much from the past on that.
Japan’s Inflation Dynamics
[15:40 – 18:26]
Lacqua [15:40]: Now, Governor, you’re in a slightly different situation. Japan’s CPI has stayed above 2% for three years now. What do you see as the fundamental changes in your economy that make inflation more persistent?
Ueda [15:54]: So let me say, to put it simply, as you say, headline inflation has been above 2% for almost three years, while what we call underlying inflation is still somewhat below 2%. That’s the situation we are in.
But if I could decompose it further, there’s probably about three components to it. First, there’s underlying inflation dictated by wage-price dynamics whereby increases in prices affect wages, which further affect prices, helped by resilient domestic demand. This component has been going up slowly, but as I said, it’s still somewhat below 2%.
Then there’s going to be perhaps a second component which will be the expected negative effects of possible tariffs on the economy and on prices. We are expecting this to take place but we haven’t seen that yet.
There’s a third component which is domestic support shock generated by increases in food prices. Actually this component accounts for about 50% of the headline inflation we’ve got at the moment.
So netting these three, we think the first component and the second component will produce a slow increase in underlying inflation toward 2% by end 26 or 27. The third component, food inflation, is going to subside toward the year end. So that we will be closely monitoring interplays between these three forces.
Lacqua [17:46]: Governor, how do you view trade concerns the day after President Trump threatened Japan with more tariffs?
Ueda [17:53]: Well, it’s being negotiated by our minister in charge. I’m trying to avoid making any specific comments on this.
Lacqua [18:05]: So let me just ask you, what will be the key trigger for Japan for deciding further rate hikes?
Ueda [18:12]: Okay, as I said, it will depend on the relative strength of the three inflation dynamics I was describing, and we need some more information to determine that.
Monetary Policy Outlook
[18:26 – 20:05]
Lacqua [18:27]: President Lagarde, when you look at rate cuts, are we going to—where do you see actually the ECB going? You’re in a pretty comfortable position right now out of all the central banks.
Lagarde [18:40]: Data will tell. I think we are determined to continue to be data dependent, to decide meeting by meeting, and to not commit to any particular rate path. That’s the doxa. And we’re very lucky because we have just completed our strategy assessment, which really gives us a good framework and good strategy lines within which to operate.
But that, those three aspects that I have mentioned—data dependent, meeting by meeting, no commitment to any particular rate path—are constant in that ongoing strategy based on what we have concluded actually yesterday.
Lacqua [19:20]: Jay Powell?
Powell [19:21]: So from our standpoint, as you will have seen, a solid majority of FOMC participants do expect that it will become appropriate later this year to begin to reduce rates again. And so, and that will depend though, as Christine just mentioned, on the incoming data we’ll be monitoring particularly what does show up in terms of inflation or what does not show up, and also carefully watching the labor market.
You know there, we watch very carefully for signs of unexpected weakness. We see a gradual cooling but we don’t really see that yet. So those are the things we’ll be watching. But as I mentioned, a majority of us do feel that will be appropriate in the remaining four meetings of the year to begin to reduce rates again.
Euro Strength and Exchange Rate Policy
[20:05 – 21:04]
Lacqua [20:05]: Madame Lagarde, the euro has also surged about 12% against the dollar so far this year. Are you concerned that its strength runs counter to your efforts to also loosen financial conditions?
Lagarde [20:16]: You know I’m not going to comment on the exchange rate. We take it into account for purposes of our projections—obviously it has an impact—but it’s a reflection of the market conditions and assessment. It’s also a reflection of the strength of our economy.
But there has been a clear appreciation relative to the dollar. Depending on how you look at it, it’s either depreciation of the dollar or an appreciation of the euros, and there might be a bit of both in that particular case. We’re also looking at the movement, the flow of capitals, and the attractiveness of euro denominated assets, which is also an interesting phenomena that we’ve observed lately.
Fed’s July Meeting Considerations
[21:04 – 21:20]
Lacqua [20:54]: Chair Powell, is it fair to say—I know nothing is guaranteed, number one we all know this—barring a real surprise, is July just too soon to seriously even consider a rate cut?
Powell [21:04]: Yeah I really can’t say. It’s going to depend on the data and we are going meeting by meeting. I mentioned, you know how I’m thinking about that, but I wouldn’t take any meeting off the table or put it directly on the table. It’s going to depend on how the data evolve.
Global Trade and Protectionism Risks
[21:20 – 23:34]
Lacqua [21:20]: Governor, what’s the biggest risk stemming from protectionist trade policy actually for the global economy and for South Korea’s?
Rhee [21:28]: The biggest risk stemming from trades and protectionist measures? You know that Korea has quite an export-driven economy, so whatever the global fragmentation is a serious impact, not only direct impacts through the U.S. tariff but also indirect impacts through China, Mexico, Canada.
And we easily can—it really depends on what’s going to happen July 9. We are actually waiting for the result but we don’t know what’s going to happen. But for example if the tariff goes back to 26% retaliatory tariff that was announced in April 2nd, and also with a lot of sectoral tariff which affect our economy—aluminum, steel and cars—we can easily say that it has impact larger than close to 1% in our GDP growth rate.
And depending on how long it lasts I think we have to adjust to the new supply chain so the impact will be larger so but I hope that scenario won’t come.
Lacqua [22:30]: What is the most concern for the Bank of Korea? Is it stalling South Korea exports to slow down in global trade or a downturn in the U.S. economy?
Rhee [22:40]: It’s all linked—global economy slow down. And one thing, I mentioned some negative sides only, but one positive side, I don’t know if it’s a positive or not but Korean companies has been preparing for the supply diversification long time ago before the U.S. tariffs start to because we have some issues with China and then also Chinese industry has become very competitive so we had to relocate our production side from China to elsewhere.
So relatively speaking you are well prepared and second still good thing is that we have some strong industry such as semiconductor which benefit from the AI technology development. So I hope that we can manage it but on the other hand given the just we look at the sheer size of the export dependence, we will be significantly affected.
Interest Rates and Neutral Rate Discussion
[23:34 – 28:22]
Lacqua [23:34]: Governor Bailey, do you think interest rates will be closer to three or four percent at the end of the easing cycle given all of the inflation and trade dynamics?
Bailey [23:42]: That’s a subtle way into the R star question actually, I would detect. So I’m fairly cautious about the whole discussion of the level of R star and therefore sort of where rates are going to reach in the cycle. There is huge uncertainty around it.
What I think is important and what we spend our time looking at is how restrictive is policy both now and going forwards, and our staff do a huge amount of work on that front to judge the restrictiveness of policy in the current context and how restrictive it’s going to be looking forwards if you project forward with the market curves and the assessment we got is that policy remains restrictive, it will continue to be restrictive, although the level of restrictiveness will come down over time which is what I would expect.
And so I would expect that level of restrictiveness to come down to a point where it goes more neutral but I think you have to judge that in context. Just to give you an example of that, in the UK economy, the level of household and corporate debt in the UK economy is actually lower than we would have expected it to be but based on past experience. So again that feeds through into just how restrictive policy is at a given interest rate. It’s somewhat less restrictive probably than it would have been historically.
Lacqua [25:06]: Could I ask all of you actually thoughts on the neutral rates, Chair Powell?
Powell [25:10]: Thoughts on the neutral rates? So I think there are countless empirical and theoretical ways to derive it. At the end of the day, I think I like to look out, look at the economy and ask whether our policy stance is having the effects we expect and want on the economy and to me, I would say we’re somewhere probably modestly restrictive at this level and by some formulations we’re more restrictive than that but if you look at the economy, growth has been solid, the labor market is solid and still historically low levels of unemployment. It’s not an economy that feels like it’s spring from very tight monetary policy but I would say that policy is still restrictive.
Lacqua [25:52]: President Lagarde?
Lagarde [25:54]: I would say that it’s a nice concept, it’s interesting and many of the terribly talented and brilliant economists in this room actually are delighted with discussion about the neutral rate. But honestly as we’re getting you know closer to target and to where we should be or are, where we should be and I don’t want to pass judgment on that, I think that discussion becomes less relevant.
I think what our staff at the ECB measures is leads us to believe that it is higher than where it was before the great financial crisis but it’s relatively low as well compared for instance with what the US neutral rate is at the moment but it’s in a way it’s a bit of an illusion to discuss that at the moment because the neutral rate is normally defined in a world where there is no shock where you have perfect equilibrium. Now are we in a world with no shocks at the moment? I don’t think so. So it’s nice to have as a concept, nice to elaborate on it, nice to do research on it but to use it at the moment where we are as a guiding principle to where we should be, I don’t think is particularly appropriate.
Lacqua [27:06]: Andrew Bailey?
Bailey [27:08]: That sort of continues what I was saying earlier. Again I don’t use it as a sort of a guide to where policy should be, but I think this whole concept of restrictiveness is of course critical to our judgment because that’s critical to the transmission mechanism of policy which we have to judge every time we meet so that’s a judgment in a sense we renew every meeting we have.
I think I rather agree with what Jay was just saying. I think in our case policy is restrictive at the moment, it’s going to become less restrictive based on the curve that we’ve got in the market. That’s what I would expect. We will judge it each time.
Lacqua [27:44]: Governor Rhee?
Rhee [27:46]: I have nothing to add.
Lacqua [27:48]: How would you see it Governor Ueda?
Ueda [27:50]: Yes so we also estimated something like the neutral rate a number of times. The range of estimates is very wide so, but at least we think we can say that the current rate is below neutral, but other than that I would refer to what Jay said a year or two ago in the Jackson Hole conference which was like we are guided by our stuff but under cloudy sky.
Scenario Analysis in Monetary Policy
[28:24 – 34:48]
Lacqua [28:24]: President Lagarde can you talk to us about scenario and why this is, you know because of the shocks and actually the changes that are going very fast, why scenarios make more sense as a template of the economy.
Lagarde [28:36]: So this is a topic that we have largely debated as part of the strategy assessment that we conducted in the last year, and I think you know in fairness the baseline which is you know the essential projection on which we work and we determine our monetary policy stance holds and is decisive in our consideration.
But at the same time our staff has I wouldn’t say forever but as long as I know myself has always conducted scenario analysis, sensitivity analysis in order to arrive at you know the most solid baseline.
It is probably the case that we will do more of it more systematically that we might publish more often than we have. We have published I think in the last few years four in four circumstances we have published scenario analysis. The invasion of Ukraine was one, COVID was one, the oil crisis as well and the tariff threats. So all those were exogenous factors that were sort of hitting our screens.
I think we might do more scenario analysis that will be looking at the longer term trends that will affect our economy and that will inform and strengthen our baseline, enhance it probably in its reliability. So that’s what we are debating at the moment how this is built, what assumptions we make, what choices are decided in terms of publishing will be determined by the governing council in good intelligence with our staff.
Lacqua [30:12]: Jay Powell on scenarios.
Powell [30:14]: For many years we have used scenario analysis internally and I personally find it very useful. I think many of my colleagues do too. You have just many different kinds of scenario. We have six or seven at every FOMC meeting. They’re often the topic of discussion among governors and at the meeting.
We have not taken the step of using them as a public communications device and that’s a big difference. So that’s one of the things we’re going to be talking about this fall. We will wrap up the first part of our framework review which is the consensus statement or monetary policy framework we expect to by the end of the summer and then we’re going to use the fall meetings to look at communications ideas and that’s one of the ones we’ll look at.
I will say it has a lot of appeal and a lot of questions and so my expectation is we, if we’re going to do something in that area it’s going to be putting a toe in the water and not just throwing ourselves over Niagara Falls on it. I can imagine a situation where we would try that in a particular circumstance but for us we’re just going to do the work and understand it as many other central banks are doing now.
Ueda [31:26]: In our case we use the scenario analysis in our risk management section as a kind of representing the tail risk, but I have to read the ECB report but if we have to move that section into the more forecasting section for public communication I wonder whether it’s going to be easy to get some consensus which scenario we have to do it among our probably members in the monetary policy meeting.
So because that scenario and underlying assumption may be much harder to communicate and agree among the members and also it’s specific to us but how I can differentiate the previous approach of risk management section to the forecasting that I have to think over what we have to do.
Bailey [32:12]: So I think two things I would add and it’s very much in the same spirit as colleagues. One, we introduced two scenarios in the May round and the May report. For me they were very useful they were either on either side—they weren’t symmetric by the way but they were on either side. For me they were very useful in terms of my decision making because they helped me to answer the question given the uncertainty. If we’re wrong, if I’m wrong in my judgment, how wrong am I going to be? Do I think I’m going to be and what would be the consequences of that? What would we then have to do to deal with them and is it manageable? And that was helpful.
And then I think the question coming back to what Jenny was saying in terms of public communication. This is the big step I think and it is challenging. I’ll tell you why because I say this quite a lot. We make a lot of conditional statements. You may have detected this in all the many interviews you do. I’m not making a personal comment now Francine but a lot of those conditional comments get immediately translated as unconditional comments. We’re quite careful. It’s not personal. This is the general point.
The reason I say this is and that’s about the central case by the way. That’s a message to us that you’re going to have to do this very carefully in that world because to get the point across there is always uncertainty, there is always risk. How you calibrate those and how you communicate those publicly is critical but pretty challenging frankly in that environment.
Ueda [33:54]: We also carry out many simulation exercises about scenarios but we have not as far as published them. We do discuss in our quality reports qualitatively what risks we have in mind. On top of that I would say in a very rough way we are carrying out something like risk management approach to management policy making which is probably a bit similar to what Christine was talking about yesterday.
I can’t come up with a good example but so risk scenarios, thinkings about tail risks sometimes do affect our monetary policy making.
Dollar Dominance and Reserve Currency Status
[34:48 – 39:38]
Lacqua [34:48]: Can I ask you all about the dollar, everyone’s favorite subject. So when you tune out noise of the past few months what has really changed about the dollar? Governor are we really seeing some sort of paradigm shift in the status as a reserve currency that means historians will look back on 2025 as some sort of pivotal year?
Rhee [35:08]: I don’t think so. Especially in case of Korea. So Korean won has appreciated significantly in the last two months but I think it’s mostly due to the very unique situation that we had and we had a very unexpected unnecessary martial law declaration in last December and after that this political risk together with the slow down of our economy really make Korean won depreciate much more than our fundamental explains.
So in some sense the appreciation that we have observed in the last two months in some sense normalization of our currencies and as for the kind of long term shift of the dollar sentiment we have discussions but it looks like people are talking about it but at this moment they keep the dollar assets while they’re increasing the hedge ratios so at this moment I think they rely on share of the impact. BIS report show this one is impact is mostly moving from unhatched to the hatched positions so we have to see what will happen in the future.
Lacqua [36:12]: Governor Bailey?
Bailey [36:14]: I’ll say two things. First of all I think it’s important to bear in mind what the definition of a reserve currency is and how it’s evolved over many years. So I like January I don’t see there being a major shift at the moment. Not least because in this day and age the definition of reserve currency has as much to do with the supply of safe assets into the market that can be used for all the purposes of collateral and security that they are as much as it is about a pure exchange rate so I think we’re a long way off that change happening.
The second thing is going back to something Christine was saying earlier when we look at financial conditions I wish we do of course but I do think particularly I always believe this but I think it’s even more relevant to unpack a financial conditions index and the reason I say that is because we’ve seen a breakdown in the correlations of the components of a financial conditions index.
So you look at sort of bond yields, you look at exchange rates, you look at equity risk premium for instance, those correlations are not the ones that we’ve tended to see established over time so you have to look at it much more carefully there are stories to my mind about each of the components of that. So when I look at the exchange rate I look at it very much on that basis. I don’t think it’s sensible to sort of pack it all up as we normally would and say it’s all behaving normally because the correlations are not actually.
Lacqua [37:40]: Governor Ueda, I mean there’s also many colleagues at central banks I guess around the world are building up gold reserves. Is that the only real alternative to the dollar?
Ueda [37:50]: I think it’s up to a certain extent what areas like Europe or what China would do in terms of improving the efficiency or convenience of their currencies like the kinds of things we were discussing this morning, capital markets integration and these things will change the degree to which the role of the data may decline in the future.
Lacqua [38:22]: Madame Lagarde?
Lagarde [38:24]: You know I think I don’t know if 2025 will be a pivotal year. I would tend to think that yes it might very well be. But for a major change to occur will take a lot of time and will require a lot of effort.
I completely agree with the points made by Andrew about the dichotomy that we’re seeing at the moment and that might be an indication of the fact that investors are looking at options. This is what investors are saying. They ask questions, they seek alternatives and whether that translates into a general lack of confidence that will be further fueled by more uncertainty, more unpredictability, a bit of a jump in the unknown on several fronts not just monetary policy not just even the economics but beyond that in terms of security at large for instance I think remains to be seen.
It’s not going to happen just like that overnight. It never did historically. There’s no reason it should now. But there is clearly something that has been broken and whether it is fixable or whether it is going to continue to be broken I think the jury is out on that front.
Looking Back on 2025 and Political Pressures
[39:38 – 41:06]
Lacqua [39:38]: Andrew, how do you think we’ll look back on 2025?
Bailey [39:42]: You’re asking me how we’re going to look back on 2025? Yeah. How will historians look back on this year? Is it pivotal?
It’s clearly an important year. There’s a lot going on with trade and I think I’m hopeful that we’ll look back on it as a year where we successfully challenge some significant economic changes and our job is to make sure that that is the case.
Lacqua [40:12]: You get attacked by the president a lot on a personal basis. Does it make your job harder?
Powell [40:18]: I’m very focused on just doing my job. I mean there are things that matter are using our tools to achieve the goals that Congress has given us, maximum employment, price stability, financial stability and that’s what we focus on. 100%.
Lacqua [40:44]: Madame Lagarde, if you were in the same position as Chair Powell would you do anything differently?
Lagarde [40:52]: I think I speak for myself but I speak for all colleagues on the panel. I think we would do exactly the same thing as our colleague Jay Powell does. The same thing. Right? Yes.
Economic Fragmentation and Global Trade
[41:16 – 50:38]
Lacqua [41:16]: Governor Bailey, is the rest of the world decoupling from America but pulling tight or elsewhere? How do you see fragmentation happening?
Bailey [41:26]: Well, fragmentation were it to happen, in my view is bad for activity in the world economy. No question about that. I mean if we reduce the openness of the world economy that will be bad for activity in the world economy.
I temper that in one respect because obviously we have talked a lot about the robustness of supply chains over the last five years and it is of course appropriate that there will be adjustments to that but if we see a breakdown of the openness of the world economy sort of beyond that, beyond that sort of resilience that we do see as needed then that’s bad for activity, it’s bad for the world economy and that I’m afraid is something that I think we need to be very clear.
I’ve said a number of times that there are reasons why this is happening. It’s not right to just go around saying this is all wrong, wrong, wrong, there are no reasons why this is happening. What I think is very important is that we get back to a governance of the world economy where we can address these issues in the appropriate multilateral fora and get to the question of what lies behind these issues, what’s at the root of these issues, what exactly are the issues and what do we do about them?
I can’t emphasize this enough that I think it’s an obligation for all of us who are obviously very heavily involved in the governance of the world economy, we’ve all got very big responsibilities to say that is our duty to get back into the process of saying what caused this and what do we do about it and what do we deduce are the underlying issues and how do we address them because otherwise say fragmenting the world economy is a bad outcome.
Lacqua [43:04]: But what kind of fragmentation would it be? Is it again, are you fearful that the world is splintering irrevocably or is there a pool that’s just moving?
Bailey [43:16]: Well, I think if it was a breakdown of trade in the world economy, obviously exactly how that would manifest itself would remain to be seen, but it would be running against a long period now where we’ve been building the resilience of trade in the world economy, we’ve been building openness. But as I said, I want to sort of temper that by saying, look, there are issues. I don’t think we should say there are no issues. This is all made up. There are issues and we need to address what they are and work them out. We need to do that in the context of a commitment to a robust open world economy.
Lacqua [43:50]: Governor, as the only governor here representing a non-reserve currency country, how concerned are you about fragmentation of the global financial system and the risk at the end of the day that the US may be less willing to provide dollar liquidity in a future financial shock?
Rhee [44:06]: No. I think I mentioned that we are quite vulnerable to the fragmentation. But in reality, as a small country, it’s a pity that we can’t raise our voice, but in reality we cannot change the course. So we have to probably take it as an environment and to adapt it.
What matters is we talk about economic fragmentation, but for a country like us, the most serious issue is combined with security. And for that issue, let me stop here because I don’t want to go further. But as for the dollar liquidity support, as demonstrated during the global financial crisis and pandemic period, the standing dollar swap lines with five international financial centers and the nine ad-hoc temporary swap lines for the nine non-reserve currencies, that was crucial in restoring the stability in the global world.
And if another global dollar shortage hits, I believe that the U.S. Fed will extend their swap lines again, which is very important. But one other problem for a country like us is we know that the U.S. provides ad-hoc swap lines as long as there is a global dollar shortage. But the issue is what happens if there is our own problem and there is no global dollar shortage? Our understanding is that Fed cannot extend the swap lines in that case and we have to self-defense ourselves.
That is why I think having adequate sufficient level of reserves is very important. And recently, thanks to the introduction of the FEMA before facility by the Fed, actually these reserves become much more effective tool to defend ourselves.
Lacqua [45:52]: Jay Powell on fragmentation.
Powell [45:54]: Well, I guess I’ll just agree with what Chang-Yong said, which is, or point out that nothing has changed relative to our swap lines. We still have the same authorities and we’re still prepared to use them in situations where it’s within our legal authorities and where we think it makes sense. So that is, we know, we’re aware that that’s a big contribution that we can and do and will continue to make to global financial stability.
Lacqua [46:18]: Governor Ueda, how much do you think about fragmentation and the impact this could have on Japan?
Ueda [46:24]: See, on the trade side, I think a lot about what will happen to Asia, even Asia excluding China. So this will depend on the relative tariff rates imposed on the region relative to China or relative to other countries.
But there’s fairly strong intra-regional trade taking place during the last decade or two. Also there’s new countries like India growing at very high speed. So I hope there’s a resilient, sufficiently resilient domestic demand in the region to keep the energy of the region alive.
On the financial side, I don’t have much to add to what other people have said, but it would be important to keep trying multi-layered approach to things like swap lines. We have Chiang Mai initiatives in Asia. Doing something similar or continuing to do something similar would be important.
Lacqua [47:44]: Madame Lagarde, you’ve often spoken about the role that Europe could take in a fragmented world. How do you see that developing and in what kind of time frame?
Lagarde [47:54]: Well, I think Europe has witnessed in the last four years in particular, well, since, sorry, 2022 in particular, the last three years, major challenges to its way of doing business, to the assumptions that it has made about security, about supply, about destination.
Whether you look at what the horrible Russian invasion of Ukraine has precipitated and how that has impaired the sentiment of security that we in Europe had and the sentiment that we could, you know, forever rely on the protection of others. That has been impaired significantly. When you look at the energy supply on which some of the European countries in particular, but most of us, have relied upon, namely access to reasonably cheap oil and gas supply from Russia, that has been impaired significantly and we had to find the resources to respond to that.
And whether you look at the business model of some countries where destination was inevitably China in the main, that has already been challenged as a result of the fragmentation that is not just a risk, but which has happened. If you combine that with the technology risk that we could all be under, either because of political determination or because of shortage of supply, whether it’s on the front of microchips or rare earth, I think we are in a situation where many of the assumptions have been shaken up and where we collectively are on the cusp of, I hope, this is my hope, of, you know, better taking hold and control of our destiny by making significant structural efforts to, you know, be more independent, be more productive, be more autonomous in all these different dimensions.
Is it going to happen overnight? Yet again, no, because on some of those fronts it takes time, it takes investment, it takes political determination, it takes momentum, and, you know, from a pure sort of, as president of the ECB, what we can do on the monetary front is to deliver on our mandate of providing price stability so that the fluidity of factors that is needed, both in terms of capital, in terms of labor, can rest assured that price stability will be within our remit under strict commitment to deliver on our target of 2% medium term.
But yes, I think it’s a historically, I believe that in a few years’ time we will look at 25 of those latest three years as significant change in the way in which we conduct our life, our business, and develop Europe. And I hope for the better.
U.S. Fiscal Policy
[50:38 – 51:46]
Lacqua [50:38]: Chair Powell, last year in Sintra you said that the US cannot run these kind of deficits in good economic times for very long. And then you also said we’ll have to do better sooner, something sooner or later, and sooner we’ll be better than later. How’s it going?
Powell [50:56]: So, of course, I probably preface that by saying that we don’t comment on fiscal policy. That is the one thing that I have said and my predecessors have also said, and that is the US federal fiscal path is not a sustainable one. The level of the debt is sustainable, but the path is not. And we need to address that sooner or later. Sooner is better than later. That’s what I said last year. There’s not a lot more I can say.
Lacqua [51:24]: For everyone else, how much of a problem for the world are America’s public finances?
Rhee [51:30]: We have to see what’s going to happen. But as I mentioned, we take it as an environment and we just adjust our policies accordingly.
Bailey [51:42]: I don’t comment on our fiscal policy. Let’s loan anybody else’s.
Lacqua [51:48]: Anyone else want to take that question?
Central Banking Career Reflections
[51:52 – 58:36]
Lacqua [51:52]: Last year, Governor Ueda, actually you spoke two years ago at the ECB conference. It was your first public appearance overseas after taking the current role in April 2023, and you talked about your surprise with the tight schedule of a central governor. Are you getting used to the schedule as it ramping up? Is it even more than when you started?
Ueda [52:14]: It’s still very tight.
Lacqua [52:18]: Is it tighter than before? How are you finding yourself after more than two years in the job?
Ueda [52:22]: It’s as tight as two years ago.
Lacqua [52:26]: So it hasn’t changed?
Ueda [52:28]: Getting used to it a little bit, yes.
Lacqua [52:30]: Governor, what’s your biggest task for the rest of your term until 2028?
Ueda [52:36]: Well, as I was saying at the outset, headline inflation is above two, underlying inflation is below two. I want both to converge to two percent by the time I leave my office.
Lacqua [52:52]: I think you were also asked about the pace that keeps you awake at night in Washington in October, and you talked about the pace of rate hikes as one thing. Is it still the same, or do you have other things that you’re worrying about?
Ueda [53:02]: Let’s see. I didn’t sleep well last night. There’s a reason for this. Governor Yi was sitting next to me during dinner, and he told me that espresso contains less caffeine than coffee, so I immediately had a cup of espresso.
[Laughter]
I meant the total amount of caffeine rather than caffeine per ounce, okay? Anyway, this is a joke, but during these international meetings, I get chances to talk to my colleagues, get a lot of useful insight, so when I go to bed, I think about those, and say to myself, maybe I should adjust our economic outlook, our policy strategy, in response to these nice comments, and these keep me sometimes awake, but I think to do to keep the trust in ourselves, which is a very foundation among central bankers.
What Keeps Central Bankers Awake at Night
[54:20 – 58:36]
Lacqua [54:20]: To all of you, what keeps you awake at night, given all of the uncertainties and the changing world, Madame Lagarde?
Lagarde [54:26]: First of all, I can confirm what Kazuo just said, because it did happen on occasions that the following day, after probably a difficult night, you came to see me and said, did you really say that yesterday during the meeting, and I knew that you had been sort of ruminating and pondered what the consequences were, so it’s the truth. It’s not a joke.
What keeps you awake? The truth. By that, I mean I’m getting more and more concerned about the role that artificial intelligence is going to play, about how distorted things can be presented, how public opinion can be manipulated, and having been a lawyer by background, where searching for the truth is one of the purposes that we hold as auxiliary of justice.
I’m very concerned by what’s happening at the moment, and what kind of moral compass and the watchdog of the integrity of data, because we keep saying that we are data dependent, and we are, and we want to see our projections and our assessment and the analysis anchored in empirical data and understanding of what’s happening in the reality of the economy, and I do have this fear that things can be distorted and that we can fall prey to that, because it’s incredibly easy and actually described in some literature. That is of great concern to me. I mean, I sleep at night, but…
Lacqua [56:10]: Chair Powell?
Powell [56:12]: I have a little more than 10 months left on my term as chair, and all I want, and all anybody at the Fed wants, is to deliver an economy that has price stability, maximum employment, financial stability, and what keeps me awake at night is how do we get that done? I want to hand over to my successor an economy in good shape, and so do all of my colleagues. That’s all we ever want, so that’s what keeps me awake at night, is are we on a path to do that, and how do we get that done?
Lacqua [56:48]: Do you plan to stay on as Fed governor after your chair term expires?
Powell [56:52]: I have nothing for you on that today.
Lacqua [56:54]: Governor, what keeps you up at night?
Rhee [56:56]: Of course, my apology to Ueda-san, but… To me… Scores on the espresso will be settled.
One concern that I have is unique to our problem is perception gap of the public due to very rapid structural changes. For example, a decade ago, our potential growth rate is around 3%, but now it’s well below 2%, but people still think that we have to grow above 3% in normal times, and that actually expedite the demand for the more stimulus monetary policy and fiscal policy, while what we need is structural reform.
But on the other hand, if I keep on talking about structural reform, I don’t know how far I can go on discussing this structural issue, because some people say that it’s well above my mandate. But I think what is important for our country is not only the security issue, but how to adapt to these structural changes, and that is a very difficult challenge.
Lacqua [58:00]: Governor Bailey?
Bailey [58:02]: I want to deliver inflation sustainably at target. As I keep saying to my colleagues, can you please stop thinking of all the shocks that we haven’t had yet in my term that we might have?
Maybe I’ve been sleeping too well, because I felt I needed something else to do, because today’s a significant day, because it’s my first day as chair of the Financial Stability Board after taking over from Klaus’s enormously distinguished leadership.
And so that gives me a whole load of other vulnerabilities to think about and worry about when I haven’t got anything else to do. But seriously, there obviously are issues in the financial system that we’re very focused on, and will be very focused on in terms of understanding the vulnerabilities of the situation we’re in.
Digital Currencies and Stable Coins
[58:46 – 01:04:12]
Lacqua [58:46]: Governor Rhee, I also wanted to ask you actually about digital currencies, because the Bank of Korea put brakes on testing a central bank digital currency this week. Would you agree that it’s more of a priority to find, I guess, the right regulation for the immediate challenge of stable coins than to develop a CBDC that no one may use?
Rhee [59:06]: That’s a hot topic now in Korea. Surging in the dollar denominated stable coins, especially the recent passage of the Genius Act in the United States, make many fintech companies and advocates of the stable coins to ask the government to allow the non-bank institutions to participate to issue the Korean won denominated stable coins.
As you mentioned, we have been experimenting the tokenized deposit pilots with a commercial bank in our permissioned network. I think that given the surging demand for allowing non-bank financial institutions to issue stable coins in public domain, I have to talk with the government agencies because it’s well beyond the bank of Korea’s mandate.
From our perspective, what we are worrying about is that if we allow the unregulated one denominated stable coin, it will definitely expedite the exchange into dollar denominated coins and undermine our capital flow management regulation.
The critic says that the new technology in blockchain can identify the irregular transactions, do the know your customer rule kind of regulation very well, and then even identify the irregular strange transaction very easily, but we are not so sure whether this is true, and also there’s a narrow banking issue, many other issues. So I think I have to talk to the government authorities how to handle this kind of regulations.
Lacqua [01:00:40]: Andrew Bailey?
Bailey [01:00:44]: Yeah, I mean it’s an important subject. It’s one of the subjects that we will have on the agenda for the FSB, no question about that. You see, the thing that I think is about stable coins is and here I distinguish them from something like Bitcoin is that they purport to be money. They purport to have the medium of exchange function of money.
And therefore they do have to meet the test of money. We talked a lot about this, we talked a lot about trust in money, about the so called singleness of money, which is really all about them being assured to hold their nominal value. And for me, this is going to be the critical test as to what structure and design comes out of all this work that meets that critical test, because if they don’t then I don’t think we can be content with them if they’re purporting to be money, but don’t actually meet the test of money.
Lacqua [01:01:40]: Christine Lagarde?
Lagarde [01:01:44]: I have a relatively strong view on that point if you don’t mind. Because I think that we are falling prey to some confusion between money, means of payment, and payment infrastructure. And that is accelerated or emphasized as a result of the technology that are being used and some technologies in particular.
And I regard money as a public good and ourselves as the public servants in charge of securing and protecting that public good. My fear is that blurring of the lines that I mentioned earlier are likely to lead to a privatization of money. And I don’t think that this is the purpose for which we’ve been appointed to do the job that we have. Nor is it good for this public good that is money.
I think it risks undermining our capacity to conduct monetary policy. And I think it risks weakening the sovereignty of those countries or those regions which inadvertently become subject of the use of that means of payment, payment infrastructure slash alleged money. And we should not only just consider it but determine what our policy should be about it. If we mean what we say and we protect what we have to protect. Thank you.
Lacqua [01:03:10]: I actually have a question. Do you fully support the recent proposal driven by the vice chair for supervision, Michelle Bowman, on rolling back capital rules? Would that actually meaningful improve liquidity in the treasury market?
Powell [01:03:24]: I do fully support what we in fact voted for what we put out for comment which is sort of putting the leverage ratio back where it should be which is a backstop to risk-based capital. And so yes to that question.
Let me say on stable coins if I can. I do share the concerns that you hear here but I also think it’s a positive step that we don’t have a regulatory framework for these now in the United States. We tried very hard in the last congress to work with people on both sides of the aisle to create such a thing. Now it looks like we’re well on the way to creating a framework which I think is something we need. If we’re going to have stable coins and apparently we are we need to have a federal and state level regulatory framework which I think we’re making progress towards having.
Advice for Successors
[01:04:12 – 01:06:26]
Lacqua [01:04:12]: We only have a couple of minutes left. Many of you have plenty of time left in office. Others will leave sooner. Knowing what you know today Governor Ueda, if you already had to offer some advice to your successor whoever that may be what would it be?
Ueda [01:04:30]: I don’t know. If I finish in, I finish in two and a half years or so maybe as I said inflation would be at 2% but I will not have finished reducing our balance sheets to appropriate levels. So I would take say to my successor take great care in proceeding with reduction of further reduction of the size of the balance sheet.
Lacqua [01:05:08]: Christine Lagarde?
Lagarde [01:05:10]: I don’t think I would say anything because I remember my predecessor telling me that it would be a walk in the park. So that’s a nothing. But I would share the ambition of Jay Powell. I would want to hand over you know job as well done as possible and results achieved as much as possible.
Powell [01:05:32]: So quickly you know we’re trying to deliver macro stability, financial stability, economic stability for the benefit of all the people. If we’re going to do that successfully we need to do it in a completely non-political way which means we don’t take sides, we don’t play one side against the other. We stay out of issues that are really not our bailiwick. And we just focus on those things. Really we’re trying to have it be so that the public lives their best economic lives and so policy makers can elected policy makers can make the really important decisions in a stable environment. And so that’s just that’s how I think about it.
Lacqua [01:06:12]: Governor Lee?
Rhee [01:06:14]: I can say something but I don’t know whether my successor will take it seriously but given that I mentioned structural issues I hope that the Bank of Korea continue to raise voice outside of just monetary policy for general economic issues.
Lacqua [01:06:26]: And Governor Bailey?
Bailey [01:06:28]: Be humble. So we’re exercising real power many people think we are not humble be humble. And I’ll say this if you want an illustration of this Christine and I were both in Ukraine the week before last. If we think we have it difficult spend time with the Central Bank of Ukraine. Nothing.
Closing
[01:06:50 – 01:07:50]
Lacqua [01:06:50]: Thank you so much to everyone for a wonderful panel. Thank you.
Event Host [01:07:10]: Thank you to Francine and to all of our panelists for doing such an excellent job of bringing today’s first day of Sintra to a fitting end. For those of you in the room just two pieces of housekeeping. We’d like you all to vote on the Young Economist competition. To do so please go outside into the foyer. There’s QR codes on the posters and click on them and then use the code on your badges to choose your favorite entry. And then please come and join us downstairs for the group photo too. And for those of you watching online thanks a lot for joining us and please join us again tomorrow morning for day two of Sintra. Thank you.
End of Transcript
Total Duration: 1 hour, 7 minutes, 50 seconds