 Welcome to the World Economic Forum right here in Davos. And welcome to Bloomberg's televised panel. I'm Francine Lacuana. Since 2008, central banks have added trillions of dollars to their balance sheet, driven yields to places they've never been before and suspended gravity in global markets. And now, as they start to tighten monetary policy, is the world economy really ready for the end of easy money? Well, please give a big round of applause to my wonderful panelists. Let's get straight to them. Joining us now, Benoit Coray, he's ECB executive board member, Cecilia Skingsley, Rooks Bank, deputy governor, Ray Dalio, Bridgewater Associates founder, Minzou, National Institute of Financial Research chairman, and Axel Weber, the chairman of UBS. So thank you for joining us. I think we need to straight start on currencies. So we'll get to inflation in a second, but Benoit Coray, there's been so much talk about whether we're entering a phase of currency wars. If we are, how much does that complicate the work of central banks? Well, good morning. And now really, I think the last thing the world needs today is a currency war. That is really the last thing the global economy needs today. We live in a world of floating exchange rates. We live in a world where exchange rates are not and should not be targeted for competitive purposes. That's what the G20 and G7 have agreed. And let's just stick to that. And we've seen lots of volatility being created recently by different statements. I think that's not helpful. Any discussion on the exchange rate should be sent back to where it belongs, which is multilateral bodies, which is G7 and G20. And that's where the discussion should take place. And meanwhile, volatility is not helpful. And if that would reach a point where this would create any unwanted consequence for us, any unwanted tightening of our entire policy, we would have to reassess. Axel, the US Treasury Secretary shows up and says actually a US dollar weaker is better for trade. Then his boss says, well, but we're targeting maybe a higher dollar. Is that currency wars? No, it's not, but I think the US position has always been very outspoken to focus on the strong dollar being in the interest of the US. If there is some deviation of that, markets are looking at that as well. Should we test that new proposition? So I think in the end, the US will come back to the proposition that the strong dollar is in the US interest. I think a strong currency is in the interest of many countries. But what monetary policy around the globe has been doing recently is actually as part of quantitative easing, currencies that were particularly easing were actually also easing on the foreign exchange side. And one of the transformation mechanism of quantitative easing is through financial markets. And if quantitative easing is done between two currencies, it can also affect exchange rates. So where we did see in the past some impact of QE was on exchange rates. I think now as we're normalizing monetary policy, interest rate channels and credit channels are coming back more. And that in my view will mean that, it doesn't mean that the exchange rate impacts will go and go away. Because central banks around the globe are getting out of QE at a different pace and also in different stages. So I think the usual perception you would have with the US exiting QE first, that that would actually have been something that would have driven the dollar continuously up. But we've seen periods where the dollar actually did the opposite and relative to the euro came down. So we are in a pretty uncharted territory. Exiting from QE will be a difficult exercise. But I don't think the dominant news this year will come from central banks. Whilst I do think that the central banks will have to take a cautious approach and they're all doing that, I don't think the disturbance in financial markets are largely gonna come from central banking because it's pretty much on track to what they announced. It's more the geopolitical and other risks you mentioned that I think have the potential to disturb the global economy. Zuhman? Well, I agree with the exercise. Those comments not necessarily represent the currency war, but it's confusing, right? And the market has been very volatile because this is a major currency. I mean, when the two key people have a very different views on the currencies, I mean, market obviously listened carefully and very confused the market got nowhere. I think that's very important. And particularly in current situations when market policies start to turn and the key central banks are still in a different phase of a monetary policy. US leader first, ECB still follow a second at Japan still. In that time, I think the exchange rates can be very volatile. So we, although I agree with it, I don't think it's currency war, but the authorities are gonna be very careful, keep the currency war in their mind. We should try our best to avoid that. Right? I think it's important to look at the mechanics of who determines where the currency movements are. A policy maker like the Treasury Secretary making a statement can affect the mood a bit. Central bankers can affect relative monetary policies and so they can affect it. And then there are those who hold portfolios. They can hold reserves in currencies. And they have a big effect. And the portfolio is very skewed toward dollars and dollar assets. The world asset portfolio. Even more than the currency next. So the holding of dollar bonds, whoever is gonna hold those dollar bonds, that's a pile of dollars for a long-term pile of dollars and how you feel about those dollars bonds will affect it. I do believe that currency will be a big issue this year as there's a reconsideration of how important the dollar is as a world's reserve currency. Is it an anachronism? Are portfolios too skewed in that direction? I think they're skewed in a dollar direction because if you wanted diversification you wouldn't have so much. So I do think that central bankers will be paying more attention to currency as a consideration in setting monetary policy. Ordinarily, it's growth and inflation but growth, inflation and currency. I think currency will be a factor in the next year. At the same rate, they won't be used or will they be used as a trade tool? I think central bankers will react to it, not cause it. Deputy Governor. Coming from a small open economy we have to live with what the big elephants are doing out in the world economy. And I think it is clear that with free capital movements and the interlinked financial institutions, interest rate channel and the credit channel are more or less designed by international forces, which for a small economy, and we have to be honest with the fact that the exchange rate channel is a part of the transmission channel. So when a number of central banks, including ourselves, has been struggling with low inflation for a long time, we have, as been said, trying not to cause too big exchange rate movements but we have to take it into account. Now, as Exxon mentioned, we're getting out of this very sort of extreme situation we've been fighting with for a number of years where interest rate and credit factors might become more domestic again. So if there is a currency war, perhaps we're getting out of it rather than getting into it. No, at the end it's very simple. I mean, what we want to see is, I mean, exchange rates are driven by market forces as they should. So what we want to see is exchange rates reflecting different financial conditions in different places and different financial conditions in different places reflect the state of the business cycle. It's very simple, in fact, and that's what we've seen by and large. And we have to keep it like that. But I just wanted to highlight something Ray said which is very important, which is that the dollar remains the main invoicing currency for the world, for trade invoicing, services invoicing. So whatever happens to the dollar exchange rate remains very important, which gives a particular importance to that discussion and that's what it has to be structured and contained and again the right place to have it is G7 and G20. Currency weakness at this time, dollar weakness at this time adds more stimulation to an already heavily stimulated environment with a limited amount of capacity. That means that from a central bank point of view, there's stimulation on top of stimulation and that is going to produce a reaction. I mean, how do you, as a Fed official, then going to have to deal with a very delicate set of circumstances, I think. And I think that's a real thing. The point Ray mentioned is absolutely right. You have to look at the ultimate holders of portfolios in currencies and how they adjust. Give you one example from Switzerland. When we came out of the financial crisis and when Europe was going through difficulties, we've seen the Swiss franc appreciate quite a bit and it didn't come from a sort of flight into quality of global investors. It came from a repatriation of Swiss citizens invested in global portfolios who suddenly recuperated some of that money and brought it home. And so the private sector in Switzerland created an inflow into Switzerland. It wasn't international investors. It was domestic citizens recalibrating portfolio allocations and then the Swiss National Bank in order to offset that because the Swiss franc was rising pretty heavily at that point in time, started an intervention policy where basically they try and stabilize the Swiss franc by intervening and buying assets abroad. So the Swiss QE was not buying Swiss government bonds or equity. It was buying European government bonds and equities and creating a structural outflow of liquidity in order to counterbalance that. So you can see how the two forces that Ray mentioned will always be in interplay the official sector and what they do and very often they react to a situation in the private markets rather than be an actual drivers of these allocations. Zuhmin, could the dollar actually not be a reserve currency in five, 10 years? My view is the dollar is increasing actually as a reserve currency, but I had that discussion with Ray the other day because many of the banks who are now holding portfolios will try and make sure that they are liquid in dollar portfolios if we were to face other liquidity issues because one of the things you have to fear nowadays is whatever was done in the last financial crisis when there were currency swap arrangements between the major central banks that the ability of the central banking community to reignite the same instruments to the same degree is probably more limited now after the financial crisis than it has been before. The central banks really need to be conscious of that and if we come back to a new situation like that we do to some degree or to a large degree rely on the central banks to step in and provide liquidity for global banks but banks have a precautionary motive so we're trying to make sure that in the core currencies in particular in dollar we have liquid long-dated portfolios. Zuhmin? Yeah, I don't think it's necessarily. The crisis is starting in the United States. Yes, this is true. The dollar enhances the position of reserve currency after crisis, that's very true. But after R&B joined SDR we observed that diversification really happens globally and even Bundesbank announced we'll take R&B into reserve currency in more and more countries but in addition to the reserves what will happen is a swap line. There's a huge amount of R&B swap lines in across various countries and this is also very important diversifications. I think so I would say in terms of reserve currencies we're moving to more diversified. Obviously academically they're always debating whether one figure is more stable or multiple is more stable but I would say multiple is more stable. So at these particular moments I mean the confusing comments on dollar not necessarily to enhance or stabilize the dollar's position as a reserve currency. Benoit and then Ray. No, I'm standing on Min's side in that discussion I think you have to make a difference between the role of the dollar as a funding currency and it's extraordinarily important as Axel said to as oil in the wheel of the system and by the way we still have the dollar swaps and they can be used and they would be used if there would be any liquidity event in the global system which is not there today. But then if you move to the real side of the economy you see a lot of diversification you see trade invoicing patterns changing you see renminbi gaining importance in trade invoicing renminbi gaining importance in foreign exchange reserves we ourselves at the ECB we've invested 500 billion euros in renminbi which is small but it's a small token it's a way for us to learn about the market and have no doubt that it will grow bigger over time. So you will see this diversification trend in the long run. I think it's just notable that as we're having that discussion what are the pros and cons and what should it be said at where in the past it was always taken for granted so that means change because if you start to think about or what is the course for all the diversification you come up with one big answer like I don't want to have nearly as much dollars if you're dealing with oh the swap lines how much should I have for the swap lines then you might want to have more dollars just the fact that there is that is going to produce a lot of change in the role of the dollar reserve currency I think. Deputy Governor talk to me about how your view has changed on what policy could look like at the Riksbank in the past you've always followed the ECB now you'd be ready to hike before them. So it's an open economy and 50% of our export goes to the euro zone so we didn't have much independence to start off with but there is there but it got limited as we were seeing inflation deviating from the target and inflation expectations going south so as I said before we have to admit that the exchange rate channel is a vital channel it can't go too much to the wrong getting us too far away from the inflation otherwise we lose the anchor. We had six years of inflation below the target it took three years to get down to zero another three years to get it back now I would say that we have we have accomplished the mission we set out to do so there we have some more time to maneuver again but it has not been very big in the first place. What's your biggest headache when you look at data points or when you look at we'll talk about the Phillips curve in a second but what do you wish you could understand better about your economy? Well there is actually a lot about the Phillips curve we see quite a good expansion not only in Swedish economy but in many economies now but it seems like the responsiveness between wage growth and the unemployment gap the resource utilization is not as clear as it was in the in the past so cyclically it looks fairly benign but structurally there are a lot of strong forces behind that in my view points to a low wage growth in many years to come in the world. Benokari how can the ECB be so sure that actually inflation is coming in 2018? Okay so let's talk about the Phillips curve but let's start maybe let's start from the beginning I mean I guess the question lots of people are asking themselves how can it be that we've injected so much money in the system and inflation is still weak that's the starting point of the discussion no I mean the Milton Friedman said inflation is always an everywhere monetary phenomenon we've created huge amounts of money and inflation remains low so what's what's happening and and here I think you really have to think about the monetary policy transmission process as a as a two-step process first step is transmission from monetary policy impulses to the economy aggregate demands slack in the economy and the second step is from slack in the economy unemployment aggregate demand to inflation really two steps and the first step has been working incredibly well incredibly well I mean QE has been a resounding success both in the US and in Sweden and in the eurozone everywhere in terms of its impact on the economy in the eurozone we've seen I guess 18 quarters of consecutive growth now this has been this is being the strongest and broadest recovery for the last 20 years it has exceeded our expectations it's a very strong impact that we've seen and it's it's largely due to QE including by the way the extraordinary channel of transmission of QE that we've discussed already which is part of it and which will which remains part of it so that has been incredibly incredibly useful now the question is when and how does it translate into a higher inflation and that's where the the Phillips curve fits in and the way we we think of the Phillips curve in the eurozone is really as being very flat for high levels of unemployment because workers have no bargaining power they're not in a position to ask for higher wages they just want a job and they first have a part-time job or they first have an interim job and then they move into permanent job and then only they ask for higher wages so there is a sequence here and we are now at the point where we're starting to see wages ticking up in a very tentative way also core inflation ticking up in a very limited way in the eurozone because we might be exactly at this tipping point where the Phillips curve is stippening the the the difference we have with other jurisdictions is we have this diversity within the eurozone and it's happening differently at different bases across countries so if you look at say Germany, the Netherlands, even Spain now you see under employment that is forced under employment going down because they are moving closer to full employment or they are already at full employment in Germany obviously while say in France and Italy unemployment is still higher they are still further away from full employment and you don't see under employment going down so it happens at different bases across the region but we're moving to the point where we'll see wages going up But is there danger that actually inflation picks up too quickly and all of a sudden? It's I mean I'm a central banker so I'm paid to see it as a danger and I tried so yes it is a risk it is honestly it is still a risk given the amount of slack in the economy the amount of pent up also debt private debt, public debt which has to go down but it's still waiting very much on aggregate demand so I would see it as a tail risk that's a risk that global financial markets should consider maybe we have time to come back to that the risk of a higher inflation but as far as the eurozone is concerned I would see it as a tail risk Axel Weber? I would be a bit more cautious about the resounding success of some of the quantitative policy we've seen reminds me a bit of you know success of many fathers, failures and often people looking at the current recovery it's a multi-dimensional recovery and many things play a role if you look at the US first and foremost fiscal stimulus is one big element why this is driven forward so on the QE side and on the Phillips curve I always remind people it's a curve it's not the Phillips line and at some point that inflection point comes and I think Benoit was a bit too much it's a line and we can be sure about that you mentioned that at some point it'll steep up but I would be less sure that central banks have a very good understanding of where that flexion point will set in and I think monetary policy clearly is going to face some difficult challenges first QE works largely by if you go to zero or negative interest rates the credit channel and the interest rate channel are largely shut off and monetary policy largely then works through financial markets and through exchange rate channels now on the financial market channel we've seen a massive improvement in market valuations and in market moving way as central banks go back to normalizing interest rate they're switching back on the credit channel and the interest rate channel and I wouldn't be as sure that that switch back to a more broad based effect of transmission of monetary policies throughout the economy including through the banking system will happen as smoothly as the central banks now hope so I think we're into difficult territory here and I think it's been an experiment that was unprecedented coming out of that we don't really have good guidance on how this will work so being data dependent is very important I admit that but at the same time central banks need to very clearly watch that inflation could be the big surprise in my view this year and I haven't really heard that in the debates here but do you want to respond and then we go to Tumen? well I don't I wouldn't disagree with Eichsel that the I mean the different channels of monetary policy transmission are now being switched on switched back the credit channel is working it's up and running it was not working back in 2012 so a lot of our effort at the ECB has been about switching on the credit channel through the LTROs and also by the way through the banking union and and actually regulation help and what I hope is tougher supervision across the eurozone and tougher stress tests and the like and that has helped a lot and everything that we are doing as supervisors on NPLs non-performing loans is also something that helps switch on the credit channel in the eurozone it's very important and we need to be very cautious I agree with that but we'll be entirely data driven so there are many ways I mean we know the direction there are different ways to get there and it's a discussion which is data driven if anything bad happens or surprising happens on the inflation front it's fairly easy for us to react so it may happen but then we have all instruments but meanwhile we also have to be very prudent not to de-rail the recoveries that we are seeing now Minjoo? Yeah I don't see the risk inflation will pick up strongly and quickly I don't see that I mean from classical ways you will see the commodity price is still relatively stable and in the low bonds all right and the U.S. overcapacity is still existing in many many countries and the labor market still have the space and even the monetary policy start to turn so all those things tell you inflation may not be able to jump up but that's not an issue the issue is I always ask myself do we really understand what this inflation means today with the technology with the e-commerce with the artificial intelligence efficiency increased dramatically the transaction costs dropped dramatically the competition through the e-commerce platform dropped the price quickly quickly to the lowest whatever the level or you can call the market equivalent does 2% inflation rate today mean the same thing 2% 15-20 years ago I don't think so should we still keep inflation target 2% I don't think so so in that case I think that's a fundamental issue we have to think about what market structure changed what does inflation mean for us today so the central bank have to very careful because we all live in our central bank before live on the inflation target monetary policy framework we have to think carefully what does inflation mean today and what will be the proper monetary policy let me go to the deputy governor and then Ray Daly what does inflation mean and I'd like to pick up on this because it's I mean it's our job as central bankers to understand how the economy evolves and how the inflation drivers changes and I agree with that that there are a number of technological sort of benign shocks they're good for us as human being it's fantastic to be a consumer in this economy but it's also fun to be a producing side and being a part of the labor market so I think the reason for why we see quite low wage growth globally or at least in the advanced economies is we have still the legacy from the global financial crisis a lot of people got very hurt there so you prioritize job security above higher salaries as the first order reaction and then you perhaps get more ambitious as the recovery becomes more mature when it comes to the technological changes the e-commerce and greater transparency I don't believe that that means that inflation is a thing of the past it's gone we as human beings are utility maximizing creatures you know it has taken us from the caves to where we are today so in economic terms it means once when we have sort of gone through all these disruptions that technology and trade gives us to handle as an employee you will ask for a higher salary when you have the opportunity to do it and as a company you will try to raise your prices to increase your earnings and that are the forces for inflation long term and in that environment I think the best contribution you can do as a central banker is to have a price stability target because in a world where everything floats and everything uncertain at least if people can expect that okay price stability is somewhere there then you don't have to worry too much about that factor on top of every other factors that there is to worry about Redali two questions for you are we focused too much on inflation do we care if it's at 1.7 or 2.3% and what is the right policy mix for the world we live in today yeah so four things that have to be balanced I think first the Phillips curve let's agree that any notions of how the Phillips curve is working forget them so let's not be guided by the usual association of linkages between inflation and growth so it's dead it's not even broken I believe that we could technology and the nature of that is changing completely the relationship between inflation and growth and if you look at the breakdown of wages and it's followed it's had a cyclical pattern but it's followed in a slower than normal in that manner and if you look at the other components of inflation goods inflation there's goods chronic goods deflation so the emphasis of the cycle is exaggerated relative to what everybody believes is the Phillips curve it's demonstrated right so if everybody's just so focused on growth and that linkage to inflation but yet look after all this quantitative easing and all of this struggling they're still struggling to get a core inflation rate in the United States Europe and Japan of 2% they're still struggling to do that right so the headline should be we don't understand that at a minimum central bankers should say we cannot rely on that so we have to see some core inflation in order to react to that because number number two and then let's take inflation how big of a worry is inflation relative to the worry of a downturn in other words when central banks are managing these things they have to weigh one against another so I'm dealing with the asymmetry of that risk supposing we're wrong and they're too easy and you got to 2.5% inflation is that going to be a tragedy is that what we're going to be talking about or supposing they aired on the other side and we had a downturn now can you imagine a downturn now and then let me deal with the sensitivity of the rate changes there is a greater sensitivity to monetary policy changes than there has ever been before that's because the market sensitivity if you look at the pricing of markets the duration of assets has become very long which means that the price sensitivity of bonds and all other assets to an interest rate change is greater than before there's so much more also leveraging up in certain ways the market sensitivity to a rate change is very high so if the central banks discount more raise interest rates that is more than discounted in the curve that will be priced through all asset classes not only bonds but it'll be priced through other asset classes and that'll hurt other asset classes if you start to hurt other asset classes that's the first stage let's remember where we are in the cycle we are late in the cycle relatively late in terms of operating rates and so on and we're having a stimulation into that so the question is I think on central bankers is how calm will you be during that or will you get it right and central bankers never get it right because it's not a perfect balance that's why we have recessions we always have that so if you're going to take the asymmetric risk which side of that asymmetric risk do you want to be on I would want to be on the okay so let's see two and a half percent if you got a you know then that wouldn't be a problem I don't want to particularly the polarity in the country in the world between the rich and the poor there is a total difference in the economies when we look at the averages so I wouldn't want a downturn okay I feel like uh Bunlaku Ray has earned his right of reply okay well I guess I can I guess I guess well first I guess Cecilia and I can confirm that we're we're very very calm we'll keep we'll keep being very calm and and we'll uh we'll uh we'll strike the right balance and it is a balancing act as as Ray said and and we have to to find the right balance but I would I would frame the discussion slightly differently starting from where Ray left it which is about the asymmetry of risks and over the last five to 10 years we've been focusing very much or even only on downside risks tail risk tail risks to the downside first deflation risk which is now by and large of the table but it has been a huge effort to take that risk out of the out of the discussion out of the radar screen in Europe and it needed a lot of a lot of it needed a very forceful action and now uh risks of a sluggish growth risk of uh prices and remaining low etc and we're also slowly moving out of that and so we'll have looking looking forward we'll have to to focus more on upside risks and that's where I would agree with Axel I would even agree that at a global level there is some complacency of global financial markets when when it comes to upside risk inflation so I'm talking globally not specifically of the eurozone if you look at the at the flatness of yield curves if you look at the at risk premiere I mean risk premiere remains very low even negative in the US so that's evidence of some complacency with regards to upward risks to to nominal variables to prices and and when global markets wake up to that risk at some point curves may steepen risk premiere will be reduced and it's a it's something that will happen but what I would in terms of central bank reactions I think what matters a lot is that the instruments are different we'll be moving as we move away from coping with downside risk to coping with upside risk we're moving away from unconventional policies to conventional policies and instrument all instruments are there so it has been very difficult to it to find to design instruments to find the instruments to fight deflation or risk the instruments came with lots of potential collateral effects side effects that we didn't know because that was entirely new political reactions were sometimes unpredictable or sometimes all too predictable and and that created noise around our action and we we we we've we've lived in that very difficult environment when we move back to gradually to normal monetary policy all instruments are there so it's not a big deal it's it's it's it's a no-brainer for us to to deal with higher inflation because all all all instruments are there so I'm not that majority I don't think that there's clarity and maybe what I'm saying or the understanding I don't know that we're communicating clearly so perhaps I can clarify we're in agreement that there is now upside risks because we're at a limited amount of capacity and a lot of stimulation and then that there needs to be some kind of tightening but then there's a balance and you want to try to get perfectly so now let me ask you the question if you were going to make a mistake so that you had a half a point higher than inflation or an economic downturn when trying to get that right which would you think would be the worst outcome well that's not the way we look at things because we we don't we don't have a dual mandate we have a single mandate which is inflation so that's about inflation being two percent to the medium okay so let's take that let's take the question then on the inflation on the core inflation rate you've been struggling to get the core inflation rate to two percent for a very very long time you're going to now have a cyclical boost here right how much attention do you think you should pay to the actual inflation rate relative to the cyclical boost and the stimulation I would think not too much right yeah no as I said we want to be patient and prudent along that road okay I'm in favor of patience and prudence let's get to I think now I'm a professor so so you can say what you want I'm the person to stand between the central banker and the markets for practitioners I will say the central bank is doing quite they did a quite good job in the past in a sense they are very cautious carefully raising interest rates and match with the market expectations the indicators if you're looking for in the feather case if you're looking for the feather don't line at the market expected the the the the funding rates right actually the the market expected rates close converted to the fact don't line the gap the term premium actually is shrinking so I think that's good may you you may just disagree but the line goes that way I think it's good but the real issue is whether if we're looking for the futures the feather will continue to I mean include the ECB and all the central bank the monetary policy do a good communication work with the market and continue to these two lines converging to each other to avoid the market volatility let me get an axle Ryan we'll come back to you axle do you worry more about too quick an interest rate rise or too slow what I look at is what is the guidance central banks give and what is priced into the market and you've seen an example for it's now in in the US where for example most of the market expected up to two rate moves this year and a bit more next year the Fed has given guidance of three rate moves the market is currently repricing the market is repricing by putting in three possibly four rate increases this year and you have to ask yourself why does that happen and it happens because the Fed said we will be data dependent and the market is reading the data that are coming in as of the tax reform and everything and says in the next meetings the Fed will see a much more bullish set of data and therefore will start to revise their outlook and that's why the market is reprising and a reprising of the market is how central bank communication then gets translated into markets and how it's impact on the economy where I do have a concern as we're coming out of this QE is how useful and I don't think it is any more useful is forward guidance by central banks for example you know just to look at the particular predicament of the ECB and we have the benefit of Buen Wai being here tying your hand on purchases for some time and also indicating that there will be a long delay till you then move interest rates probably has stopped being as useful as it was in the past where a commitment device like that can everyone expecting lose monetary conditions will prevail as we're coming to be more data dependent that will be faced out just like it was in the U.S. And I think the market pricing and how it reprices policy as data come in is the way I look at that and so where we are now I think central banks are on the cautious side and probably how the market is repricing that was the right side to be as we're moving into a stronger economy as fiscal stimulus comes in as the U.S. might add some infrastructure investments there's other non-monetary policy stimulus that will make monetary policy stimulus less required to go forward and could actually turn monetary policy stimulus if not changed into a counterproductive over stimulation that that would ignite help ignite inflation but that's I think where I would portray Benaxa, is forward guidance not good also for households and for animal spirits of a region or a country? Well look as financial markets are the core transmission at the moment still of monetary policy as many of that happens through valuations in asset market as Ray says a too fast or faster than expected monetary tightening will hurt financial markets beyond what would be required in a pretty predictable normalization I think that's the concern I think we should agree on something and it's an important thing to agree on so I think we're here I think that what we had as far as guidance and monetary policy by the Federal Reserve for something like two years was wrong and the market's discounting that was wrong and there needed to be less rises in interest rates than were discounted in the markets and that the Fed said and that was good and we had a bull market as a result of that we are now in a spot where the markets are discounting very little increase and the Fed is saying a little bit more and now the question is do rates rise faster than is discounted and they're told because the set of circumstances happened and I think we can all agree that that would then be bearish on the markets is that right can we all agree on that yeah great this is particularly important let me add one thing quickly communication become the key issue I think the Fed exactly Fed didn't say very much market did not discount very much but in these particular moments the potential risk we'll have a new Fed chair I'm not questioning the chairs I'm Jeremy Powell it's a very experienced central banker but also he has our most new team so how is the Fed communicated to the market and leave the market discounting the Fed the market policy garden let me just get Boon-Wa's thoughts on this Boon-Wa great I mean should you care about the markets so no is the central bank on the Fed I'm not commenting at all a full trust in Jay Powell to steer that in a prudent and sensible way forward guidance is an important discussion and let me start by saying that it has served us very very well so far it has really helped a lot together with low rates negative rates and all the rest of the toolbox it has been instrumental in making sure that financial conditions in the eurozone would remain fit to our economic conditions which is in a sense a thrust of everything we're doing we want to be sure that financial conditions in the eurozone remain appropriate for the state of the economy which is not the same as in other places like in the US and forward guidance has been part of that and very important in stabilizing and anchoring and pinning down the short end of the yield curve now it will have to evolve this is acknowledged we are in a transition we'll see a gradual evolution a gradual transition of our instruments we've started that we've insisted for instance quite a lot on the fact that our monetary policy stance is not only about QE it's about QE but it's also about the acquired stock of assets which is now very substantial and has an impact on market condition a substantial impact I would say it's about the rate guidance and so we have a mix of instruments and it's agreed that it's something that we have to discuss we said it in the account of the December discussion and by the way there has been a lot of comments noise around governing council members disagreeing around that the discussion we're having so far is on when to have a discussion on how we change the guidance right so it's meta monetary policy if you want to call it like that so just to put a little bit of you know to take a little bit of distance with that so it's not a it's not a so the discussion is not on March it's not an existential difference as Mario said yesterday okay and Deputy Governor what's your take on forward guidance is this an effective tool for monetary policy um well it's it's really for the people in the transmission mechanism yeah the financial markers to to to answer but but for me it is we have our version of forward guidance is an interest rate path the policy rate path that as we publish at each policy meeting since 2007 and it it's definitely clarifies the discussion both we have on the board on what is not only required in the present decision taking but also going forward and I think it sort of clarifies the discussion with versus the market players on what is the most sort of the optimum monetary policy going forward so I think it's it's it's there to stay at least for in our case with the interest rate path can I also go back a little bit I I thought your your question is it's a bit sort of mean to say do you choose between going on plus point five percentage points higher inflation or avoiding a downturn cyclical downturn it's important to remember that there are always cyclical reasons for not taking difficult decisions but if you are in the in the chair of having to take decisions you have to try to look a bit longer and we don't frame the the decision making as as Benoit said in in in that in that way that you you put it but it's it's about asking yourself okay we may overshoot the inflation potentially but if that is a temporary thing we should allow for that to happen if it is a permanent thing we have to be lot more cautious because one of the things we learned in Sweden as inflation deteriorated below the target is that it takes a lot longer now to bring it back to target you have to fight with the economic agents in society a lot more about bringing back the trust so if anything you have to keep your eye on the core objective price stability much tighter now than and then than in the past who on the panel is expecting a downturn in the next 18 months no no possibly I would say I would say there's a question of a bear market within the next 18 months and then there's a and if you have a bear mark you can have a bear market in bonds a big bear market in bonds you can have a big increase in rates sensitivity you can have a big reaction is that and I would say then that there would be a reasonable likelihood of something like 12 months after that to have a downturn I would say it would be a reasonably high probability that you would have a downturn in the next two years three years which would also be just before the next presidential election and I think that that would be polarity a lot of polarity so I would say a lot if you were to ask the panelists I'm just speaking frankly you know what is the probability of a downturn within the next two or three years that's an interesting question and then what would that downturn look like how would that look like what would it look like the next two to three years the probability can be very high very high 50% or more more than that more than that well I guess if you look at the horizon like that that's actually beyond the usual policy horizon of central banks if you look at two to three years out so if you look at your models they would usually tell you you're going back to some kind of normal because that's how these models are constructed but I do think as Ray said before we are in a late cycle stage and this cycle has been artificially prolonged partly by monetary policy but recently by stimulated fiscal policy look at the U.S. we rarely had such a fiscal stimulation which will lift growth for one or two years by 0.5 to 0.75 at such a late part of the cycle you add in the announcement of the administration to look into infrastructure investment and private public partnerships again adding more dynamics to the economy and that's where I think monetary policy comes into the game because people are expecting that as monetary policy is starting to move rates up and up the only effect we've seen so far and that is counter productive is the long-end state largely put and monetary policy at the short end has actually flattened the yield curve that's not your usual environment and so the real question is how is the long end of the market how is the market reprising that if the market reprises suddenly the central banks will have a problem if the market takes it at a steady pace central banks can continue to take their time and focus on it but that's an open question as Ray said it depends on how convincing communication by central bank goes in the market and actually I'm sorry Benoit I think forward guidance is the announcement of an attention of an intention it's not a commitment device and I think the market makes a very clear distinction about this and the longer you pretend to tie your hands but you actually don't the market will reprise so I think central banks have a balancing act to work here Benoit correct well forward guidance is a declaration of intentions it's clarification of our reaction function and then it is being fed by a flow of data so I have no absolutely no disagreement with excel on that it's not a commitment it's not possible anyway it's just clarification on how we expect to react given our reaction function on to which we commit because that's a reaction function that's our policy and the expected a flow of data the expected course of the economy it's called forward guidance it's not called a forward promise just to it's forward it's forward guidance it doesn't solve the problem I think that's going to be important for the next two years I think it's much less the actual the actions of the central bank that will determine how markets will react to it but it's the reaction of markets themselves and how they look at the availability of liquidity and how they need to reprice an entire set of asset classes where risk has not been adequately priced over a number of years and I think that repricing of risk will be a much bigger driver of the impact of monetary policy normalization on market and on the economy than actual the policy action itself but there is a lot going on in markets being decided in markets there is a lot being decided in politics but our contribution is to be as clear as possible on how we would react to that and that's what forward guidance is about but I just wanted more to comment on the on the forward on the on the on the perspectives and it's true that the over the next months maybe years the global prospects look very very favorable Eurozone is doing very well US will be having a big stimulus emerging market economies are full of full of question marks we're not discussing it here but by and large so far it's okay and so you see the global economy running with with with all engines being fired and the IMF is as we've seen is revising up their forecast that's a so that looks very good but that's also when you can make mistakes when you're running the full speed along the highway you've got to be very careful the way you drive now so that will require a lot of cooperation coordination internationally which leads me to an important point which in a sense ties back to the discussion on foreign exchange that we had earlier that that is exactly the kind of environment where you need very strong international cooperation very you need a lot of trust among the main players and you need a the right framework to address all these issues international cooperation is key if you want to avoid accidents yeah regardless what we say Axel says the market repressings the meanwhile says you know political factor or central bank policies the real issues we have to face is how do we end this long cycle but that's the whole thing can we have a softer landing I think that's the real issue right this issue will bother us in the next 24 months no by the way I mean I'm very happy to be having that discussion but why don't you why why don't you have the same discussion with finance ministers because that's about we do it's another session we're fine okay so I mean I mean I'll be interested in uh I'd be interested in uh in uh in knowing the answers Axel but to go back to race scenario of a likely downturn over the next two to three years the real question that markers are pricing are asking themselves at the moment so assume that were to happen central banks will be back to the table to use monetary policy tools in order to mitigate the impact do they have the space and that's exactly the question the market is asking have they gotten by now to a position where they have the ability to use some of these tools or we will fall back then into the usual reaction that we've seen last time around another round of unorthodox monetary policy to react it and so that's an important one that will determine how markets will reprice this but that was exactly my point that was exactly my point that monetary policy has limited space as we speak and so you need to see fiscal space you need to see a structural space if you want to call it like that and that's why in the eurozone we've been urging finance ministers to rebuild fiscal performance you've got a better mix in the U.S. right so so we agree then that there's the question of whether we'll have adequate space yeah and then there's also the social political consequences of an economic downturn so we would have to assume that we'll have that won't be a pretty picture we're going to be and that and so now I'll ask the question again is there asymmetry relative to something like if you're going to be a little wrong which side would you want to be wrong on okay we have two minutes so I need one maybe one I'm afraid the discussion is going into that monetary policy should solve all the problems in the world here we won't be able to handle the social cohesion problems that we see in the world I think I think each and every policy area has to do what it's best at we are not the only game in town Benoit and the central bank community it's the joint economic policy of the world that makes us this place a better place I'm not saying that you should be driving that for social welfare I'm just saying do we agree on that kind of picture if there is a number of risks yes that's true we have we have 50 seconds left Benoit won't talk about bitcoin just for like a hard a hard hour and then we'll have another session next year oh for is it on bitcoin in bitcoin in 50 seconds yeah okay let's be let's act on the risks and that's about regulation and it's primarily investor protection but it also has to be money laundering terrorism finance and everything and the international community is a kind of shaping gathering and I will we're preparing an answer to that and I would expect for instance the G20 discussion in Buenos Aires in March to focus very much on on these issues what's the regulatory answer how do you understand how do you control these gateways between the shadow currency universe and the regular financial system that's being discussed and and there will be answers but don't lose sight of the opportunities the the flip side of the discussion what bitcoin tells us as central bankers is our is that our payment systems are too expensive and they are too slow and we've got to act on that we need better cross-border payments also thank you also we need better cross-border payments also because it's good for development is good for financial inclusion so bitcoin can help us it can pay us a service by forcing us to upgrade our systems that's a positive lesson thank you all