 Good afternoon everybody. My name is Loretta O'Sullivan, I'm Group Chief Economist with Bank of Ireland and I'm delighted to be here today and to welcome you to this IIEA seminar. We are delighted to be joined by Professor John B. Taylor, who has been generous enough to take time out of his very busy schedule to come and talk to us. Professor Taylor is going to provide an address which will ask whether we are entering a new era of high inflation. He'll speak to us for about 20 to 25 minutes and then we'll go to Q&A, which we'd be delighted if all of you would like to participate in. And you can join that discussion through the Q&A function on Zoom and do feel free to send your questions in as Professor Taylor is speaking and we'll collate them and ask them at the end. When you're sending your questions in if you could also please just identify yourself so your name and your affiliation and you can participate in the conversation as well in the discussion on Twitter using the handle at IIEA. A reminder as well that today's presentation and Q&A are both on the record. So let me formally introduce Professor Taylor now and then I'll hand over to him. So John B. Taylor is the George P. Schultz Senior Fellow in Economics at the Hoover Institution and the Marion Robert Raymond Professor of Economics at Stanford University. He's also the Director of Stanford's Introductory Economic Centre. He's an award-winning teacher and researcher, and he has served as a senior economist and member of the President's Council of Economic Advisors as Undersecretary of Treasury for International Affairs and on the G20 eminent persons group. Professor Taylor's book, First Principles, outlines his view on how to restore America's prosperity, and his most recent book is to choose economic freedom, enduring policy lessons from the 1970s and the 1980s. So Professor Taylor, no more of you. I'm going to hand over to you and let you take us away. Well, thank you very much. And thanks for inviting me to Ireland, even though I'm in California on the other side of the world, I'm going to, but it's a pleasure to be here. I was at the IIEA back in, I believe, 2014. So it's a while ago. So it's good to be back, but it's good to be here too. So we're hopeful to get some rain, but we haven't got it just yet. I'm going to use some slides, which I believe will come up as I begin to talk here. And the title, I think, but in some sense, a very apropos of where we are now, are we entering a new era of high inflation? That seems to be on people's minds more and more. And so I'm going to direct my remarks to that for the first part of the discussion, and I hope we have a good discussion after that. So let me just begin, if I may, move the slides down, yes. Until very recently, and I'm going to focus mainly on the U.S., not entirely, but until recently, we had been going back to what I call monetary policy rules. The Fed Chair, Jay Powell, had said not too long ago, I find these rule prescriptions very helpful. Mario Draghi was then President of the ECB. We would all clearly benefit from improving communication over our reaction functions. And of course, Rago Rajan was then Governor of the Bank of India and said the same thing. But then the pandemic hit and rules were out. Basically, many central banks just forgot them. The Fed didn't publish them. But it didn't take too long before back early last year. They put back in in the Monetary Policy Report. Now, the Monetary Policy Report is issued twice a year in the U.S. So I look at it very carefully. And so they put it back in. But then just a month or so ago, they took them out again. And I think there's a really question about why they took them out. And in congressional hearings, Jay Powell was asked by several members, both in the House and the Senate, and he said he put them back in. So we'll see if they come back in. But the fact is why they're in or out has been only really small changes in actual policy. So even though there has been attention paid to the recent moves, it's there's still a gap between what I think a good policy will be. And I'll tend to define good policy by rules. But the only way to do it is a gap that exists between them and the actual actions. So this suggests to me that we are indeed entering a period of high inflation. Unless some sensible monetary policy actions are taken. So that's what I want to discuss. So I'll go to the next slide, which is just a picture on the U.S. real GDP. You can see it's through the latest quarter we have the fourth quarter of 2021. We had this incredible hit as many of the world economy has has done but we're almost back to normal in fact by some measures we are. But if you look at the unemployment rate, which is the next chart. It's stated here to January 2022. But we already have two more months it's March 2022 and the unemployment rate is four is 3.6%. So it's come down by 4.4. So you can see this gigantic increase at the time that the pandemic hit and that's really, really below where it was at the start so so in some sense this is a returning to to normal and the policy is not quite yet. So if we go to the next chart it shows you where we were right before the pandemic and this is this is from the IMF you can see that there was some growth and lots of parts of the world not all over the place but it was moving along. Then we then the 2020 hit the next chart 2020. You can see it's all negative basically, except for a few exceptions. And you can see Europe and the United States are down in the negative area but then in 2021 most recent data you see the next chart. We're back again and so for the most part we all seal green, which is great. And so that's a sense in which we are getting back to normal we hope it will continue we hope there's not a resurgence of the pandemic. So let me just with that colorful background let me go to the next chart and just think about monetary policy. So there it is, is has a grow grew rapidly by a big step in 2020. It's been continuing at a high rate since then so this is one s one element of monetary ease if you like it's been a continuing. So that's just a picture the next picture is another indication of policy this is the effect of federal funds rate, which is the main instrument. The Fed is focused on, and you can see it just, it just picked up in the most recent meeting by 25 basis points and so that's about where it is now. But it's well below where it was before the pandemic. And of course well below what it was in other other times. So this is a sense in which it looks like the Fed is moving back. So that's what the banks are as well. But let's look at one more chart, which, which represents another element of monetary policy, which is the purchases of treasuries and mortgage back securities by the Fed. And of course this increased a lot during the pandemic in 2020, but it's still continued at a pace until this month and now it's stopped. So we're going to continue and the real question for the Fed is whether they start to reduce this again. There's real questions about whether this has had a direct impact, maybe some questions about that is aimed at the longer end of the yield curve. But I think the basic instrument is still is still the federal funds rate. So we'll focus most on that but this money growth and asset purchases are frequently referred to as part of policy. So let's continue the next slide. This is really what people are talking about and really the reason for the title of the talk. And you can see there's been a real resurgence of inflation. These are quarterly data. You can see the most recent observations United States of course is 7.1% and a fourth quarter of last year. I haven't really loaded that up yet but you can see it's a huge jump. It's not quite as high as it was in the bad old 70s but it's getting there and in some sense it's it's really shooting up more rapidly than the past. And it's really has a Fed has not until very recently paid attention to this and one of the reasons they're paying attention is it's affecting the world is affecting markets more generally. That's the sense in which we are entering an era of high inflation but we need to do something about it. So the next slide begins to think a little bit about why there has been so little action thus far you see 25 basis points quite low. And one reason was for quite a while the Fed said it don't worry about this it's transitory. It was low before the crisis. There's a lot of talk about supply change and special special impacts on inflation. There's a lot of ships building up outside of harbors and things like that. Those are a factor but it's not the main thing that's going on it's been more of a distraction. There have been some small changes as I mentioned a minute ago. These, the Fed has stopped the purchases of treasuries and mortgage backed securities, but it hasn't undone them yet. So, in some sense the policy rule which I'll talk about, which I think is is really getting a resurgence of interest is not yet a strategy. They really haven't talked about that although they were in other central banks were as well before the pandemic hit. So that's in a sense the rationale for little action is don't worry about it go away but I think not people having real questions about whether it will go away. So the next slide dubs into this a little bit more this is a table. This is a table that appeared in the July 2021 monetary policy report so they do this twice a year. They just took it out which it says in the in the red at the bottom of the chart and just took it out. But this has all the rules that the Fed looks at we don't know exactly how much they look at it. The first ones that the so called Taylor rules now what been around for on the they have just the rules are all pretty similar in many respects and I don't need to go into the details but the first one just says that the interest rate should be equal to the long run interest rate, plus the inflation rate plus I have times inflation rate minus the long run maybe the long run is to. The unemployment rate, they could have the upward gap instead of the unemployment rate because they move so closely together, as we know, but this is the really underlying the policy. And to some extent, I think one reason it was taken out in February is if you just plug in the numbers, you get numbers way different from the half a percent, which the Fed has so who knows exactly what it took about. But as I'll show in a minute, Jay Powell was quizzed about this in a recent here and he said he put the Mac in. So if we go to the next slide. You can see this. I tried to document a little bit just early last month in the House representatives in the Senate. And that's why he took these out of the policy report because they were included as it says in the second bullet in all the reports in July 2017 and Janet Yellen did that which he was fed chair. Now it's interesting as it says in the third bullet, this submission occurred the same time the Fed got so behind the curve, just as the discrepancy between one of the rules that they focus on the tail rule. And that was the policy which was large as it ever been. And so that's why members asked Jay Powell about this, and they brought attention to the, to what was missing. And I think this was a good thing to do. But his answers were important so I quoted the one of the, he referred and answered one of the representatives by saying we'll have it in the next one will have the rules back and the answer. In the same way, we'll bring them back in July. So we'll see if there's a return but my sense is that there's been quite a bit of notice of this removal and I think who knows exactly the reason they removed it maybe because such a discrepancy. We'll go in we'll now begin to talk about the rules a little bit more and what they suggest in the next slide. So this is the settings of the federal funds rate. Back in September of last year December of last year. It was beginning to move up. It was still 1% in 2021 point, sorry point one in 2021 point three and 2022 that started to move up. These are actually from the reports that the Fed puts out. So you can see they began to move up in December, still well below as I'll show you in a minute what policy should be I believe. But they started to move up and that's because they looked at the data that many people began to complain. And so this shows you the increase now it's continued and I try to show that in the next chart, which gives you the continuation into March of this year. And you can see that now by the end of this year. They have at 1.9% of federal funds rate, and then 2.8 2.8 so that's this is moving in the direction of higher rates and so and but so far they're still actually at point five. And so it's still quite low so this is still a signaling, which is important to be sure because people do look at the futures of policy and they try to figure it out. But you can see that the feds has been moving in the direction which I think is appropriate. At least in terms of what they say they'll do. They really haven't moved yet. We'll see what happens the rest of this year. And so this is the indication that they begun to move. And it's just repeating what they've already there I have a few more illustrations of that move in this next chart. These are the this is the famous dot plot that the Federal Reserve issues to communicate about its policy each dot represents the participant and FMC members estimate of where the federal funds rate will be this is the December release of the FMC. And at the end of this year just point nine, and then it rose to 1.6 still 2.1 quite below way in 2024 what what we think it should be the stars are just the averages of the dots, but the dots are the real thing and this is what the FMC is that I believe this is a helpful way to indicate where they they think they should go as these are these are estimates or votes of what each member wants to do. But anyway, this is back in December so things have changed and that is illustrated in the next chart. And so yes, well this is quite a change. So you can see in 2022 the dots have all moved up. And so the average is 1.9 so when we say 1.9 the end of this year. It's that average and then it goes up. So the pledges that will go up to 2.8 by then 2023. Stay that in 2024 and then begin to come down the longer run they don't say exactly what that is. But it seems it seems like the peak is 2.8. And unfortunately that even if they get to that, the concern is it's not enough that you have to give them credit for moving in this, this correct direction. But you don't have to worry about whether it's, it's enough or not. So this is really where they are now both in terms of the, the actual dots and where they project they will be at the end of this year 2022 and into 2023 and 2024. So the next slide begins to analyze this a little more. So this is a little bit of, of thinking. And for this is the, the dots, average dots, their stars here for the FOMC in the September of last year, December last year. And they will indicate this, the rule a rule, this Taylor rule, which basically just says that the interest rate should equal some constant times the inflation rates are some constant times the GDP gap of the unemployment rate. So even last year, they were behind by, by any estimate, the, and they started to move up. And so that's, you know, it's moving up but it's still well below throughout. So as I'll say in a minute, the red line is a year ago. It's, it's 2021 so assume the equilibrium interest rate was 1% that seems to be what the Fed has argued it's using the CBO estimates congressional budget offer estimates of, of inflation and the gap. It's, it's, it's only up there, you know, 2.83%. And the question is really what it is now, given the numbers I just showed you at the beginning of the talk. So they're behind by this estimate. Now, they, at the next chart shows you they've begun to catch up. Yes, there it is. So as of April, this is now plugging in the dots and average the dots over the years over the time period I've indicated. So you can see now they've all gone up in fact they're getting close to the red line. But the red one is a year old. And so it's good they're getting in the right direction but it still seems to be. They still seem to be behind the curve as I'll show you in a minute so but this is, this is, I think an illustration of they were behind the curve a year ago. If you use year ago estimates that's the red line, they're getting closer. But the real question is, are they close enough. So this is the topic of the talk. So the next chart begins to delve into that. So this is some algebra, which corresponds to the so-called Taylor rule. And by the way, this Taylor rule has gotten so much more publicity in the last month than it's had before, which is good for me but not so good for the Fed. The, the number 4.75 is the average inflation rate over four quarters. The point five just coefficients that I've found be useful 1.6 is the gap. And so it's 6%. So it's well above the 3%. Even if you plug in a lower inflation rate of four instead of 4.575 and you still get a number which is 5%. And so, as you know from the charts, the inflation rate is a way above four already. And so, so in the sense, this is this, this is why they, I think they are behind the curve. And you, we can talk a little bit about this. There's other estimates besides this rule. But this is the one which has gotten a lot of attention recently. So, so this, the main message here is that line I showed you in the previous slide is no longer three. It's, it's higher, maybe five, maybe 6%. And that's what the algebra says. The next chart is a representation that I'm not the only one saying this, and this is an example of john husband is an economist. Same thing from grants interest rate observer. It basically looks at the federal funds rate, what it should be according to the rules. And it's the light green line I think it's like green it says by this it should be over 5%, 6%, maybe 7%. And the blue line is where they were until very recently they're now at point five so it's still a gigantic gap. And that's what I think is getting people worried. If you look back in history and, and you mentioned the being at the talk I recently wrote a book with George Schultz he just passed away unfortunately. It was 100 years old, but we just wrote a book and we illustrated how the Fed got so behind in the late 70s and Arthur Burns was the chair then he said it's not us it's other things and so he convinced President Nixon that wage and price controls. But there you can see it in the 70s there was just the same kind of gap and things and they didn't make any adjustments. The wage and price controls were a failure. It really took a policy change in the 80s that made the difference. So that's in a sense there's a hope it doesn't turn out like it did in the 70s but there's a risk that it will if there's not adjustment. So let's go to the next slide. And this is just an, you know, just, these are links if you're interested. These are all the things that I just noticed in the month of March that have people have been writing about this. The Wall Street Journal and their, and their main editorial keeping rates too low for too long was ignored except by me. And then they had this, the one of the writers has this chart at the bottom at the bottom which I just replicated that's so called policy rule error. So they're way off it goes up to 7576%. And then there's other examples so this is just a handful of all the things that have been written about the Fed being behind the curve and you can see the headlines projected right hikes won't sufficiently tame inflation. Kelly Evans from CNBCs, but it's just an example and there's many others so I think what this is what this is showing is that we as we have this academic work. So we have the policies that the central banks use not just the Fed but other central banks but they're still now catching up and I think just beginning while we're seeing some adjustments. So if we go to the next slide, please. This is kind of a summary of the sense in which the Fed and other central banks are still behind. I'll update this in a minute with other central banks but if you go back to July of last year. The inflation rate was 4% gap was minus two. If you assume the target inflation rate was to which is what the Fed has generally been saying, and then the equilibrium interest rate at one that's a little lower than has been assumed you still got a federal funds rate at 5%. So if you now plug in the most optimistic forecast at all suppose inflation falls to 2% by the end of 2022 and suppose output is equal to potential, then the funds rate should still be 3%. So we're well behind in this estimate and this even assumes that the so called equilibrium interest rate is one rather than two, and it uses the average inflation over the four quarters not the actual average over a longer period so but I think in this sense even if you make these adjustments go all the way that say Nirvana is here you're still behind and that's that's the concern. So let me just give a couple more slides to wrap this up. This is a international issue and that's why I'm so happy to speak across the Atlantic into Europe and to Ireland in particular, but these principles I think I think we're going to learn from this. I chaired a working group was created by the G 20 and chair was on sorry. And basically this argued before the crisis that we ought to have open capital markets flexible exchange rates between countries, or, or blocks of countries rules based monetary policy, and then to stop the capital controls because they get in the way. And had the report and basically argue that East Central Bank should follow its rule based policy, and that will lead to a better international policy so, in some sense, the, this phenomenon that I've mentioned with respect to the Fed is is contagious who have all the reasons for that central bankers know each other they look at each other, and they to some extent, the Fed is always not always in the lead that's for sure. And they might not be this point and finally this, the next slide just says that if you could normalize policy in each countries that you would get an international reform in general. My hope is that each central bank would would describe and commit to its rule strategies it doesn't have to be a numerical formula. That's what I do but it doesn't have to be. And it's attractive, because each country can do what they think is best for themselves, but it can contributes to a global improvement I believe and and it will be a better circumstance. And then finally I just to conclude this, this question which I was asked to address are we entering entering a new era of high inflation I think the answer is clearly yes. Unless there's a change and there's beginning to think about the change and that's good. It's now clear that central bankers have to be guided by some kind of a rules based policy they got so off after the crisis and continued it, and I outlined a method to do so they should get back on a strategy that markets understand and that works. And of course this would be something where the interest rate would increase if growth increases or inflation rise and of course that's already happening. As we speak. Now I would emphasize any strategy or anything a central bank has to do can do will do is a plan and all plans can be changed their rules or strategies. But I believe and this is maybe the most important thing to conclude with that some chances now some changes now with if they're telegraphed and are relatively smooth. But if they don't occur we stand a real chance of a damaging change later and that's really what worries me and that's why I think we have to admit this is all this is a beginning of something needs to be changed and then finally, I think I just have some references. I've been worried about this all the time, talking about things very important so let me conclude at this point and see if there's any questions or thoughts and see if I got interested in this subject so let me stop there.