Federal Reserve Chair Jerome Powell speaks at an ECB panel in Portugal — 7/1/2025

Key Concepts

• Aging, digitalization, greening of the economy
• Price stability
• Tariffs and trade ructions
• Oil price volatility
• Inflation and growth risks
• Monetary policy
• Fragmentation
• Geopolitical developments
• Administered prices
• Wage-price dynamics
• Neutral rate
• Scenario analysis
• Baseline projections
• Risk management
• Reserve currency
• Financial conditions index
• Digital currencies
• Stable coins
• CBDC (Central Bank Digital Currency)
• Capital rules
• Leverage ratio
• Risk-based capital
• Artificial intelligence
• Structural reforms
• Swap lines

Inflation and Economic Outlook

• Christine Lagarde (ECB): The ECB has reached its 2% inflation target. The disinflationary process has been conducted over the last two years. There are uncertainties, risks of fragmentation, and geopolitical developments that could impact inflation. The ECB remains vigilant and committed to its target.
• Jay Powell (Federal Reserve): The US economy is in a good position with inflation near 2% (2.3% headline, 2.7% core) and unemployment at 4.2%. Inflation is behaving as expected, but the Fed is watching for effects from tariffs. The Fed is prepared to learn if inflation is higher or lower than expected.
• Changri (Bank of Korea): South Korea's inflation is stabilized around 2%. Tariffs are believed to be deflationary due to Korea's lack of retaliatory tariffs, falling export prices from China, and low aggregate demand. The focus is on the growth impact of tariffs.
• Andrew Bailey (Bank of England): Recent inflation rises in the UK are due to administered prices and are considered transitory. The key judgment is whether there will be second-round effects. There are signs of softening in the economy and labor market.
• Kazuo Ueda (Bank of Japan): Japan's headline inflation has been above 2% for three years, but underlying inflation is somewhat below 2%. There are three components: wage-price dynamics, expected negative effects of tariffs, and domestic supply shocks (food prices). Underlying inflation is expected to increase slowly toward 2% by the end of 2026 or 2027.

Tariffs and Trade

• Powell: Tariffs have not yet shown up in inflation. The Fed went on hold when tariffs were announced, as inflation forecasts increased. The Fed is waiting to see the effects.
• Changri: Tariffs tend to be deflationary for Korea. If tariffs go back to 26%, with retaliated tariffs, the impact could be close to 1% in GDP growth rate.
• Bailey: It's too soon to see the price effects from trade and tariffs. These effects could be two-sided, leading to weaker demand or supply chain disruption.
• Ueda: Avoiding specific comments on trade negotiations between Japan and the US.

Monetary Policy

• Lagarde: The ECB is determined to be data-dependent, deciding meeting by meeting, and not committing to any particular rate path.
• Powell: A solid majority of FOMC participants expect it will be appropriate to begin reducing rates later this year, depending on incoming data on inflation and the labor market.
• Changri: The Bank of Korea has been in an easing cycle, cutting interest rates by 100 BP since last October. They will continue to ease, but financial stability risks, especially rising housing prices, are being monitored.
• Bailey: The direction of interest rates continues to be downwards. No meeting is off the table for rate cuts; it will depend on the data.
• Ueda: Further rate hikes will depend on the relative strength of the three inflation dynamics.

Exchange Rates

• Lagarde: The euro has surged against the dollar. The ECB takes it into account for projections, but it's a reflection of market conditions and the strength of the economy.
• Bailey: When looking at financial conditions, it's important to unpack a financial conditions index because the correlations of the components have broken down.

Neutral Rate

• Powell: The Fed is somewhere modestly restrictive at the current level.
• Lagarde: The neutral rate is a nice concept, but less relevant in a world with shocks. It's higher than before the great financial crisis but relatively low compared to the US.
• Bailey: The concept of restrictiveness is critical to judging the transmission mechanism of policy. Policy is restrictive at the moment and will become less restrictive.
• Ueda: The current rate is below neutral.

Scenario Analysis

• Lagarde: The ECB will do more scenario analysis, looking at longer-term trends that affect the economy.
• Powell: The Fed has used scenario analysis internally for many years but has not used it as a public communications device. They will be talking about this in the fall.
• Changri: Expresses concern about communicating scenarios publicly, as it may be hard to get consensus among members.
• Bailey: Introduced two scenarios in the May report, which were useful for decision-making. Public communication is challenging because conditional statements are often translated as unconditional comments.
• Ueda: The Bank of Japan carries out many simulation exercises but has not published them.

Dollar as a Reserve Currency

• Changri: Doesn't see a major shift in the dollar's status as a reserve currency. The recent appreciation of the Korean won is due to unique political and economic situations.
• Bailey: The definition of a reserve currency has as much to do with the supply of safe assets as it does with the exchange rate.
• Ueda: The role of the dollar may decline depending on improvements in the efficiency and convenience of other currencies.
• Lagarde: 2025 may be a pivotal year, but a major change will take time and effort. There is something that has been broken, and the jury is out on whether it is fixable.
• Powell: Hopeful that 2025 will be a year where significant economic changes are successfully challenged.

Fragmentation

• Bailey: Fragmentation is bad for activity in the world economy. It's important to address the underlying issues in appropriate multilateral fora.
• Changri: Korea is vulnerable to fragmentation. The more serious issue is combined with security.
• Powell: Nothing has changed relative to the Fed's swap lines. They are prepared to use them in situations where it makes sense.
• Ueda: Thinks a lot about what will happen to Asia, even Asia excluding China.
• Lagarde: Europe has witnessed major challenges to its assumptions about security, supply, and destination. They are on the cusp of better taking hold and control of their destiny.

US Public Finances

• Powell: The US federal fiscal path is not a sustainable one. The level of the debt is sustainable, but the path is not.
• Changri: Takes it as an environment and adjusts policies accordingly.

Digital Currencies

• Changri: The Bank of Korea put brakes on testing a central bank digital currency this week. There is surging demand for dollar-denominated stable coins.
• Bailey: Stable coins purport to be money and must meet the test of money.
• Lagarde: There is confusion between money, means of payment, and payment infrastructure. Money is a public good, and the blurring of lines is likely to lead to a privatization of money.
• Powell: The US is well on the way to creating a regulatory framework for stable coins.

Advice to Successors

• Ueda: Take great care in proceeding with further reduction of the balance sheet.
• Lagarde: Said nothing, because her predecessor told her it would be a walk in the park.
• Powell: Deliver macro stability, financial stability, and economic stability in a non-political way.
• Changri: The Bank of Korea should continue to raise its voice outside of just monetary policy for general economic issues.
• Bailey: Be humble.

What Keeps Them Awake at Night

• Lagarde: The role that artificial intelligence is going to play, how distorted things can be presented, and how public opinion can be manipulated.
• Powell: How to deliver an economy that has price stability, maximum employment, and financial stability.
• Changri: The perception gap of the public due to very rapid structural changes.
• Bailey: Delivering inflation sustainably at target and the vulnerabilities of the financial system.

Synthesis/Conclusion

The panel discussion highlighted the complex and interconnected challenges facing central banks globally. While some regions are seeing progress in controlling inflation, uncertainties surrounding trade, geopolitical tensions, and technological disruptions continue to pose significant risks. The panelists emphasized the need for data-driven decision-making, vigilance, and international cooperation to navigate these challenges and maintain economic stability. The future of the dollar as a reserve currency, the role of digital currencies, and the potential for economic fragmentation were also key areas of concern and debate.