 Wel, we've had some spirited debates in the last couple of days around price and wage setting in advanced economies central banks talk too much to market. Who killed the Philips curve? I think the feeling was there were potential culprits in this room. Maybe we can have a polling question on who killed it but now we get to hear from a group of four individuals who, yw cael ei ddweud ychydig iawn, lle mae hi'n gweld cymdeithasol a'r beth yw'r achos yw yn eu cyfnod ar ôl i'r gyfnod, yn ffurdig ar ymgyrchu ddweud yn Donald Trump. Mae'r grunau wedi'i gweithio'r ddweud oedd yn gweld, a bod ydych chi'n gweithio'n gweithio'n drwng Mary Oedragi, ymddangos ymddangos ymddangos, ysgolau tynnu, ymddangos Ysgolau Ysgolau Ysgolau, ac ymddangos Coroda ymddangos ymddangos ymddangos Japan. Yn y pethau yw hwn yn gwneud â'r panel hwn, yw'r gweithio. Yn y gweithio yw'r gweithio, mae'n gweithio eich gweithio'n gweithio'n gweithio'n gweithio'n gweithio. Ond mae'n gweithio ffawr o'n gweithio'n gweithio yw ymlaen ond y gallwn. A gallwn ni'n cael ei gweld ychydig yn ymlaen yng nghymru a'i osgylchio. Mae'n gweithio'n gweithio, gwneud, sy'n ffordd ymlaen i'r gwirio'n gwblwch o'r peth o'r ffinoffau. I get to ask a few questions and then I promise you will get to ask lots of erudite questions as well. But President Draghi, do you want to kick us off? Thank you, Stephanie. I think you set the bar pretty high and asking me at least to say something interesting. But just trying to get the sense of many of our discussions today but also last year. The first point is that it's clearly a variety of reasons why the response of inflation and wages has been so slow. And they go from measurement of this lack, low productivity, the trade unions have disappeared, structural reforms, labour supplies gone up, it's increased a lot. And then known wage related aspects like people wanting more stability rather than higher wages especially because their employment is of low quality and then the importance of past inflation. Now to disentangle all these reasons, it's very difficult. But one conclusion is that we see that all these combined effect of all these reasons is gradually washing out, is gradually waning. A good example is one given by the importance of past low inflation for a long time. The ECB staffs calculated that past low inflation has dragged about 0.2% out of wage growth in the last three years, per year, 0.2% per year. And now we see that this effect is waning out and has headline inflation is picking up, current headline inflation because more and more important and past low inflation is losing importance. And so that's in a sense also says that the anchor in inflation expectations was crucial and remains crucial and fortunately there will anchor. So once this is said, we see that nominal wages are indeed increasing. No matter which measure we take, we take compensation per employee, we take compensation per hour, we take negotiated wages, all of them are going up. And they're going up around now it's 1.9%, the last data point for the compensation per employee and compensation per hour is about the same thing. Having said that, is this going to be translated into higher inflation? Well here I think the record is a little more mixed. For example, we had an increase in wage growth by 0.8% between 2016 and 2018 and this year but the increase in inflation was only 0.1% and because productivity gone up by 0.7%. Now what we expect for productivity, we do expect it will grow less than it has done in the late stage of the cycles and wages, nominal wages will grow more than they have done up to now. So all in all we see the unilabor cost on an upward path and by the way the other consideration which was touched in the previous discussion was related to price in power. It's coming back of price in power and there again we see encouraging signs because if we look at an index which more closely reflects input prices, namely the domestic price, domestic known food price inflation in April that's gone up by 0.5% which is the highest rate since I think the last six, seven years. So all in all this is encouraging. Now what about e-commerce? Is this going to dampen this process of recovering inflation? And again the previous discussion about whether an increase in concentration does affect the rate of inflation to some extent gives some light on this issue. Now the answer that we have is that we find very little evidence that e-commerce has any effect on inflation. Clearly it has increased price transparency, clear may have some compression of margins, some cost saving, but all in all in the aggregate this doesn't show into a permanent lower inflation. So probably the effects of the e-commerce and other aspects of the globalization have to do more with the composition of industries rather than with the aggregate effect that we cannot find in the data, an aggregate permanent effect. So all this makes us confident that inflation is converging towards our objective and we draw this confidence by the ever tied labour market. By the high capacity utilization rates, by and frankly by as I will say in a moment by the continuing ample monetary accommodation. Also by the disappearance of what we call the tail risk of deflation. So all this leads us has led the governing council last week to give guidance on monetary policy. And the first thing is we made as I said last week at the press conference, we need to make sure that the ample degree of accommodation that is currently incorporated into the financing conditions on which the staff projections are predicated is maintained for as long as necessary in order to bring about the convergence of inflation towards our objective. And then we went through the various measures we said that we intend to maintain our portfolio of accumulated securities for an extended period of time after the end of net purchases and in any event as long as necessary. So, and then we enhanced our guidance on future rate path for our key interest rates. We said that we expect to help them at the present level, at least through the summer of 2019 in any case for as long as necessary to assure that inflation evolves along the trajectory that is aligned with the sustained adjustment path that we expect to see in the medium term. Thanks, Stephen. Thank you. Gemma Pow. Thank you, Stephanie. Thank you, Mario. So nine years into an expansion that has sometimes proceeded slowly, the US economy is now performing very well. Growth is meaningfully above most estimates of its long term trend, although admittedly that trend is not what we would have hoped it to be. The labor market is particularly robust with unemployment at its lowest level since April 2000, and inflation has moved up close to our 2% objective, although we haven't yet seen it remain there on a sustained basis, as our goal would suggest we should do. Today, most Americans who want jobs can find them, and high demand for workers should support wage growth and labor force participation, the latter a measure on which the United States now lags most other advanced economies. A tight labor market may also lead businesses to invest more in technology and training, which should support productivity growth. And some groups such as some racial and ethnic minorities that still have higher unemployment and lower participation rates could also see increasing benefits from a tight labor market. In short, there's a lot to like about low unemployment. Achieving our statutory goal though of maximum employment in a context of price stability and financial stability is both our responsibility and our challenge. Earlier in the expansion as the economy recovered, the need for highly accommodative monetary policy was clear, but with unemployment low and expected to decline further, inflation close to our objective and the risks to the outlook balanced, the case for continued gradual increases in the federal funds rate is strong. I'll turn for a minute to current labor market conditions. At 3.8%, the unemployment rate is now below most estimates of its long-run level, which are clustered in the mid-fours, and many other labor market indicators also suggest an economy near full employment. I'll name just a couple. One would be an elevated level of job vacancies, so for the first time since the labor market began collecting this data in 2000, there are now more job vacancies than there are people counted as unemployed. In addition, the quits rate is elevated, a sign that workers are able to find another job when they seek one. And surveys show that businesses are finding it difficult to fill vacancies and that households perceive jobs as plentiful. A couple of other indicators are less clear. Labour force participation among prime age workers has moved up in recent years but remains below its pre-crisis levels. In addition, wage growth has been moderate, which is consistent with low productivity growth but also an indication that the labor market is not excessively tight. Looking out ahead, the job market seems likely to strengthen further. Real GDP is now reported to have grown 2.75% over the past four quarters, well above estimates of its long-run trend. Expansionary fiscal policy is just arriving and expected to add to aggregate demand over the next few years. So many forecasters expect the unemployment rate to fall into the mid threes and to remain there for an extended period. If that does come to pass, it will mean the lowest unemployment in the United States since the late 1960s, 50 years ago. Because we have so little experience with very low unemployment, it's interesting to compare today's labor market with that earlier period. Unemployment was below 4% from February 1966 through January 1970 and during that time, PCE inflation increased from below 2% in 1965 to about 5% in 1970. In hindsight, unemployment is now widely thought to have been unsustainably low and to have contributed to escalating inflation. But the question is how significant and relevant is that precedent for today? The U.S. economy has changed in many ways over the last 50 years. By some estimates, the natural rate of unemployment is substantially lower now. For example, the Congressional Budget Office now estimates that the natural rate was about 5.75% then and now a full percentage point lower. And rising education levels do point to a decline in the natural rate since the 1960s because more highly educated people are less likely to be unemployed. The share of the population with a college degree has risen from less than 15% to nearly 40% now and the share with less than a high school degree has declined from 45% to about 5%. Another important difference from the 1960s is that inflation has been low and stable for an extended period which has better anchored inflation expectations. Today, policymakers have a greater appreciation of the role expectations play in inflation dynamics and a clearer commitment to maintaining low and stable inflation. So, unfortunately, with the passage of a half century and important changes in the structure of our economy and its central bank practices, in my view, the historical comparison does not shed as much light as we might have hoped. And that lack of useful historical precedent leaves us with some uncertainty about the answers to several important and challenging questions. First, estimates of the natural rate of unemployment by FOMC participants and others have drifted lower as unemployment has declined without much apparent reaction from inflation. But how reliable are these current estimates? They've always been uncertain and they may be even more so now as inflation has become less responsive to unemployment. The anchoring of expectations is a welcome development as likely played a role in the flattening of the Phillips Curve. But a flatter Phillips Curve makes it harder to assess whether movements in inflation reflect the cyclical position of the economy or other influences. Second question, what would be the consequences for inflation if employment were to run well below the natural rate for an extended period? The flat Phillips Curve suggests that the implications for inflation might not be large, although a very tight labour market could lead to larger nonlinear effects. Research on that question is ambiguous again, reflecting the limited historical experience. We should also remember that where inflation expectations are well anchored, it's likely because central banks have kept inflation under control. If central banks were instead to try to exploit the nonresponsiveness of inflation to low unemployment and push resource utilization significantly and persistently past sustainable levels, the public might begin to question whether our commitment to low inflation continues and expectations could come under upward pressure. Of course, so far we see no signs of this at all if anything some measures of longer term inflation expectations in the United States have edged lower in recent years. Third question, can persistently strong economic conditions pose financial stability risks? Of course, strong economic conditions are a good thing. Such conditions can make the financial system better able to absorb shocks through strong balance sheets and investor confidence. But we've often seen confidence turn into overconfidence and lead to excessive borrowing and risk taking, leaving the financial system more vulnerable. Indeed, the fact that the two most recent US recessions stemmed principally from financial imbalances and not from high inflation highlights the importance of closely monitoring financial conditions. Today, I see US financial stability vulnerabilities as in line with their long run averages. While some asset prices are high by historical standards, I don't see broad signs of excessive borrowing or leverage. In addition, banks have far greater levels of capital and liquidity than before the crisis. Fourth, while persistently strong economic conditions can pose risks to inflation and perhaps financial stability, we can also ask whether there may be lasting benefits. As I mentioned at the beginning, a tight labour market could draw more people into the labour force. In fact, as the labour market has tightened, more workers have been moving back to work and off disability roles. There could also be benefits to productivity and potential growth. All told, though, the persistence of any such positive hysteresis benefits is uncertain since, again, the historical evidence is sparse and inconclusive. So to wrap up, as is often the case, in the current environment, a significant uncertainty attends the process of monetary policy. So today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal funds rate remains strong and is broadly supported among FOMC participants. Thanks very much. Philip Lowe. Thanks very much, Stephanie. It's a great honour for me to be able to participate in this panel. In some ways, I'm the odd one out here. I come from a small economy, not a larger one. We've had positive interest rates for the last decade. We haven't had to go anywhere near zero. We haven't done quantitative easing. We haven't embraced forward guidance. We've had 27 years without a technical recession. I'm hoping we can extend that a while longer. As I said, an odd one out, but I don't really feel like the odd one out, though, because the issues we're discussing here in Cintra are really at the core of the issues we're discussing in Sydney. In Australia, the inflation rate has been below the midpoint of our target for some years, and it's going to stay that way, I think. Wage growth has repeatedly surprised on the downside, and the current rate of wage growth isn't consistent with us achieving our inflation target on a sustained basis, like others. We're grappling with why we find ourselves in this situation. The fact that it's happening in so many countries suggests to me that there are global factors at work, and they're probably structural in nature. The result of those factors is that the inflation process looks very different in many countries, and at the heart of that, I think, is the wage process, which looks different. Whether that's going to be permanent, it's hard to tell, but it's certainly persistent enough that it's important for policy. What I'd like to do in my time is to offer some reflections on two issues that are really at the heart of this conference, and that is why is the wage process different, and how much of it is structural, and what are the policy implications of that. The wage process, as I said, is different, so the relationship between wages and unemployment looks to have changed. There are three sets of factors that are really important here. One is the changes in the industrial relations landscape, and we saw a really good example of that this morning in Professor Schoenberg's paper. The evidence there is pretty compelling. The changes in industrial relations arrangements in Germany have affected wage and employment outcomes, and the Australian experience is very similar to the German one. It's hard to escape the conclusion that changes in industrial relations has changed the inflation process. The second factor, I think this is actually more important, is increased perceptions of competition arising out of globalization and technology. Everyone feels like there's more competition. One of the first things you learn in economics is that there's more competition, prices aren't as high. We discussed this in the earlier session. There are a couple of factors that are driving these extra perceptions of competition. One is globalization. Hundreds of millions of extra people have entered the global labour force, particularly in China and India. First of all, that affected manufacturing wages around the world, and now I see it affecting services wages. Many more services sectors are becoming tradeable. I see a lot of examples where business services that used to be supplied in Sydney are now supplied in Manila or Chengdu or Bangalore. That's meaning that everyone feels like there's more competition. The other factor that's adding to the sense of competition is the nature of technological progress. It's much more likely to be embedded in intellectual capital and physical capital, and we're also seeing widening gaps between the leading firms and the laggard firms, and both of those features are affecting the wage dynamics. With technology progressing so quickly and particularly for the leading firms, many firms are having trouble keeping up. They're having trouble adopting the new technologies and to remain competitive, they focus on what they can control, and that is their costs. The main cost they can control is their labour costs. The technology progress is leading for many firms to have a very strong mindset on controlling costs. I see lots of examples of this in Australia. Almost every business meeting I go to, business people complain that it's incredibly hard to find workers. I rather naively ask, why don't you pay more, attract some workers from another firm? When I do that, they look at me as if I'm completely mad. That doesn't be the last thing they would do, and I typically get a lecture about how competitive the world is. There's competition from China, Japan, and they worry about technology. The last thing I can do is increase my costs. It's the one variable I can control, so there's a very strong mindset that I've got to control costs, and I think it's coming from competition. It's a global factor, and it's structural. The third factor that's affecting the relationship between wages and unemployment is that labour supply in many countries is turning out to be much more flexible, and we're seeing this rise in the participation rate. There are a variety of reasons for this. One is, let's see this again in Australia, rising labour force participation by older people has health outcomes have improved. We've seen big advances in the health outcomes of many people. Our bodies are asking longer as we're working in services rather than manufacturing, and that's allowing people to stay in the labour force longer, particularly when there are jobs there. That's quite an important factor, and the increasing acceptability of part-time employment is allowing many women particularly to stay in the labour force longer. The labour supply is turning out to be quite flexible, so even though we're seeing very strong employment growth in a lot of countries, it's not translating into higher wages. Things look different, industrial relations, increased perceptions of competition, and increased labour supply, and I think those factors are going to be around for a long time, so I don't expect the situation that we're dealing with to change quickly. What are the policy implications of this? The main one to me is that the system that we're operating in looks less inflation-prone than it once was, and that's reflected in most of us worrying about inflation being too low, not too high. It's a very different world when I was at university. Listening to the discussion over the past two days, I've been trying to think about, trying to listen for ideas about how we deal with this world that is less inflation-prone. I can take the liberty of summarising the things I've heard under three broad approaches one could adopt here. One is that central banks should just try harder. The basic conception of how the economy is working is fine. We just need lots of monetary stimulus. We need to keep out that. We need to just try harder, and eventually it will turn out okay. The second perspective, a couple of people touched on this yesterday, we just need to accept that inflation will be low for a while. After all, low inflation isn't that bad. Central banks want to achieve their inflation targets, so that's clear. Most people out there in the communities that we're supposed to be serving don't really care that much if inflation is a bit lower than the target, especially if the labour market outcomes are okay, if there are plenty of jobs being created. The second perspective is, it's not fantastic, but we've just got to be patient except the inflation is going to be low for a while and there's not really a great loss of social welfare from that. The third perspective was one introduced by Yuri yesterday. He said, we'll just lift inflation expectations. Central banks should embrace social media, they should communicate better, make it very clear what inflation expectations should be, and the problem's kind of solved. You can make a case for each of those perspectives and I don't think there's a right answer. I see a few problems though with the try harder approach. I keep on solving this problem with monetary stimulus. I don't see the risk return trade off from that approach being particularly attractive. In terms of return, the effectiveness of monetary stimulus in driving up inflation, there's a question mark over how effective that is, and I can see clear side effects and the side effects come on the financial side. If interest rates are low and the economy is growing quite well, there's a great environment to borrow to buy assets. We've seen some of that. We see higher debt and higher asset prices. It's helpful now, but eventually, interest rates will hopefully need to correct and some of those developments on the financial side will need to be reversed and that's going to pose risks. The effectiveness of more monetary stimulus to solve the lack of inflation is questionable and I see clear risk from doing that. I think that does leave us with the possibility of accepting that inflation might be just a bit lower than we'd like for a while. That's difficult for central banks to accept. They see their job deliver on the inflation target, but it's not so difficult to accept that if you see your job or your mandate as broader than just delivering on a specific rate of inflation. In Australia, our mandate was written back in 1959 and it hasn't changed since then. We haven't swung with the fashions in central banking. We don't have a single mandate. We don't even have a dual mandate. We have a triple mandate. That's price stability, full employment and the general welfare of the Australian people. That's an unfashionable mandate perhaps in this room, but I'm really glad that we have that mandate, especially in the current environment, and I use all three elements of that mandate when I'm explaining what we're doing and why we're doing it. I often ask rhetorically and publicly into the politicians, do you think it would serve our collective welfare to have yet more monetary stimulus so that we could get back to inflation more quickly if the main way we got back to inflation more quickly was encouraging people to borrow more and push up asset prices even further? Not everyone's going to answer that question the same way, but most people say, no, that's not worth it, especially if the labour market's generating sufficient jobs, which is certainly the case last year we've had 3% employment growth. In our case, my view has been that the welfare maximising approach, which is really what we're about, maximising the welfare of the people, is to be patient as long as the labour market is improving. As long as we're moving in the right direction, we don't need to force the process more quickly through monetary stimulus. One thing, though, that we have done in an effort to get there a bit more quickly is a version of option three, lifting expectations. As I said yesterday, it's lifting wage expectations. My concern has been that a 2% wage norm has become the standard in Australia and we're getting reasonable labour productivity growth. So 2% wage growth and reasonable labour productivity growth doesn't make for 2.5% inflation on a sustained basis. So I've been talking publicly quite a lot about trying to lift wage norms back to start with a three, rather than a two, whether that works or not. I don't know, but I'd rather do that than try and deliver more monetary stimulus to get inflation rise. I'd rather do it by trying to lift wage expectations. Thanks, Stephanie. Thank you. I can see everyone now preparing their resumes for applying to be the head of the Reserve Bank of Australia. It's quite a nice job. Governor Koroda. Thank you. Japan's economy has improved significantly over the past five years since the introduction of quantitative and qualitative monetary easing or QQE in April 2013. The economy is no longer in deflation, which is defined as a sustained decline in prices. However, wages and prices have continued to show relatively weak developments compared with a strong economic expansion. The mechanism behind this phenomenon is not entirely clear. Today, I would like to talk about the recent experience in Japan where the sluggish nets in wages and prices seems to be more evident compared with other advanced economies and discuss its implications for the Bank of Japan's monetary policy. First is the firm's wage setting stance. For the past few years, total cash-earning per employee has been rising for a bit of fluctuations. However, their pace of increase has been moderate compared to the labour market tightening with the unemployment rate being at a record low level of 2.5%. In particular, base salaries of full-time employees which account for almost 70% of total employee income have not risen much despite the general labour market tightening. In Japan, lifetime employment has been widespread and labour mobility across firms has been relatively low. Therefore, wages of full-time employees tend to reflect labour market conditions insufficiently, at least in the short run. In Japan, wage negotiations between labour and management take place at major firms every spring where the rate of increase in base pay is decided. The rate has been almost 0% since around 2000 under the prolonged deflation. In 2014, when actual prices started to rise, there was a return to base pay increase for the first time in nearly 15 years. However, the problem is that the pace of increase in base pay still lacks strength. On this point, some have argued that reflecting that both labour and management in Japan plays high priority on the stability of employment and wages, firms avoided large-scale layoffs and wage cuts during the prolonged deflation so that firms cannot simply switch to increasing wages even when the economy grows and the labour market conditions tighten. The deflationary mindset that has become entrenched among people has been quite tenacious and it will take time to completely dispel this mindset. Second is firms' price-setting stance. Even though moderate wage increases have been taking place, wage costs have not yet been directly passed on to prices of products and services. Firms that face increases in wage costs will generally consider the following two options to maintain the same level of profitability. One is to pass on the increased wage costs to sales prices and the other is to improve productivity through streamlining of business processes and labour-saving investment. So far, many firms in Japan have been making efforts to raise their productivity. The fundamental reason behind this is likely to be a tenacious, deflationary mindset that I mentioned earlier. Consumers remain reluctant to accept price rises despite the improvement in the employment and income situation. Therefore, firms are cautious about raising prices due to their concern over losing customers. Another likely reason is that the productivity of Japanese firms, mainly in the service sector, is low by international standards and thus there is significant room for improvement. In fact, initiatives are widely being taken in the services and retail sectors such as enhancing efficiency of customer services, cutting back excessive services and optimizing inventory management and delivery services. Such efforts by firms in these sectors are encouraged in part by digital technology in recent years including artificial intelligence and robotics. These measures to improve productivity are expected to produce positive effects in the long run in that they would address structural issues such as a decline in the working-age population and lead to boosting the growth potential of Japan's economy. At least in the short run, however, they likely will reduce the upward pressure on prices. I would now like to make three points from the perspective of monetary policy. First, wages and prices have been improving gradually under the powerful monetary easing over the past five years, although sluggishness remains. A base pay increase has taken hold again in Japan's economy and proportional firms that have raised their base pay has been increasing steadily. In addition, mainly in the service sector where there is an acute labour shortage moves to reflect the increased wage costs in prices have been spreading gradually. As medium to long-term inflation expectations are projected to rise through the adaptive formation mechanism, if further price rises come to be observed widely, the Bank of Japan judges that the momentum toward achieving the price stability target of 2% is firmly maintained. Second, the Bank therefore needs to maintain a positive output gap by persistently pursuing powerful monetary easing under the framework of QQE with ill-curve control. The Bank thereby will encourage firms' wage and price setting to become more proactive and maintain positive momentum for a long time. Third, sluggishness in prices is attributable to a rising productivity that reflects technological innovation in recent years. It is important to continuously examine how this will affect the natural rate of interest as well as economic and financial activities, the effects of new technologies on the economy are often difficult to grasp in an accurate and timely manner using existing statistics. Thus, they should be examined in detail from various perspectives. Thank you. You've all focused on wages and wage growth which is understandable given that the challenges are currently being faced. If I could just come back to you briefly that Governor Low pointed out that even the 2% wage growth that they're seeing now in Australia was not enough to achieve the inflation target. How important is more wage inflation to you in hitting your target? What kind of wage inflation do you need to finally hit that Japanese inflation target? The Japanese government has been asking Labour and Business to raise wages in the last five years. This year, the government even requested Labour and Business to agree to 3% wage increase during the so-called spring offensive. The final result is not yet known but I presume total wage increase including base pay as well as other elements of wages would have risen close to 3%. As I said, the Bank of Japan is aiming at achieving 2% inflation target or price stability target while the labour productivity increase in Japan is around 1%. That means that at least 3% wage increase is necessary to be consistent with 2% price stability target so that the government request for 3% wage increase is quite appropriate. By the way, also the government has been raising minimum wages by 3% almost every year. Again, this is consistent with our price stability target. Governor Low, I'm interested in the context. The conversations that we had yesterday about whether or not central banks can really change people's expectations and the difficulty of talking to households and really changing their way of thinking when they are often really not wanting to pay attention to you at all. How do you think about your capacity to affect that wage growth? You say that's a major focus now. Is it harder to do that because we're so concerned about talking to markets that it's harder for us to talk directly to households? I think Charles Whiplosh was saying yesterday. I'm not trying to talk directly to households on this particular issue. I'm trying to talk to businesses. We've got the central bank calling for higher wage growth. We've got political leaders on a centre-right government calling for higher wage growth and senior members of the business community calling for higher wage growth. Yet it doesn't happen. When I talk to individual businesses, they agree in principle that the country would be better off having wage growth of 3-point something or 2-point something. But not in their business. The reason it shouldn't happen in their business is they're so worried about competition. In a market economy, we don't have the coordination mechanism to get to something which I think would be a better outcome because no individual business wants to put up its wages more quickly than its competitors. There's a first mover problem. The thing that I'm trying to do and I don't know whether it's going to be effective is to help solve that coordination problem by saying, look, it's okay. It's okay to give wage increases of 3-point something and if that can become the norm, it will be better off. I don't know whether it's going to be effective or not. Governor, President Draghi, I'm interested. The Eurozone experience of this is a little bit different. I guess not just because the recovery is not as far along as the many, many years recovery in Australia. We've heard a lot in the last couple of days and we just heard from Philip. There's something different about the wage bargaining process and we're getting a lot of employment growth and not so much wage growth. And yet, if you look at the forecast for the Eurozone, it feels like we're not expecting such a transformation in the labour market outcomes, at least in many countries in the Eurozone. Maybe in some we think the natural rate has fallen dramatically. How do you think about whether or not wage bargaining and the wage employment relationship has changed in the Eurozone? Well, it's a difficult question because we actually have 19 countries and each one of them has a historical setup of industrial relations and I don't think they can be easily compared. But you have to set monetary policy for all of them. That's right, exactly. That's a challenge. But it's silly changed in a sense. You, as I was mentioning, one of the reasons in the list of why is the wages aren't responding as fast as we were used to, is the disappearance of trade unions. Now, in some countries, they were important to begin with, but in others were not. So there is a combination of factors that has changed this relation. But the point I was making before is that, yes, that's true, that explains the past. We are convinced that the future looks different, looks much more like we were used to see years ago when this relationship was stable and we were looking at that to predict the movement in wages from the labor market conditions. So by and large, you have a variety of factors. We think we are convinced they were very important in the past in explaining the slow speed of adjustment. Now they are sort of washing out, they are less important. We see, for example, that what was discussed in the first day of this conference, the residuals or Philips Curve washing out, moving away. The relationship is increasingly capturing a rather traditional design. Now, of course, maybe, we got to be careful here because maybe we want to see absolutely want to see things that don't exist and therefore we convince ourselves that they exist. But frankly, if I compare, for example, all the projections about future inflation that the ECBs produced over the last four or five years, you clearly see a greater convergence, you clearly see a narrowing down at the confidence intervals, you clearly see an upward trend in underlying inflation. For example, one thing that's telling is that over our projection horizon, the underlying inflation, now the core inflation is higher than headline inflation. So in our projections we actually discount some slowdown in oil prices but an underlying strength which remains through the 2020. I'll say yes. It's a complex continent, 19 countries, very different, lots of reasons they can explain in the past not sure that this diversity is the best predictor of the future. We've been implicitly talking about as if we have many, hopefully many more years of recovery to go and to discover what the dynamics of wages and prices will be. But we started the week with quite a provocative speech from Larry Summers who said that the world was now economically, politically and socially less prepared for the next downturn than it's ever been. Chairman Powell, do you agree with that? Well a couple of things we know are that interest rates have been lower and we don't know this but probably remain low which means we'll be closer to the zero lower bound which may mean that we're more likely to hit the zero lower bound and I think we've taken that into consideration. I think there's still fiscal policy space in the United States, there's less than there used to be, there's less than there should be but there's some room to react and I think we're going to take all of that on board and the real question is and I guess Larry may have said something about this, I didn't pick it up but what's the right policy response to that and if you look at an economy in the case of the United States which has growth well above trend unemployment at 3.8% inflation moving up not quite at target but getting close and the federal funds rate still in a place that is accommodative in the view of members of the committee perhaps 100 basis points below the median estimate of financial rate so what that calls for in our thinking is continued gradual rate increases I guess one of the things that came through in Larry Summers' remarks but also other places is that because we know that there is this reduced monetary policy capacity we expect there to be in coming next time we have a downturn the relationship between fiscal and monetary policy becomes quite a lot more complicated in this environment where you have a lot more unconventional policy or potential for unconventional policies and even now there is a potential for conflicts to develop between the fiscal objectives and the monetary objectives I mean Governor Corredor I wondered how you think about the interaction between fiscal and monetary policy over the next few years in a somewhat abstract way but is it now more complicated than when we first designed those independent central banks Always the cooperation between fiscal authority and central bank by way of policy coordination or something like that is necessary but at the same time the mandate of the central bank is basically the price stability and the financial system stability of course some central banks like the Federal Reserve and the Reserve Bank of Australia have another mandate of achieving full employment or something like that but for the Bank of Japan the mandate is basically price stability and financial stability and we have to continue to aim at achieving and maintaining price stability and financial stability and in some cases that might make active proactive fiscal policy somewhat difficult but at this moment I don't see any difficulty of coordinating fiscal policy and monetary policy arising in the near future I don't see any problem I guess one example is if the government is now going to move to having a broad target for the budget which includes the debt interest then that complicates things The government is aiming at achieving primary surplus by fiscal 2025 and also trying to achieve debt GDP ratio to gradually grind over time and I think that fiscal consolidation program is quite appropriate for the Japanese economy as well as the public finance because already the Japanese government has accumulated very large debt over the years and it's quite necessary for the government to consolidate fiscal position of course gradually in the medium to long run and that is not particularly inconsistent with our monetary policy in coming years I'm going to get on to I can see these people thinking of their questions which will be much tougher than mine but I had one more question for Chairman Powell we had some discussion yesterday I think you weren't here for it but there was some discussion about how central banks should communicate to households and whether perhaps we end up talking a lot to financial markets means that you're also talking in a very careful as you all are today very careful way that then makes it harder for you to speak sort of directly and straight forwardly to households. You said in a panel that you participated in recently when we were both in Stockholm you said you thought that maybe there would be less need for forward guidance in the future I made me think when Charles Wyplos was saying you shouldn't be spoon feeding the markets do you want to say a little bit more about how you see forward guidance? Sure obviously we want the public and the markets to understand how we're thinking about the economy how we're thinking about the path of policy our reaction function and that kind of thing I think during the financial crisis in order to support the economy we began to do quite explicit state based and then state based forward guidance about the path of policy and that was an unconventional tool that we came to rely upon. I think it worked I think it did assure the public that rates would remain lower and that sort of thing so as we move back to a more normal environment in the United States we're going to have a shorter statement at the end of the meeting that won't have so much in the way of formal forward guidance we're still going to have a number of economic projections which puts quite a lot of information about the individual projections of individual members of the committee so that's really how we're thinking about forward guidance how I am anyway Okay so maybe you'll take a group of questions from the audience and then yes Ben Friedman we'll have these two here Okay Lars Svensson Stockholm School of Economics I have a question to Philip he was nervous about the side effects of lowering the policy rate and raising inflation to the inflation target in Australia nervous about the side effects of that I would like to point out to another side effect of undershooting your inflation target if you do that on a sustained basis if you accept lower inflation on average than your inflation target that is like having an implicit unofficial target below the official target once the market and the general public understands that they will lower their inflation expectations by the fisher equation that means that the average policy rate will then be correspondingly lower and the gap to the effective lower bound will be shorter smaller and we will more likely hit the effective lower bound in the future doesn't that make the economy less resilient and more vulnerable isn't that a pretty important side effect of undershooting your inflation target I think we will try and take a question from Ben Friedman as well Ben Friedman from Harvard my question is for any or all of our distinguished panelists the overwhelming focus of discussion at this conference has been about how the flattening of the Phillips curve has made and is making it more difficult for our central banks to raise inflation up to their stated targets I hope each of you has been thinking about the reverse of that proposition which is that in the event we hope unlikely that something goes wrong and we wind up with inflation above our central banks targets then either because the central banks policy is behind hand in slowing the economies or something goes wrong with oil prices there's of course the usual laundry list of things that could go wrong the same flattening of the Phillips curve we've been talking about would then make it more difficult for our central banks to reduce inflation back down to the targets and in a world of dynamic strategy for policy surely that implication has some bearing on policy today so I wonder whether our central banks have taken account of and are thinking about the potential difficulty in which they would find themselves should inflation for some reason or other over the next some years wind up being in a situation in which not how do we get from one to two but how do we get from three or something like that to two we've got a cluster of questions in the same place I promise I will ask questions from other parts as well but if you actually there's a third question just here actually right next and then we'll go to the panel so I'm Stefan Gerdag from EFG so my question is also to Philip Loh and it's along the line of Larson's questions so Philip you mentioned that the public may not care very much if inflation is one percent or if it's two percent but anyone who has borrowed is going to care about what the actual inflation is in particular governments are going to care so if they have I mean they borrow under the assumption that the central bank will deliver on the inflation target but if it ends up being unexpectedly low exposed real interest rates end up being unexpectedly high now that's not a problem if you have a public debt-to-GDP ratio of 40% which I think is the Australian case but it is a problem if the public debt-to-GDP ratio is 140% which is the case in some countries now one can of course argue that this is just an example of poor fiscal policy in the central bank which is simply not this but in practice I mean shouldn't the central bank worry about the public finance consequences of running unexpectedly low inflation thank you Philip Lowe do you want to answer the couple of questions that were particularly related to you but then I think others will probably have remark Thank you well I acknowledge the risks that both Lars and Stefan talk about but in my mind they're relatively marginal our fiscal policy discipline fiscal policy for a long time so we don't have a public debt issue at all and I remain confident we're going to get back to 2.5% it's just going to take us a bit of time I accept that it's going to be a gradual process and because it's gradual people might lower their inflation expectations but if we keep communicating that we're shooting for 2.5 and we're making gradual progress towards that I don't think we're going to see a persistent decline in inflation expectations there is a risk that that happens balancing that risk against the risk that would come from pursuing a policy that pursued a more rapid return of inflation to 2.5% and in the environment we've been in I see the risks being quite large from trying to get inflation up more quickly we've been 1.75 to 2 I think we can live with that for a while to try and get it back to 2.5 very quickly it would be mainly through people borrowing more money and having higher asset prices I think that's a much bigger risk to our economy than people having surprisingly low inflation expectations we've got very high levels of debt very high levels of asset prices that's our number one domestic risk not lowering people having lower inflation expectations we're trying to balance those two things off Do you want to respond to the point about the the flip side of the Flatter Phillips Curve a kind of infinite sacrifice ratio I guess I would just briefly say so if we think that inflation is held in place by relatively strongly anchored inflation expectations and we've seen years and years of inflation below that the principal risk we've been worried about through these years is the pressure on inflation expectations that they might move downward which would be really bad at a time when we think interest rates are going to be low would mean even less room for policy to respond so that's been the thing we've been we've been worried about not moving inflation up but just really worried that we'd lose expectations and I think as you get to a place where we're getting close now to on target inflation I think we're well aware that if expectations were to move above 2% meaningfully then yes it would be some work to get it back but that project we haven't really seen inflation expectations get up to 2% yet or inflation itself Do you see any advantages to having inflation when you've had a prolonged period below inflation of having inflation then overshoot for some period of time on this expectations question That's not the design of our approach we've said that we would be concerned if inflation were to run certainly above or below 2% and so we haven't said that we're shooting for or would like that's not something we've said but I think as I said in my remarks it doesn't mean that we can stop thinking about resource utilization it really is just a question of keeping inflation expectations anchored at 2% First to Lars you all may guess that we've been asked several times to revise our objective of inflation and it depends on where you are located in Eurozone you have some countries that have asked us to revise it downwards people I mean just not countries just not governments but people saying claiming that 2% was an outrageously high inflation and countries that have been suggesting that 2% was too low inflation one of the reasons why we refuse to there are many reasons why it would have been unwise to revise our objective one of the reasons why we never revise the downward our objective was exactly what you said we simply would self limit our policy space without any clear gain from any point from any angle so there's no reason to do that on Ben's question I think I'll say something very close to what Jace just said I think it's a high class problem at this point in time but we've asked ourselves what if of course we are being questioned so many times about the monetary policy being so unconventional so expansionary so accommodating that we had to ask ourselves what if and the answer is that we have plenty of instruments to do that we plenty of instruments to go back and certainly our deposit facility reserve is one that comes to mind immediately the rhythm of the reinvestment policies another one that comes to mind the third would be the interest rates in due time but there is also another observation that came to mind while you were asking the question is are we sure that the slope of the Phillips Curve remains constant in an entirely new regime of inflation where expectations are being adjusted to a permanently higher level of inflation and I'm not sure I would answer yes because one of the reasons why we find so difficult to disentangle different factors is exactly we aren't sure that's been stable all throughout the last 10 years at the slope I mean that's the the other thing we look at however and that also gives guidance to in responding to your question is well we have very different countries in the eurozone and they are different for a variety of reasons one of which however is relevant to this discussion is how advanced are they on the recovery path what's their position in the business cycle and the ideally what we would like to see is higher inflation for countries that are in different higher what different inflation rates for countries that are in different positions in the business cycle and we are seeing some of that which is another encouraging sign that we are proceeding on a convergence path I'm interested when you say you have lots plenty of facilities I mean on most of the it goes back to the point earlier on most of the estimates of when we might have a recession a lot of those instruments are not going to allow the kind of room that you had in response to the crisis don't you think there will have to be more of a role for counter cyclical fiscal policy in that environment oh okay no but Ben was talking about the opposite problem namely too high inflation normal sacrifice what we do if we have a recession well frankly even on our medium term horizon projections namely until 2020 we don't see a recession we see lower growth but nothing that resembles to a recession so the question is should we actually ask us what not we actually not monetary policy what others would do just in case of a recession and here again it's very difficult to answer in a complex place like eurozone you have countries that have fiscal space and countries that don't have fiscal space and here comes a completely different set of considerations how do we how do we ensure that the eurozone becomes gradually somewhat resembling to an optimal currency area how do we ensure that there is a collective convergence and here we are entering the realm of the reform of the monetary union the deepening of the monetary union by the way on this front the recent document produced by France and Germany is to be welcome is to be welcome because it's an encouraging step in this direction and it's an important step made important by the very difficult political circumstances in which this document is being produced and so that is and it's also important it's being made important because I think if I'm not mistaken it's the first time we are having a proposal by governments so we had proposals by the commission we had proposals in the famous five presidents report but they were not governments proposals so in this sense but we cannot bottom line of the answer we cannot disentangle what would be the policy response in front of a so far hypothetical big recession in the euro area from the question of the reform of the deepening what we call deepening of the monetary union just quickly on what you said about the statement because obviously that's a very timely thing to talk about is your interpretation of that agreement that it takes the eurozone closer to having a greater ability to respond ffiscally to a future crisis You see your question can be answered in a variety of ways and some people would agree with this statement saying yes we need a stabilization capacity others would not. The important thing that I would draw from this recent development is that not necessarily a specific instrument is being designed, presented and defined but it's an approach it's a sense that in the future we have to work to deepen the monetary union whether this instrument is exactly what you are suggesting a stabilization budget or it is an unemployment insurance scheme like being suggested hinted at least in the document by the way we shouldn't the document is vague as you've seen much work will be needed on that it's going to be determined the important thing in my view is that for the first time after discussing for several years the deepening of the monetary union now finally we have something we can work on and something doesn't come from five presidents of individuals but it comes from governments from the German and French government I think you've definitely just been interesting but we'll leave it to others to judge but yes over there I can't see you Mary Marcella from the Central Bank of Chile President Draghi made a reference to underlying inflation and core inflation and it seems odd to me that we have been discussing price dynamics over a couple of days and very little reference has been made to core and underlying inflation which is quoted by Central Banks very often in justifying their decisions so maybe one reason for that is that the most common measure of core inflation that we have which is excluding food and fuels maybe too crude as a measure of core inflation so I wonder how much of what we have discussed these days about building alternative price inflation indicators maybe already integrated into the kind of analysis that Central Banks make particularly President Draghi has made a reference on a number of calculations that are made by the ECB and a second question is that we have discussed a number of factors that may be pushing inflation down some of which look like one-off given that there may be a number of those their effect may be more lasting but I wonder of how would you react to another one-off change in prices which is raising import tariffs how would you look at that in terms of measure inflation and the response of a monetary policy Christian, do you have a question? Just wait for the mic Thank you In the past week just gone we saw the Federal Reserve retire forward guidance that had been in the statement for a long time and we saw the ECB introduce a new form of forward guidance so I wanted just to take the opportunity to invite both the chairman and the president to comment what they think we've learned about forward guidance, specifically when is it appropriate to use forward guidance and at what point in the policy cycle does it become if at all inappropriate to provide this forward guidance So there was a question about the price setting that happens from tariff setting I guess the broader question coming out of things like even the retaliation that we had announced today from the European Union is when does this trade issue become a real start to have a meaningful impact on your assessment of the strength of the global recovery and potentially monetary policy going forward Chairman Powell So that's your question for me Well no, it's a question there was a mention of trade that was just terrifying If you want and you take the forward guidance because after all you lifted it, we don't the frankly we haven't what is about tariffs what is being projected in the last set of projections are the tariffs that have been implemented already which are not not very don't have a very significant effect either on output or on prices a completely different analysis would probably be and we haven't done it yet when we will consider the tariffs that have been announced or implemented since then first second it's not easy but I think at some point we'll have to figure out kind of what is the potential what is the round of retaliation effects that's going to take place and what is the effect and that's probably the most important thing what's the effect on confidence and therefore what's the effect on business investment what's the effect on exports what's the effect on consumers confidence we think there have been lessons that one can learn from the past and they're all very negative so it's it's not easy and it's not yet time in a sense to see what the consequence of monetary policy of all this can be but there's no reason there's no ground to be optimistic on that the on underlying inflation sorry okay why don't you answer the other question then I'll answer the underlying inflation first I'm obviously not going to comment on any particular trade policy but in principle changes in trade policy could cause us to have to question the outlook so we have a very wide wide range of context in the business world and the United States and around the world and as we talk to them they continually and increasingly express concern over trade developments we talk about that in the beige book and then the reserve bank presidents talk about it in the FOMC meeting and we talk about it then in the minutes and I'd say those concerns seem to be rising for the first time we're hearing about decisions to postpone investment, postpone hiring postpone making decisions that's a new thing if you ask is it in the forecast yet is in the outlook the answer is no and you don't see it in the performance of the economy and we don't have any way to know how to put it into the outlook just yet so that's where that is before we get on to the forward guidance I'm sort of interested in what Governor Corotor and Governor Lowe have to say I'm on the trade point because there's a perception that the countries that are more involved with China will have less will have some protection from this I mean rather than direct impact on the Japanese economy the indirect impact on the Japanese economy could be quite significant if this escalation of tariff by US and China continues and actually implemented that would significantly affect East Asia supply chain centering China, Korea, Japan, Taiwan as well as Southeast Asian economies so I really hope that this escalation could be rescinded and normal sort of trading relationship between US and China would prevail so this is a matter of great concern for Japan by the way I just would like to make one comment on Professor Friedman's question, quite interesting question although I mean if really inflation rate suddenly accelerate towards 3% or 4% by what factor if it is through external factors like sudden currency depreciation or sudden oil price rise they would have only temporal impact unless exchange rate continue to depreciate or oil prices continue to rise so these are temporary factors so I don't think this would raise serious problem sudden rise in inflation expectations that is extremely unlikely and then you would find that after all the philips curve was not so flat philips curve became steeper so that with tight river market the wages and prices started to raise inflation accelerate and so on then of course you can use steeper philips curve to contain your inflation Governor Lay did you want to respond on on trade I think what's happening is incredibly disturbing can any of us think of a country that's made itself warfare and boosted productivity growth by building walls probably not I can think of a lot of countries that have made themselves wealthier and more prosperous by reducing walls to people capital and goods and services and my country would probably be the poster child there so I view what happening is incredibly worrying the tariffs themselves I don't think kind of we're going to derail the global expansion but I can think of two mechanisms where that expansion could be derailed the first is through financial markets because they're very good at telescoping future events to today so far the financial markets have taken a relatively benign interpretation but that could change very quickly and so we could see a lot of turbulence as people bring those future events forward to today and the other mechanism is that businesses the option value of waiting goes up a lot in what Jay was saying going to delay decisions and in Canada that's happening in Mexico it's happening by disturbing that it's happening in the United States it's probably happening in China I know it's happening in parts of Southeast Asia so the option value of waiting is very high at the moment and it wouldn't take that much for financial markets to combine with businesses who are waiting to turn this into a really big global event so I hope it has a low probability but I'm very disturbed because it's happening and it's very worrying and so on a much smaller issue on underlying inflation I agree with Mario about the importance of looking at underlying inflation and much of our public communication is around measures of underlying inflation not the exclusion based ones we exclude food and energy but we put a lot of weight on the trimmed mean measure of inflation and the weighted median and much of our public communication is focused on those two measures President Drayn, you said you just wanted to Yeah, on the still on trade and on discussion tariffs there is a more general aspect of what's happening that it's in a sense if possible it would be even more worrisome and that is the I would say the desire for unilateral action that has quote several countries not only United States we are talking about that in the context of tariffs but there are other examples of unilateral action that basically undermines the multilateral framework in which I believe all of us have grew up and so the potential changes that this may start are something that is unknown it's very worrisome and again I cannot see any positive side to that so I have a source of considerable let me use the word that we use with markets not with people, uncertainty and there was a question about forward guidance the lessons of forward guidance so fundamentally as we all know here even on a good day there's a tremendous amount of uncertainty about the path of the economy and hence the path of policy and so to be providing a lot of forward guidance all the time is to risk under communicating about that uncertainty and I think that's a real risk for us that we say things and they're often taken as forecasts or even promises and they're really not so I think in the ordinary course we should be very careful to communicate as clearly as possible about the level of uncertainty that we have and I think explicit forward guidance cuts against that and the central bank needs to correct the public's misperception of the path of rates or needs to provide more accommodation and perhaps as close to the zero lower bound I think that forward guidance is a very close in product extension to just regular rate policy it doesn't have political economy issues with it it's sort of a commitment technology in a way even though you probably will wind up saying that it's not a commitment but the public we know will take it as such to some extent so I think it works the record in the crisis was that it did reduce uncertainty about the path of policy and even push down expectations about the path of policy so a relatively close in product extension that I would think could well be used in the future when needed but shouldn't be used in the ordinary course I think we got time for that one or two more more Eric Eric Nilsson Eric Nilsson for unique credit Chairman Powell last autumn in Washington you gave a very good speech predicting that the Fed could normalise rates without having any negative impact material impact on emerging markets since then a few things has happened you got a big fiscal expansion that sucks up a lot of savings around the world you started to reduce your balance sheet and you become chairman and then we've had a bit of wobbles in emerging markets I don't think anybody thinks it's systemic but it's certainly sort of out there so I wonder whether you would sort of expand a little bit on whether you are as confident in what you said at the IAF conference in Washington today or whether there is a bit out there that worries you a bit more your own curve has flattened a lot which is from us in the market something we kind of look at and wonder whether that's a forewarning or something more serious I'm not sure we have is there another question no I think there will be on emerging markets I should start by saying that emerging market economies now amount to more than half of economic activity and well more than half of the growth so they're quite important and important to us and having them remain strong is quite important to our own growth so we recognize and appreciate that we also understand that in a world of global capital markets and integrated capital markets and integrated value change in economies the things that we do will have spillovers into other through financial conditions into other economies and by the way vice versa of course as you've seen over the last couple of years we understand that and we know particularly that smaller open economies in particular can receive flows at times which make life difficult, it can be a difficult challenge for them to manage so what do we control about that one thing we control is to try to communicate as clearly as possible about how we see our economy and how we see the path of policy how we would react to changes in either of those things and I think over the last couple of years if you look back over the last two years where we are today is pretty consistent with what we've been saying where we thought we would be now and the way we thought we would react so that we do control and we'll continue to try very hard to carry out our mandate and to avoid surprises wherever possible well thank you very much I can't help wondering whether we will still be saying the same things in a few years time we'll still be wondering why wage growth is not stronger and what is the natural rate of unemployment the president was pointing out earlier many of these issues have been discussed for decades but potentially not by four central bank governors of such important economies so thank you very much to all of you and thanks for all the questions thank you