New York Federal Reserve President William Dudley sat for an interview with CNN's Richard Quest on Tuesday.
Here is the transcript of that interview.
Richard Quest: Mr. President, thank you, sir. Much appreciated. There's a lot to talk about, but don't worry, we won't talk about it all. We'll be judicious in our time with you. But here, if you like, are the controversial bits, the sexy bits: The last minutes of the FOMC used the phrase "fairly soon." We all know what fairly soon means. If you and I go to have a cup of coffee, we'll have it fairly soon. We could meet for dinner fairly soon. What does fairly soon mean in the context of the minutes?
President Dudley: I think it means what it says. It doesn't say it's a week, a month, a couple months. Fairly soon means in the relatively near future. I think the key thing in terms of thinking about monetary policy is -- what are we basically communicating to people in the markets? We've basically been saying that if the economy continues on the trajectory that it's on, slightly above-trend growth, gradually rising inflation, we're going to continue to remove monetary policy accommodation. So let's look at what we've actually gotten. It seems to me that most of the data we've seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased. So we're very much on the trajectory that we said -- that we thought we'd be on and we said if we were on that trajectory we're going to gradually remove accommodation. What else have we seen? We've also seen things that should make us even more confident that this is going to continue in the future. After the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets -- the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction. So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.
Quest: And that's obviously fairly soon, which implies sooner rather than later?
Dudley: I think that's fair.
Quest: There's also one new wrinkle into this, of course, which is the role of fiscal policy. A large increase in government spending is coming. We know it's coming. The president is going to talk about it tonight. How does the Fed factor in what you know is coming but is not here yet?
Dudley: Well, it's hard to actually put it into your forecast yet because we don't know what it is, how big it is or when it's actually going to hit the economy. But we do know that fiscal policy is going to move in a more stimulative direction. So what that says to me is that the risks to the outlook are now starting to tilt to the upside. So while I haven't really built it into my GDP forecast, when I think about the balance of risks -- up or down in terms of economic activity -- I think the fiscal side tends to push things -- the risks to the upside.
Quest: But you can't wait for it to happen, can you? I mean the whole question of monetary lag. I know you've got to think about many of these policies not coming into force until 2018, but you have to plan now.
Dudley: Well, look, I think monetary policy is pursued on the basis on the economic outlook. Fiscal policy outlook obviously affects that -- the trajectory of GDP, unemployment and inflation. So that's a factor weighing on us but the fact that we have so little specifics yet about what's going to happen -- it's got to wind its way through Congress -- means I don't put a lot of weight on it in terms of my modal forecast. I just think it makes the risks to the outlook a little bit tilted to the upside at this point.
Quest: And from what you've heard -- and I'll accept that the detail is few and far between -- from what you've heard, are the sort of spending, fiscal plans that you're hearing, are they the right sort in terms of productivity gains that the Fed can live with?
Dudley: Well, I think we're going to have to see. To the extent that you reduce the burden of regulation, that should lift productivity growth. To the extent that you pursue greater infrastructure spending, that should lift productivity growth. So those are the aspects of changes on the fiscal side that would actually be supportive to stronger economic activity.
Quest: But, for instance, I'm going to throw the numbers that we've seen -- the $50 billion on defense spending that the president said that yesterday, $50-odd billion on defense. Is that the sort of thing that you find is -- leads to greater productivity as opposed to just shear consumption?
Dudley: I wouldn't think that defense spending would have a huge benefit to the productivity growth, but obviously we have to spend money on the military to keep the country safe. Also, if you're increasing spending on military but cutting spending on discretionary or domestic programs, the net effect may not be very powerful in terms of supporting the economy.
Quest: Into this difficult area we have the financial markets. They're on a tear. I mean today could be the 13th record high, we could be in record territory, you know the numbers better than myself. You can't wait for the fiscal plans completely until next year, but you have to take into account what's happening in the markets at the moment, don't you?
Dudley: Well, financial conditions are very important in terms of how they influence economic activity. So if the stock market is up, credit spreads are narrow, financial conditions are more buoyant, that's going to tend to make the economy stronger. The important thing for us, though, is not to overreact to every little movement in the stock market. It's got to be something that lasts for a period of time for it to actually affect household and business behavior. So if the stock market goes up, and then goes right back down, it's not going to have much consequence for the economic outlook. But if it goes up and stays up, then that's going to support, presumably, consumption through higher household wealth.
Quest: What do you believe you're seeing at the moment?
Dudley: Well, there's no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly. There's a survey of small businesses that showed a very large increase in December and sustained that increase in January. So, there's no question that sentiment has improved quite markedly post the election.
Quest: That -- animal spirits or whatever you want to call it -- that market influence. It transmits itself around to the entire economy, doesn't it?
Dudley: Well, we would expect to have some consequence for economic activity. But we'll have to see if that actually -- one if the confidence is sustained, and whether it actually materializes in terms of increases in spending. I would say so far we haven't seen much effect of the improvement in confidence actually leading into greater spending. I think the economy is still on about a 2% GDP track, which about what it's been over the last year or so.
Quest: When you hear the president looking for 3 to 4% -- and the Treasury secretary looking for 3% to 4% economic growth -- admittedly not next week, next month, maybe not even next year. But as a medium-term, longer-term goal, do you find that acceptable?
Dudley: I think it would be great if we have 3% to 4% GDP growth because that would mean productivity growth is very strong and that would lead to rapidly rising living standards, so that would be good for everybody. The key is, what actually happens to productivity growth.
Quest: Do you find 3% to 4% realistic?
Dudley: I would say it's possible. You know, we had productivity growth back in the late 1990s where productivity growth was averaging over 2.5% a year. If we could get back to that kind of level of productivity growth, then I think 3% plus growth would actually be achievable. But that's a pretty high standard to reach for.
Quest: You are no longer the only game in town, to use the phrase. For the last five years, six years, seven years, you -- not you personally but you and your colleagues -- central bankers around the world have been saying 'Hey, c'mon, we can't do this on our own. You're requiring us to do all the heavy lifting.' Well, guess what, you've now got a bit of help from Washington, haven't you?
Dudley: Well, I think it is correct that monetary policy has had to do most of the heavy lifting over the last few years. And I think that's unfortunate because monetary policy is a blunt tool. Monetary policy can't allocate resources across the economy. Monetary policy can't do much to affect productivity growth. So I think it's good that the burden is going to be more broadly shared.
Quest: How close do you believe -- and in this I'm not just asking about the Fed but I'm thinking about the Bank of Japan, I'm thinking about the ECB, the BoE -- how close do you believe central banks have come to being out of ammunition?
Dudley: I don't think we're close to being out of ammunition. Certainly speaking for the United States, the federal funds rate is now well above zero --
Quest: But if there's another recession and you've got rates down at just about zero, and you've already done QE and the efficacy of QE is starting to dissipate --
Dudley: I mean, obviously one can imagine a circumstance when central banks might be ultimately out of ammunition. But that's -- the U.S. is nowhere close to that situation.
Quest: On the question of the Fed and the leadership of the Fed, there's going to be, there's already two seats, there's a third one that's about to become vacant. There's obviously the question of the chair and the vice chair, whether they stay on the board after their terms in office come to an end, entirely constitutionally correctly, this President is going to be able to completely reform the board of the Fed.
Dudley: Well the President is obviously going to be able to make some appointment to the board of governors. Of course, remember, the Federal Open Market Committee also consists of the Federal Reserve bank presidents and more importantly than that, the Fed's mandate is set by Congress. Congress wants the Fed to achieve maximum sustainable employment and price stability. So I would expect that whoever gets named to the Federal Reserve is going to try to carry out that task set for the Fed by Congress.
Quest: Oh sir, you know we talk about doves and we talk about hawks when we talk about Fed governors.
Dudley: I've heard that.
Quest: And therefore a new president can -- my word, not yours -- manipulate the board?
Dudley: I think -- I don't expect that. I think Congress has been very clear about what the Fed's objectives are and people who are named to the board of governors and people who serve on the FOMC try to conduct monetary policy consistent with those goals of maximum sustainable employment and price stability. Right now you'd have to say we're doing pretty well in those objectives. We're pretty close to full employment, and we're pretty close to our 2% inflation objective. So it's not clear why you'd want to change any of that.
Quest: That inflation objective, 1.6% at the moment, you can't -- inflation is one of those things, you dare not let it get ahead, because by the time it gets ahead it's too late to do anything about it. Most people don't seem to understand this, do they?
Dudley: Well you mean the long lags of monetary policy?
Dudley: Look, I think it's very clear you don't want to keep monetary policy too accommodative for too long. This is something that Chair Yellen talked about in her testimony. Because if you do, then you're going to have to hit the brakes really hard later, move up rates very sharply and that could actually cause the next recession. So slow and gradual seems to me the right way to proceed, moving monetary policy relatively early to make sure the economy doesn't overheat and that can actually allow you to sustain the economic expansion.
Quest: I need to ask you, one of the biggest issues at the moment is cybersecurity. Now, I emphasize when I mention the Bangladesh case that I'm not suggesting for a moment that anything was wrong. I know the background to that particular case. We don't need to go into the minutiae of the whole SWIFT system, but when we look at the issue of cybersecurity, do you believe it is one of the most significant threats facing us at the moment?
Dudley: I think it is one of the most significant threats because we have a lot of people out there that want to do us harm and they're building their capabilities just as we're building our capabilities, so it's little bit of an arms race on both sides. The other thing I think we need to be very conscious of in terms of cybersecurity is we need to really define well the roles and responsibilities of all the different actors. So the person who is making the payment, they need to make sure that their systems are secure. The person transmitting the payment has to make sure that the people that are transmitting payments through their payments mechanisms are well buttoned up. And the person receiving the payment has to be also secure. So it's very important to get those responsibilities well defined and insure that there's an assurance regime to make sure everyone is doing what they're supposed to be doing.
Quest: Do you worry that there are weaknesses in the current system that make the global financial system vulnerable to cybersecurity? Because it's the nightmare scenario, and we're sitting in the building, frankly, where if anything were to happen, financial Armageddon is not far off if something happens to one of the major central banks in the world, or one of the big clearing banks or one of the big investment houses.
Dudley: Well it's certainly something to be concerned about. That's why we spend so many resources trying to strengthen our defenses in the cybersecurity space -- both securing the perimeter but also teaching our employees the insider threat.
Quest: But is it taken seriously?
Quest: By policymakers, by CEOs, by shareholders, by government leaders?
Dudley: I think so. I think so. Because when I talk to other people, the CEOs at major banks, that's the thing they worry the most about too. So it's definitely very, very high up on our agenda -- right at the top of our agenda. And I think it's right at the top of most people's agendas as well.
Quest: As we come to the end here, Mr. President, what is it about this job you enjoy? If you think about it, you're sitting at the top of the financial system, you're the president of the New York Fed, which of course is responsible for monetary policy, the open market policies of the federal government. What is it that you enjoy about it?
Dudley: Well, I mean, how I think about it is I spent a long career in the financial industry and I learned a lot about financial markets and learned a lot about the macro economy and to bring all that experience to bear in the context of monetary policy, to try to get good outcomes for the American people, that's challenging but also rewarding when we're close to achieving our objectives.
Quest: But has there been a moment -- because you were here during the crisis --
Dudley: Yes, I was.
Quest: Has there been a moment, where you suddenly say 'Ah, I never realized it was that difficult to do that.' Or 'I pontificated as a private economist about why doesn't the Fed do this. Well now I darn well see why they didn't do it. You can't do it' or 'It's too difficult to do it' or 'We tried to do it.' Anything like that?
Dudley: Well, I think that, definitely I saw many things during the financial crisis that I never expected to see. There were a couple speeches I gave at the time, basically looking at all of the things that happened in financial markets that are totally outside the realm of our experience. I think when you're on the inside, you are constrained by the fact that the FOMC is a committee and it consists of many different members. So even if you're seeing something, you have to convince your colleagues what you're seeing is actually important. So it's really important to bring along your colleagues so you can rise to the occasion and do what's necessary to actually stabilize the economy. I think one of the things that I brought to bear in terms of the crisis is that I know a lot about financial markets and the people within this institution know a lot about the financial market plumbing and I think that really helped the New York Fed contribute to the Fed's response during the financial crisis.
Quest: Did you ever fear that it was going to get away from you? That this train was going to run out of track?
Dudley: Absolutely. But it didn't.
Quest: But you did?
Dudley: I definitely worried. There were days in the fall of 2008 that you really didn't know exactly what's going to happen. That's why we pulled out everything -- all the tools at our disposal to help support the economy because we were very, very close to a Great Depression.
Quest: And today?
Dudley: Today I think we're in much better shape. I think the regulatory changes put in place post the financial crisis have made the banking system of the United States a lot more secure, higher capital, higher liquidity, a better means of resolving large institutions should they get in trouble. We've addressed some of structural weaknesses in the financial system, for example money markets. Money market mutual fund reform.
Quest: But you don't want those reforms to be taken away -- Dodd-Frank.
Dudley: Well, look, I think it's fair that we want to take a look at regulations and make sure we got the cost-benefit right. But if you look at the U.S. banking system today, is it a good thing that we have more capital? That we have more liquidity? Absolutely. We don't want to roll that back. Because we saw in the financial crisis what happens to households and businesses if we don't have a financial system that can do what it needs to do in terms of intermediating flows of credit between savers and borrowers. We really had a fundamental breakdown in our financial system in the fall of 2008, and I don't ever want to go back there. Therefore we certainly need to keep things like capital, like liquidity, like resolution in place so we don't ever have a financial crisis like that again. That was the worst economic environment of my lifetime. It was certainly the worst financial crisis of my lifetime. And I hope to never see one like that again.