 All right, so with that, I'm delighted to introduce the speaker for our closing remarks, Dr. Loretta Mester is the president and CEO of the Federal Reserve Bank of Cleveland. Loretta, we're absolutely delighted to have you join us here in Frankfurt to close out this great program that we've been sitting through for two days. So please, the floor is yours. Well, thanks Ed and really thanks everybody for really great work. It's been a really fun two days for me and I feel like I learned a lot and there's more to learn. So, you know, first, I want to really appreciate the program committee and Cleveland Fed also the ECB and then the ECB for the hospitality. It's been it's been really wonderful and I should be like all the other speakers that came from central banks and say that the views I'm going to present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee. So, again, thanks very much. I think we've really had a productive two days. And, you know, what was great about it to my taste is that it was really focused on the research frontier. There's a lot of new work being presented here. And it really I think it's going to expand our knowledge. So, of course, high inflation has been the real challenge facing many central banks over the past two years and returning the economy to price stability in a sustainable and timely way has really driven monetary policy decisions. So, I thought I'd start just a little briefly about the US economy. You know, since early last year we've been at the Fed tightening the stance of monetary policy we've raised our target range for the federal funds rate by five and a quarter percentage points. And we're also reducing the size of the Fed's balance sheet by allowing assets to run off in a systematic way according to a plan that we announced in May 2022 and that also helps to firm the stance of monetary policy. So, the tightening we've done on monetary policy has led to a broader tightening in financial conditions. Banks, which do play an important part in the transmission mechanism of monetary policy, have been tightening their credit standards, making credit less available to businesses and households. And in addition, as you know, treasury yields, mortgage rates, and credit spreads have also risen. Now, the monetary policy actions taken to date are helping to moderate demand in both product and labor markets and to alleviate some of the imbalances that have contributed to price pressures. Real output growth has slowed from a very robust pace in 2021. Supply is also adjusting with disruptions and supply chains having generally improved over time. And in the labor market, some progress is being made in bringing demand and supply into better balance. But I would characterize labor market is still strong. Job growth has slowed and job openings are down, but the unemployment rate is still low at 3.8%. And the vacancy unemployment rate is still above its level to wearing the strong labor market conditions in 2019. Now, labor supply conditions are helping to rebalance the labor market. The labor market participation rate of workers between the ages of 25 and 54 is above what it was before the pandemic. Progress continues to be made on inflation with total PCE inflation down significantly from its peak. And underlying measures of inflation have also improved, but less so. Now, despite the high inflation rates, medium and longer term inflation expectations remain reasonably well anchored and arranged consistent with the Fed's goal of 2% inflation. Now, although there has been some progress, inflation remains too high, and the FOMC is committed to moving inflation down to 2%. The monetary policy questions or whether the current level of the Fed funds rate is sufficiently restrictive and how long policy will need to remain restrictive to keep inflation moving down in a sustained one time runway to our goal of 2%. So future policy decisions are going to be about managing the risk and the intertemporal costs of overtightening versus under tightening monetary policy. And that assessment is going to require very close monitoring of economic banking and financial market developments and using all of that economic reconnaissance to determine whether the economy is evolving in line with the outlook or not. So that outlook needs to be informed not only by incoming data, but also by our models and our understanding of inflation dynamics, which has been the topic of the conference. So the period of high inflation has highlighted that there are many things we do understand about inflation, in particular, when demand is outpacing supply in an environment of very accommodative fiscal and monetary policy, which are the conditions that characterize the economy in 2021 after the pandemic induced shutdown. Inflation will begin to rise and it will remain persistent until monetary policy is recalibrated to moderate demand. Nonetheless, making such assessments in real time is difficult, especially when supply conditions are not stable and forecasting inflation remains challenging. Indeed, the FOMC participants, of which I count myself one, underestimated inflation for much of the high inflation period, but policymakers are required to make decisions based on available, albeit limited information. So further research is needed on many facets of inflation and inflation dynamics. So since I'm in a room full of researchers and very good researchers, I want to highlight some of the questions whose answers would help inform monetary policy decisions. And I did take the same route when I presented keynote remarks at this conference in 2014, and it turns out that several of the questions I asked then are still relevant. But don't be too discouraged. Progress has been made in addressing them. But the period of high inflation and structural changes to the economy during the pandemic and after the pandemic have presented new questions and really different takes on old questions. So I think we're going to need further research to answer these questions and helping to further our understanding of inflation as an aid to monetary policymaking. So the first question I asked in 2014 I think remains relevant. How can we best estimate the underlying friend in inflation? So monetary policy makers, of course, are charged with keeping inflation at a longer run goal, and monetary policy affects the economy with long and variable lags. So both of those factors mean that policy makers need to be able to forecast inflation over the medium and longer run. So they really need a method to separate temporary changes from changes that are more persistent. Now, when the economy reopened after the pandemic and do shutdown, U.S. monetary policy makers attributed much of the increase in inflation to supply shocks that were expected to be transitory. We even use that word in a lot of our communications. And then inflation was expected to return to its low pre-pandemic trend at some point. And it really took some time and repeated under forecasts of inflation for policy makers to realize that the conditions for high inflation were in place and that aggressive policy action was required. So better understanding of the factors that affect the medium run inflation trend and ways to separate temporary changes from changes that are more persistent would have really helped to avoid that situation. Now, separating temporary from more persistent factors is challenging to do, especially in real time. Not only because some of the inflation data get revised, including the PCE inflation measure that the Fed targets, but also because measured inflation reflects the combination of factors. And we talked about that during the conference. There are idiosyncratic factors, broader but temporary macroeconomic factors, and more persistent movements that affect the underlying inflation trend. Of course, one approach to estimating that trend is to remove items that are often the sources of temporary movements in inflation. And the traditional core measures of inflation in the U.S. exclude prices of food and energy because they're thought to be very volatile. Another approach recognizes that other components can show more volatility than food and energy and derives measures that exclude components with the most extreme movements each month. So the median and trimming inflation rates are of this type. And some papers have shown that these types of measures can help to identify the underlying trend and may outperform measures of core inflation in forecasting total or headline inflation. And then, of course, there are statistical models that try to isolate the trend from the noise and identify cyclical and acyclic components of core inflation, where the cyclical components are by definition those associated with labor market tightness. So I think the literature hasn't just sort of best way to isolate the inflation trend. So in practice to forecast inflation, policy members tend to look at all the measures of inflation, date on the real side of the economy, anecdotal reports from community and business contexts, and various models. And one of the poster session papers actually proposed a new way of measuring trends. So again, this is an ongoing research area, which I think is productive. Now, many of the forecasting models being used are informed by theoretical models of inflation dynamics. And that brings me to my second question. Can we reconcile the actual pricing behavior of firms with predictions from the New Keynesian model, which is the workforce inflation model used by many central banks? So as you know, and what was presented here shows in recent years, there's been a considerable amount of research that's really examining real-world pricing behavior of firms and incorporating those facts into macroeconomic models. In fact, you know, I was very pleased to see so many papers in the conference that we're doing that. And I think that's an important thing to do. It's really a continuation of what I think is a very desirable approach of ensuring that our macro models are based on sound micro foundations. Now, the availability of data on individual prices has made some of these advances possible. New surveys are being used to better understand firms' actual pricing behavior. For example, we have a survey that we're conducting the Cleveland, Atlanta, and New York feds. And they found that firms' prices are strongly influenced by their perceptions about demand for their products, a desire to maintain steady profit margins. And their labor costs. And that paper, based on the survey and included in the poster session, estimates that cost-price pass-through at firms was about 60% on average. But there was considerable heterogeneity across the firms. And interestingly, although the firms do tend to raise their prices when wages rise, other research from the Cleveland Fed indicates that consumers do not expect their wage growth to keep up with inflation. So when you ask them in a high-inflation environment, they think that their wages aren't going to keep up. So that paper finds that a one percentage point increase in inflation expectations causes expectations of income growth to rise by only two-tenths of a percentage point. In other words, the respondents expect rising inflation to hurt their real income. And I think that's probably a good explanation of why people really dislike high inflation, even when there's a strong labor market, which is what we've experienced in this episode of high inflation. Now, research such as this can help to close the gap between the macro models we use to inform our monetary policy decisions and the microeconomic data. And in addition, research on actual pricing behavior can also inform the framework for setting monetary policy. For example, at first blush, it might seem that having a higher inflation target, all else equal, gives monetary policy makers more room to move the nominal interest rate down before hitting the effect of lower bound. They could then provide more stimulus to the economy if the economy needs it. But again, some other research out of the Cleveland Fed suggests that all else would not be equal. In particular, a higher inflation target would not provide as much policy room as one might expect. Raising the inflation target would be subject to the Lucas critique. With higher steady-state inflation, firms would change their price-setting behavior and adjust their prices more frequently. And because monetary policy's ability to affect real activity depends on the degree of price stickiness, a higher inflation target would make monetary policy less effective because firms would be changing their prices more frequently. And the research's quantitative result says that to increase the policy space by 2 percentage points, instead of increasing the inflation target from 2% to 4%, one would need to increase the target to 5%. So if you add to this the cost of having to change posted prices more often, the higher level of relative price distortions because everything is an indexed in the economy, higher shoe leather costs from searching for the lowest prices, and the higher inflation volatility associated with higher inflation, the benefits of setting a higher inflation target are not compelling. So the Fed's inflation target is 2%. We're committed to returning inflation to 2% in a sustainable and timely way. And that explicit target was established in the FOMC's statement on longer-run goals and monetary policy strategy in January 2012, and it's been reaffirmed every year since. Now, the 2% target was taken as given when the FOMC undertook its review of its monetary policy framework in 2019. And the revised statement on strategy, which reflected the outcome of that review, recognizes the importance of keeping inflation expectations well-anchored at levels consistent with 2%. And by well-anchored, I mean that the longer-run inflation expectations are insensitive to data. So, you know, one of the big lessons from the 1970s is that it's much more difficult and costly to bring inflation down once it's become embedded in the economy. That is once businesses and households expect inflation to remain elevated, and those expectations influence their savings and investment decisions and price setting and wage setting behavior. And, you know, indeed, inflation expectations have been a central factor in models of inflationary dynamics since the 60s and 70s. Now, the theory indicates that well-anchored longer-term inflation expectations can help mitigate the pool of research gaps on inflation, and therefore the cyclical movements in interest rates that policymakers induce to maintain price stability in that case would not need to be as large as when inflation expectations are not anchored. And it was great to see a lot of talk here and some papers on inflation expectations. So that leads me to my third question. So, you know, for the purposes of setting monetary policy, how should inflation expectations be measured and over what time horizon? So, you know, one of the difficulties in moving from theory to practice is that, of course, the models talk about inflation expectations, but those expectations aren't directly observable. So, you know, we look at a number of the surveys and some of the measures that you were using in the papers are the same kind of thing that policymakers need to look at to understand inflation expectations, which tend to vary by the agent you're looking at, consumers, businesses, policymakers, and also professional forecast is in the time horizon. So, you know, there's a lot of different ways of deriving it. There's measures from the surveys. As I said, there's measures that are based on financial market data. And then there's compositive indices that try to combine all those measures. The problem is again, bringing theory to practice is that a clear signal isn't always forthcoming because sometimes the inflation expectations measures of different groups of agents can behave very differently from one another. And even if you look within a group, there's can be variation and the literature is really not firmly established whose expectations are the most important for inflation dynamics. I mean, the other thing we found in some of our surveys is that households may find it very challenging to answer questions about the economic concept of inflation. Heck, I think even economists sometimes miss kind of what do we really mean when we say inflation and another recent paper out of the Cleveland Fed. And all the papers that I'm saying, you know, recent research, they're all in the text of this so you can look up the papers I'm talking about. Anyway, the Cleveland Fed research found that when consumers are asked about what they think inflation will be in the future for various categories of consumer spending, their answers don't aggregate up using any possible waiting scheme to what they say they expect overall inflation will be. So the aggregate and inflation expectations over the categories tend to be lower than the expectations of overall inflation. And the bottom of aggregated expectations explain a greater share of planned consumer spending. So that inconsistency reinforces the approach taken, I think by policymakers to look at various measures of inflation expectations. And there are several new measures. And I think they're really increasing our understanding of inflation expectations. So the Cleveland Fed has developed a measure of inflation expectations that doesn't require the response to really understand the economic concept of aggregate inflation. It's called the indirect consumer inflation expectations measure. It began in 2021 and it's based on a nationwide survey of more than 10,000 responses. It's updated on a weekly basis. It's available on the web page. So instead of asking consumers directly about overall inflation, what the survey asked consumers to do is it asks how do you expect the prices of the things you buy to change over the next 12 months? And how much would your income have to change for you to be able to afford the same consumption basket and be equally well off, hence the indirect part of that, name of that measure? So when you look at that measure, it's kind of interesting because according to the measure, women's inflation expectations have tended to run higher than those of men, although the most recent data suggests not. And older respondents and more educated respondents have also reported higher inflation expectations than their counterparts. So I think this is interesting and it's a new data source. So when you're thinking about calibrating models, you could actually use some of the disaggregated data on inflation expectations depending on what you're trying to do in your models. I think it's great to have new data like this. Now less information has been available on firms inflation expectations, even though firms are the price setters. But again, there's a lot of new data being brought to bear on that, which I think is good. We at the Cleveland Fed, we've been publishing a survey of firms inflation expectations. And again, it's another nationally representative quarterly survey of CEOs and other top business executives. It was actually the survey was started by a group of academics and then we started maintaining it in 2021. So if you look at that data, it indicates that the year ahead inflation expectations of business executives rose as inflation increased in 2021 and 2022. And then in 2023, their expectations began to decline, but they still are pretty elevated at 4.3% as of July. Now, there is a troubling result in that survey. I find it troubling that when we asked the business executives in April what they thought the Fed's inflation target was. Okay, the mean response was 3.1%. Okay, so of course, that's higher than our target of 2%. And what also, you know, there's always these level effects when you're asking people these questions. But but also I think very troubling about that is it's nearly a percentage point above the mean response before the pandemic. So that, you know, to me is is a an indicator that we should be making sure that we're keeping on the task of getting inflation back down to our goal of 2%. Now, monetary policy makers typically focus on medium to longer term inflation expectations because that's the time horizon over which monetary policy can be expected to affect the economy. And it's more reflective of consumers perceptions of the Fed's commitment and ability to return the economy to price stability. So there's a lot of research, you know, a lot of research that shows that changes in the prices of particular salient items such as gasoline and food, which are independent of monetary policy can have an outsized effect on household shorter run inflation expectations. And so that's one reason that, you know, a lot of times we don't focus on those indicators, but there's research out of Cleveland, the Cleveland Fed that indicates that policy makers shouldn't ignore persistently elevated levels of shorter term inflation expectations and only focus on longer term expectations. And the reason is that they find that persistent differences in inflation expectations across consumers of different ages are in the data and that households form their expectations of inflation based on their own lifetime experience of inflation. So that fact when they embed that in a New Canaan model, it ends up that inflation shocks tend to be more persistent than they otherwise would be. And that the optimal responses for monetary policy to tighten when short term inflation expectations rise, even if longer run expectations are stable. And the reason is because if you do that, you limit the experience households have with high inflation, and that helps to keep inflation expectations anchored in the future. So again, another dynamic model where understanding more about inflation expectations formulation is actually informing the policy recommendations coming out of the models. Now, I think, you know, understanding inflation expectations, which is really a key component in our models is going to help inform how policy makers should respond when inflation deviates from the target. And that brings me to my fourth and final question again, a big focus of the conference, how should monetary policy makers respond to supply shocks. So, there's no doubt that the current episode of high inflation has been a very challenging one for monetary policy makers in the US inflation began rising in the spring of 2021. And, you know, there was a sequence of supply shocks, first driven by the pandemic, then by the war in Ukraine. And those supply shocks contributed to high inflation. They were concentrated in the good sector. And that good sector was all already seeing a surge in demand, of course, as consumers shifted spending from services to goods during the pandemic shutdown. But also they continue to make some of these decisions, you know, like social distancing measures, when the economy reopened and that also shifted demand more to goods and less to services. So, the supply shocks exacerbated the imbalances between demand and supply, which in an environment of very accommodated fiscal and monetary policy led to a significant and persistent increase in inflation. So that episode, and we talked about that in the last seven, that episode really called into question the conventional view that monetary policy should always look through supply shocks. Of course, the thinking is that supply shocks tend to be transitory. And while they raise the price level for a time, they do not lead to a persistent increase in inflation, war inflation expectations. And then in addition, since monetary policy acts with a lag, if you were to react as a monetary policy maker to attend transitory supply shock, it would actually be counterproductive because it would affect the economy after the supply shock has dissipated. But of course, to the extent that the supply shocks are more persistent, or there's a sequence of supply shocks, this thinking need not apply because such shocks can threaten the stability of inflation expectations and that would require policy action. Indeed, you know, if inflation expectations aren't firmly anchored and monetary policy fails to react in an appropriate way, what starts out as a potentially temporary shock could lead to more persistent effects on inflation. So there's an endogeneity of the transitory nature of the shock. So that really brings up, you know, the possibility that monetary policy may want to react differently depending on the nature of the shock that's led to the rise in inflation. The reaction might depend on the size of the shock, the persistence of the shock, and what effect they are expected to have on inflation expectations. And one of the papers that we just saw presented the last paper, that is, I found a very interesting paper, you know, basically suggesting an environment where prices are more flexible than wages and agents have bounded rationality rather than fully rational expectations with respect to inflation. Inflation, policy may want to respond more aggressively to supply shocks when inflation is already high and less aggressively when inflation is low and you get that pivot as was Thomas discussed. So you first look through the supply shocks, and then you respond more aggressively as inflation moves up. And that arguably characterizes the current high inflation episode, at least it characterizes what policymakers actually did, even if they weren't aware that that might have been the right thing to do. But there's other interesting research out there too that shows that optimal monetary policy responses depend critically on how inflation expectations are formed and how well they're anchored. So, you know, in one model when expectations differ from rational expectations and aren't well anchored, policymakers are better off responding earlier to signs that inflation is rising rather than delaying and only then responding aggressively. And the implication is that when there's uncertainty, policymakers should overestimate the degree of persistence of inflation shocks rather than underestimate it. So I think more research on timing and magnitude of the optimal monetary policy response in the face of different types of shocks and when inflation expectations deviate from rational expectations. Well, that's going to be, I think, very helpful to policymakers as we think about how to, you know, bring inflation back down to 2% and how to maintain inflation at our goal. So to end and to conclude, I want to thank again the organizers at the Cleveland Fed, at the ECB for putting together such a strong program. I want to thank all of you for the insights you brought in terms of your research and your discussions and your poster sessions. And, you know, I think back when we started the Center for Inflation Research at the Cleveland Fed, we started in December 2018, and I remember some people raised an eyebrow. You know, they were really questioning, why are you focusing on inflation? Inflation has been so benign for such a long time. It turned out it actually to be the precisely right time to start the Center because it actually helped further the research agenda and put us in a better spot in this episode. So, you know, maintaining the price stability is the responsibility of the central bank and only the central bank can deliver on that goal over time. So, you know, there's considerable progress has been made on developing inflation models and measures that can better inform monetary policy, but I think there's still a lot more to do, a lot more for all of us to learn about inflation dynamics. And I really want to encourage all of you who are doing the research, participating in this conference, furthering progress. I really want you to continue on this research agenda because really good policy making really depends on the research that informs it. So, again, thank you very much for what you're doing and thank you for participating in the conference.