Former Fed Vice Chair Richard Clarida Talks Pandemic Monetary Policy and Inflation

Jon Hartley and Richard Clarida discuss the latter’’s career, academic contributions and government service, including his time as vice chair of the Federal Reserve. Their conversation covers key topics such as inflation in the early 2020s, monetary policy during the COVID-19 pandemic, and the upcoming Federal Reserve monetary policy framework review. They also discuss the legacy of the Fed’s flexible average inflation targeting (FAIT) enacted under Clarida’s leadership, the utility of DSGE models at the Federal Reserve and other central banks around the world, and the early origins of “nowcasting”.

Recorded on September 20, 2024.

ABOUT THE SPEAKERS:

Richard Clarida served as vice chairman of the Board of Governors of the US Federal Reserve System from September 2018 to January 2022. Clarida is also the C. Lowell Harriss Professor of Economics and International Affairs at Columbia University. He was assistant secretary of the Treasury for economic policy, serving two secretaries of the Treasury. Clarida is also a managing director of Pacific Investment Management Company’s (PIMCO) New York office and that firm’s global economic advisor. Prior to rejoining PIMCO in 2022, he was the firm's global strategic advisor from 2006 to 2018. Earlier in his career, Clarida was with Credit Suisse and Grossman Asset Management. He holds a PhD and a master's degree in economics from Harvard University. He received an undergraduate degree with Bronze Tablet Honors from the University of Illinois.

Jon Hartley is a Research Assistant at the Hoover Institution and an economics PhD Candidate at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently a Research Fellow at the Foundation for Research on Equal Opportunity (FREOPP) and a Senior Fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists, and serves as chair of the Economic Club of Miami.

Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, IMF, Committee on Capital Markets Regulation, US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada. Jon has also been a regular economics contributor for National Review Online, Forbes, and The Huffington Post and has contributed to The Wall Street Journal, The New York Times, USA Today, Globe and Mail,
that doesn't make it any less of a mess.

(00:20):
And so I think that is also a fair point.

>> Jon Hartley (00:32):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today my guest is Rich Clarida,who is a macroeconomist and
the C Lowell Harriss Professorof economics.
And Professor of international andpublic affairs at Columbia University,

(00:55):
which also served as the 21st vice chairof the Federal Reserve from 2018 to 2022.
Previously, duringthe George W Bush administration,
Rich was assistant secretary ofthe treasury for economic policy.
In which he's served as chief economicadvisor to two different US treasury
secretaries.
Rich also serves as PIMCO'sglobal economic advisor,

(01:17):
where he's been affiliated formany years when outside of government.
Thank you so much forjoining us today, Rich.

>> Richard Clarida (01:23):
Yeah, looking forward to this, Jon, thanks for having me.

>> Jon Hartley (01:26):
Well, it's an honor to have you on,
I want to start with your early life.
You've a lot of really great interests.
For those who don't know,you've got quite a few musical interests.
You performed with Chair Powellan acoustic version of
God Rest Ye Merry Gentlemen andWe Three Kings.
Around Christmas time in the marbleatrium of the Eccles building,

(01:50):
which is where the Federal Reserve Boardis headquartered in Washington, DC.
In 2016 you released a 13-track album,Time No Changes.
When did you decide youwanted to be an economist?
Were you ever considering other careers?
You grew up in Illinois,you went to University of Illinois for

(02:11):
undergrad, Harvard foryour PhD in economics.
How did your interest ineconomics first get started?

>> Richard Clarida (02:16):
Well, so, in terms of the music, I grew up in a small coal
mining town in downstate Illinois,and my father, both my parents,
were very musical, andthey were both very educated.
In fact, my father had a PhD, which isunusual in downstate Illinois decades ago.

(02:38):
But he was a musician.
Indeed, in his youth he wasa professional jazz musician.
So my brother andI were in elementary school.
We didn't have a choice.
I was gonna play clarinet andBob was gonna play French horn.
Sort of the peak of my clarinetcareer was at the age of 13.
I performed the Mozartclarinet concerto from memory.

(03:00):
I mentioned that to one ofmy colleagues once, and
he replied that's not a big deal.
When Mozart was 13 he wrotethe Mozart clarinet concerto.
But in high school I got moreinterested in jazz and rock and
was in rock bands in high school,wrote some music in college and
actually released a coupleof songs in the local area.

(03:24):
But anyway, in terms of economics, it'sgoing to sound corny, but it was true.
I took intro to economics as a freshmanat the University of Illinois in a big
lecture hall, I think 600 people in thelecture hall, and was completely hooked.
And I basically, as a freshman,said this is what I'd like to do,

(03:45):
I'd like to be an economics professor.
And I was fortunate enough,when I was a sophomore, to have a mentor,
a gentleman named Matt Canzoneri..
A very respected internationalmacroeconomist who was my professor.
And Matt was my mentor and basically said,if you want to get a PhD take

(04:05):
the following math courses anddistinguish yourself.
And I basically followed that template.
And in those days it's muchdifferent today, as you know,
John, but in those days this is the 1970s.
So I started at Harvard in 1979.
Indeed, I only happen just quipsometimes that the reason that I got

(04:26):
into a top graduate school like Harvard,
I had good grades and all that, butthis was the decade in which there
was a very popular book calledthe Over Educated American.
And the basic thesis was that Americanswere over investing in education.
There was no college orgraduate school premium.

(04:48):
And since that didn't really matter to me,I was doing it sort of out of love and
interest, you know,there was a spot for me.
So that was basically how it was.
I wanted to be an economics professor.
I had the opportunity to do that andwent straight from college to,
to graduate school at Harvard in 1979.
So that's sort of the quickfirst 20 plus years of my life.

>> Jon Hartley (05:12):
Well, ironically,
that's where The Overeducated Americanwas written, right?
By Richard Freeman.

>> Richard Clarida (05:18):
Yeah. Who was one of my professors at Harvard
actually.

>> Jon Hartley (05:21):
That's too funny.
That's fascinating.
Do you have secular influenceswho loomed large in your
time at the Harvard economics department?

>> Richard Clarida (05:32):
My, yeah, Jon, I have to tell you,
it a very heady time to be interestedin macro, in the early 80ss.
First of all, the US and the globaleconomy was an absolute train wreck.
Inflation went from 2% to 15%.
There were four recessionsin eleven years.

(05:55):
Forget jobless recoveries and
the unemployment rate spenthalf the time around 10%.
And so what was a train wreck for
prosperity was a stimulatingworld to be trying to understand.
Now,, precisely this time was somethingthat was emerging out of the midwest,
which was called the rationalexpectations revolution.

(06:17):
And in those days that wasa very contentious and
controversial line of research.
Now, not to graduate students.
I thought, of course,what's the alternative?
And I was very fortunate in several ways.
One, I had an incrediblementor at Harvard,

(06:38):
Benjamin Friedman, forwhom I worked at the MBER.
And in those days the stipends andsupport for
graduate students werenot what they are today.
So essentially, at Harvard in those days,although they didn't make you pay tuition,
but, you know, in terms of surviving,you had to have some sort of,

(06:58):
you either taught principlesof economics or had an RA job.
And so that's how I supported myself.
So Ben was an incredible mentor andstill a dear friend.
Tom Sargent visited Harvard in 81, 82.
And in comparison to what facultyoftentimes do when they go on leave, which
is they get a nice office, lock the doorand they write a book or finish articles.

(07:23):
Tom actually solo taught two PhD courses.
And of course, those of us who wereinterested in macro took them.
And it was both stimulating and exciting,
plus he's a very, very persuasive and
magnetic promoter of rationalexpectations in macro.

(07:47):
And then finally, a lot of my technicalskills I was able to start building
up because young Olivier Blanchard,before he became an institution.
But Assistant Professor Olivierwas There and was on my committee.
And also Mark Watson had arrivedas an assistant professor.

(08:09):
And so it was an exciting timeto be thinking about macro.
There was a toolkit that was beingdeveloped to sort of try to put
some structure on it, andit was just a great, great experience.

>> Jon Hartley (08:24):
Well, it's an amazing time to be at the Harvard economics department
as a PhD student.
As you mentioned, there wasa time when there was quite a bit
of a transition in thinkingaround macroeconomic models.
There was a lot of I guess, Harvard andMIT was for a very long time,

(08:46):
sort of the home of the oldKeynesian sort of tradition.
And Ben Friedman andothers very much being part of that
in some respects Larry Summersnow still part of that,
sort of those for proponents ofthe old ISLM type static framework.

(09:08):
I want to get into your greatacademic contributions because
you very much laid some of the groundworkfor the sort of success of thinking here.
So we had sort of the old Keynesianparadigm, pre sort of 1980s,
1970s, folks like Alan Blinder,Ben Friedman, and

(09:30):
then you had the sort of RBCrational expectations revolution,
but then folks like yourself came along.
You're one of the foundersof New Keynesian economics.
One of your most famous papers istitled the Science of Monetary Policy,
a new Keynesian perspective withJordy Galli and Mark Gertler.

(09:52):
I'm curious, how did that papercome about along with the whole
idea of taking the RBC paradigm andrational expectations and
adding nominal rigidities,which I think is sort of the successive
step that happened there andwas a huge part of your contribution.

(10:13):
And those sort of early newKeynesian folks in the 80s and 90s,
when I think of folks like Ned Phelps,folks like yourself, Mark Gentler,
John Taylor, Greg Mankiw,you're very much a huge part of that.
I'm curious,what was the inside story there?

>> Richard Clarida (10:29):
Yeah, well, okay, so there are different layers
to that onion, and I'll try to be concise.
Here's sort of the big, big picture.
So there were several things going on.
So once the macro professionbought into at least starting

(10:52):
with models where you hadpeople who were optimizing and
had rational expectations,there was a big fork in the room.
Everyone agreed, yeah,you want optimizing agents and
you want to take someview on expectations.
And then at that point, there wasa fork in the road and some folks said,

(11:15):
really influenced, I think by EddiePrescott, that in order to sort of answer
what those folks thought were interestingquestions, you didn't even really need to
take a stand on sticky prices ornominal variables at all.
So that agenda said,let's see how far we can get without going
into the complications of rigidities andthe like.

(11:37):
And I think there was success in thatliterature, but it never resonated with
me cuz all the things I wasinterested in really could not.
That would have been puttinga square peg in a round hole, but
I think here was the problem, Jon.
The problem was, among thosesubset of people of my generation

(11:59):
who thought about nominal rigidities,there were a couple
related issues that meant thatthe RBC literature made earlier and
more rapid progress than the subsequentwe now call New Keynesian models.
The first, and actually,
I gave a talk at Hoover on this atone point that alluded to this.

(12:23):
One of the problems was that of theincredible influence of Milton Friedman
in his 67 presidential address, which is,I teach that still to my students,
I just taught it yesterdayin my seminar at Columbia.
Arguably, I think it's ten pages,you can count the words,
but in terms of influence per page orper equation, it's completely off

(12:47):
the charts cuz I don't think there'sone equation, there's only ten pages.
And there are, at least by my count,at least four and
maybe five seminal ideas in that paper.
And one of them was essentially,implicitly a real business cycle argument,
which is that a lot of what we calleconomic fluctuations are shocks and

(13:09):
imperfections in labor markets andthey'll sort of grind to the right place.
And it sort of said, a lot of whatwe think is a problem is just really
an outcome of how an economyfunctions with shocks.
But Friedman was not dogmatic andin particular, I think he always,
at least in the Friedman that I read,I only had a chance to meet him once,
actually, I should say John Taylor.

(13:30):
I came out to a Hoover conference decadesago, and John kindly invited me to
a reception of his house,where I got to meet the great man,
which was a real highlight of my careercuz that was the only chance I had.
But Friedman had another argumentthat was influential, which is, yeah,
probably there are rigidities.
The problem is, it's not clear that giventhe lags in policy and other things,

(13:54):
it's not clear you can actually doany better if you try to offset them.
So the mindset in the 80s,among young folks in their 30s,
20s who had the rationalexpectations toolkit,
was there's a lot of interesting stuffthat you can explain without rigidities.
And B, even though they're there,

(14:15):
it's not clear you can really doanything about it because of Friedman's
point about destabilizingthe economy if you try to offset it.
And so what that meant is when Mark andJordan and
I started working on this in the mid 90s,there was a great
deal of skepticism that it wasa relevant research program.

(14:39):
And then I gave another talk at Hooveron this a couple of years later,
which is where the Taylor rule came in.
So I can't speak forthe other new Keynesians, but at least for
Clara de Galle Gentler, when the lightwent off was when John's paper appeared.
And it provided the missing linkbetween wanting to link RBC models to

(15:03):
what we thought of as realisticmodels with nominal rigidities.
And essentially, you had to takea stand on monetary policy.
You have to close a model, right?
You've got endogenous variables,you need as many equations and
you needed an equation.
And by thinking of the Taylor rules and
equation that related a shortterm interest rate to macro

(15:27):
variables in a sensible waywas an important insight,
and we were among the first to have that.
And so then once we had a way to closethe model, there was a lot of tools,
in fact, I told John this at the timewhen he and I used to get connect.
And I actually worked with John atthe treasury back in [INAUDIBLE] when

(15:49):
he was undersecretary.
And we talked about it then, but I alwaysthought in the late 80s, early 90s,
before we started working on this, I said,look, the questions are interesting.
The toolkit is all there.
Much of it was developed by Johnin the seventies and eighties.
We got an interesting set of questions.
We got this toolkit.

(16:11):
So, yeah, but I think it wasthe combination of the huge influence
that RBC had on people and the fact thatit wasn't clear how to close the model.
I should also say it wascertainly the highlight of my
professional career to be able tocollaborate with Mark and Jordy.
In those days, Jordy and I had writtena paper together on structural modeling,

(16:38):
open economy,macro modeling of different shocks.
Then Mark andI had written a paper commissioned for
a bureau conference on doing sort ofa country or case study of the Bundesbank.
And then Mark suggested, well,why don't we just all three work on this?
That's what became the five Clarida,Gali, Gertler papers.

(17:01):
But I guess what I want your viewers toknow is that even though this is now,
I think, a respected literature, thereweren't a lot of folks thinking about
these things because ofthe factors I mentioned.
I should also say, in fairness,it was in the air in the mid nineties.
In the following sense.
Mike Woodford, who went to Princeton but

(17:23):
is now my colleague at Columbia,began to get independently interested
in the idea of looking at nominalrigidities in fully specified models.
And of course, Mike's pioneeringtreatise worked out exactly why.
The Taylor type rulesnot only are intuitive,
they actually have good properties interms of macroeconomic performance.

(17:50):
Then people like Kang and Waldman also.
It wasn't just us, butI'd say where we were really focused,
perhaps where others weren't,was enclosing the models in a realistic
way with a policy reaction function,where some of the other papers worked
with sort of money in the utilityfunction and money demand function.

(18:13):
We just said, lets go for the gusto,lets just jammin a Taylor type rule.
The final thing, and I'll be quiet,
although we respected John'scontribution enormously,
we did feel that there was an evolutionof it that could actually be even as or
more useful, which was the idea of, andthis was getting back to Friedman 67,

(18:35):
the long and variable lags isessentially taking John's insight, but
at having the reaction function notto contemporaneous inflation, but
to expected future inflation.
The idea being that if youraise the funds rate today,
it's not going to have any impact onthis month or this quarter's inflation.
So implicitly, any policy decisionto raise a lower rate is implicitly

(18:58):
an assumption about where the economyis going to be in the future.
All the CGG stuff worked withforward looking Taylor rules,
which also have someinteresting features as well.
That's sort of the quickest quick history.

>> Jon Hartley (19:17):
One thing that people talk about,
the sort of RBC versus new Keynesiansort of debate, was something
that I think the new Keynesiancritics of RBC says in RBC models,
there's really no room for policy orthat policy doesn't really matter.
And so the idea of having monetarypolicy that is not neutral,

(19:42):
that's something that you canget in a new Keynesian model,
and that's one ofthe potential virtues of it.
I think there's interesting questionsabout whether it's sticky wages or
other kind of rigidity, ormaybe something completely

(20:05):
different altogetherthat causes recessions.
I think there's arguablya lot of room to go.
I'm curious, as a practitioner,someone who's been at the very top of
a central bank, this is something thatI've spoken with a lot of guests about.

(20:26):
It's really important to highlight,
these DSGE models are built bycentral banks around the world,
and their staffs around the world,and are updated and
do play a role in each monetary policymeeting of various central banks,
in developing forecasts and developingcounterfactuals and things like that.

(20:51):
One thing I think that I've noticed isin having talked to a lot of former
central bankers and talked to a lotof people in various central banks,
is that really a lot of central bankersthemselves, who often come in as political
appointees, certainly in the case ofthe Fed, aren't necessarily staffers,

(21:11):
in many cases aren't very familiarwith DSGE models, which over time have
become increasingly complicated withinthese hundred page macro papers.

>> Richard Clarida (21:23):
You noticed that too.
I'm not the only onewho's noticed that trend.

>> Jon Hartley (21:28):
I'm curious, do central bankers, in your view,
actually use DSGE models,or is it more of a,
I think VARS produce betterforecasts in general.
Is the thinking in your mindmaybe a lot simpler than that?
Just following some basicmonetary policy rules,

(21:51):
obviously not following it ina mechanical way in the sense that maybe
John Taylor would prefer, butusing things like that as guidelines?
I think that the Taylor typerules have been some of
the most successful parts ofthe sort of Keynesian paradigm.
If you just run Taylorrules of regressions,

(22:12):
the fit is actually pretty goodin a lot of developed economies.
I'm curious, in your mind,are central banks, have they become
just like a big subsidy to DSGEresearch that's really not in practice,
used very much outside the seminarrooms and writing the papers?

(22:34):
In your experience, certainly as someonewho's written down DSGE models and
basically helped invent that literature,
were they useful to you as vicechair of the Federal Reserve?

>> Richard Clarida (22:49):
There are a couple things there at least maybe three.
Some thoughts I'll share.
My first conversation withJay Powell when I was on
the verge of being nominatedby the White House.

(23:10):
I had never really hada chance to meet Jay.
So we did meet in January of 2018,and it went very well.
And I looked him in the eye.
I said, Jay, I think I may behere because your staff has
told you that I've madecontributions to DSGE.

(23:33):
But I want you to know that if I'mfortunate enough to be selected as
the vice chair of the Fed, I will not viewit as my role to promote DSGE models.
It will be my role to pull you asidein the privacy of your office and
tell you when andwhy you should ignore them.
I meant that as the reality ofthe way I thought about it coming in.

(23:59):
So to me, DSGE, I'll make a confession for
the first time ever on Hoover podcast.
In my career in the last 25 yearsas DSGE has been taking off,
I've thought to myself many times.

(24:20):
It's really been a pleasantsurprise in the following sense,
that as someone who had taughtintermediate macro to bright
undergraduates fordecades before those models took off.
For the subset, if you takethe standard three equation DSGE model,
there are only a limited numberof shocks you can look at.

(24:41):
You can look at a demand shock,you can look at a productivity shock,
you can look at a monetary policy shock.
The models are so simple, at least,declared a galley girdler,
you don't have a financial sector.
And I think what people shouldknow is that the qualitative
impulse responses from a DSGEmodel are virtually identical

(25:04):
to the qualitative impulse responsesthat you would get from a 70s or
80s style ad hoc dynamic ISLM model.
Carefully thought through the way it wastaught in the late 70s and early 80s,
where you've got some long-runequilibrium condition you're approaching.
It's the neoclassical synthesis, sothere's a shock, there's rigidity, but

(25:27):
you're reporting longer equilibrium.
So at one level, DSGE models,
at least the simplethree-equation versions of them,
really do not give differentanswers than you would get from
a thoughtfully specified andsolved old-fashioned model.

(25:47):
So that's part of it.
The other part of it is,I think it's not just at the Fed,
in fact, for a year or so, I wasan advisor to the Norwegian central bank.
And this was more than a decade ago,maybe now,

(26:08):
15 years ago, and they then,and I'm sure today,
are really a leader in tightly linkingthe monetary policy briefings and
scenarios to a very, very,very rigorous and thoughtful DSGE model.
I think it maybe has 25 equations,not 100.

(26:28):
I've seen that work and it can work well.
But again, in that context,
it's a structure within which youpresent the briefings and the scenarios.
Now, within the Fed, and indeed withinthe Fed system, there are DSGE models.
The board has several, and most,if not all, the Reserve Bank has them.

(26:51):
And then the briefing->> Jon Hartley: Effort Ferbus probably
being the most notable model.
Yeah, well, Ferbus is not a DSGE model.
So I just say when I gotbriefings as a Fed official,
for each FOMC meeting, there'smultiple hundred-page briefing books.

(27:12):
And in each book,there's a section on the staff forecast,
and then a separate subset ofthat is the projections and
decompositions froma suite of DSGE models.
And sothey're definitely part of the briefing.
But at least in my time,they were not mechanically followed or

(27:36):
not even really mechanically favored overprojections from VAR models or Ferbus.
And Ferbus, actually, I should say,since you asked, Ferbus actually has,
from my perspective,some very nice features.
So, for example,Ferbus Federal Reserve Board Macro Model,

(27:57):
which I should say was veryinfluenced by Taylor's work
because the young John Williams,was really brought
tailored to the Fed in termsof doing the modeling,
putting in rational expectations,and lags and inertia.

(28:17):
But Ferbus has some useful features.
So, for example, you can look inFerbus simulations, where you assume
financial markets know the model andare rational, but the private sector,
or some subset of the private sector,has some sort of a rule of thumb.
Ferbus is also quite useful becauseit's much more elaborate in

(28:39):
terms of a financial sector.
So you can look at howa shock to policy or
to tax policy changes the mortgage market.
And soI don't really think it's either or.
To paraphrase something I learned fromBen Friedman, if you're going to be
forward-looking, then you wannaefficiently look at everything,

(29:02):
every information variable that'shelpful in assessing the future.
So that would be sort of a quick wayto summarize the way I think it works.

>> Jon Hartley (29:13):
Well, that's amazing, and amazing to hear from a former Fed
vice chair that our models are often more,more helpful than DSGE ones.
I'm curious, a few economists getto both research and practice or
implement what they say is professional.
Certainly, being a macro economist,

(29:36):
then vice chair of the Federal Reserveis a great exception to that rule.
You also served as Bush 43 treasuriessecretary for economic policy.
I'm curious, what did you learn asan economist from your time in Washington?

>> Richard Clarida (29:54):
Well, it was, I had three tours of duty in DC.
So as an assistant professor, I hadan opportunity to take a year of leave and
go to work as a senior staff economist atthe Reagan Council of Economic Advisors.
And that was really transformative.

(30:14):
First of all,you pick your mentors well [LAUGH].
So I was so incredibly fortunate,Michael Musa,
who passed away ata ridiculously young age.
But among those of us who are of thatgeneration, Mike was larger than life,
and Mike was a member of the council andwas looking for a staffer,

(30:39):
essentially to be his right-hand person,right-hand man.
And I got that job.
And so to me, that was, andI was 28 or 29 years old,
and soto be at the executive office building and
also was a very fascinating time foreconomic policy.

(31:03):
In fact, I went back and
looked at some of the issues thatthe CEA was working on in that year,
but such things as fundamentaltax reform in 1986.
There was then a very ambitious bit ofimmigration legislation that essentially,
I think, has not ever been revisited,at least with formal legislation.

(31:28):
You had something called the savings andloan problem,
which later became the savings andloan crisis.
The Plaza Accord had been in 85, andthen there was the Louvre Accord.
So to be a 28, 29-year-oldmacroeconomist not making policy but
helping people who werethinking about the world.
And so I made a vow to myself Idefinitely got to get back to do this,

(31:52):
but I also wanted to geton with my academic career.
So that's what I got out of that,it gave me the interest to try to
bring rigorous macro thinkinginto interesting questions.
So I then had another opportunity to goback 1,512 years later in the treasury and

(32:13):
in a higher level,this time as an assistant secretary.
And sort of designed the job,which was enjoyable.
I was essentially the chief economist fortwo treasury secretaries.
And so there was an element of briefingand updating them, but there was also
basically an element of being a resourcefor the other groups in treasury.

(32:37):
So I worked very closely with Johnon some international issues,
with Peter Fisher, who wasthe undersecretary for domestic finance.
And that sort of reinforceda message that I had taken
away from my CEA days,which is that there is value in.

(32:57):
If there's a question posedto you by a policymaker,
there is value in getting to 90% ofthe perfect answer in a week or a month,
as compared to getting to 100% ofthe perfect answer in three years.
And so there are a lot of things Iworked on that I tried to give it
my very best shot, knowing that if I wereactually writing an AER or QGE paper,

(33:22):
then there might be things I would do orthink about that could be useful.
But instead of thinking it's zero one,it's either QGE or bust,
I actually thought there was a valuein bringing good economics, but
on timelines andsubject to other constraints.
To be frank, John,a lot of macroeconomists,
when they go to Washington,hate that part of the job.

(33:43):
They think, well, how can I answer thisquestion from the treasury secretary or
the director of the NEC?
It's going to take me a couple yearsto actually think through this and
write the paper.
And so I think some people's brainsare wired to actually find that
something that is of interest andworthwhile in itself.
And other people sort of chafe against it.

(34:06):
So I'll give you oneconcrete example of that.
So literally, my first day on the jobat treasury was September 11, 2001.
So everyone remembers where he orshe was on that day.
Well, I was sitting in Peter Fisher'soffice, who was the undersecretary for

(34:29):
domestic finance,when the plane hit the second tower.
And I think we both looked at each other.
I probably said somethinglike holy blank [LAUGH].
But the relevance to this is when I sawPaul O'Neill actually was traveling
that day.
So when I saw secretary O'Neill the nextday, he said to me, well, Rich,

(34:49):
welcome aboard.
He said, you know, I have a frustration.
And the frustration is I had a much bettersense of the global economy as the CEO
of Alcoa than I do at treasury,because when I was at Alcoa,
every day I'd have a computer terminalthat would show me all of our production,
our inventories, our delivery lagsin 50 countries around the world.

(35:12):
And I had a real pulseon the global economy.
And here I get data, that's great data,but from the commerce department,
that's three months stale andthen revised.
And so I took that as a motivation.
And I benefited by havingsome really good career staff
people in Treasury,a guy named Ralph Monaco and Kitchen.

(35:36):
And I basically said to them, I said,look, there are these working papers out
there by stock and Watson aboutthis new thing called nowcasting.
So let's get up andrunning a nowcasting model.
And by today's standards,it was very primitive, but
it used some regressionapproximations that stock and

(35:58):
Watson had in the appendixto their classic paper.
And so that's what we did.
So the staff had the first usgovernment fed nowcasting model up and
running by November of zero one.
And sort of in the category of in life,
sometimes it's betterto be lucky than good.
Our first ever nowcast for

(36:22):
Q4 of 2001 was thatthe GDP was roughly flat.
And the Wall Street consensuswas we've had this big shock,
a terrorist attack, hit consumerconfidence, GDP will be -4, -6.
And whatever the first release was,

(36:42):
it came in within a tenth ortwo of our nowcast.
And that was far and away the bestnowcast we had during my time.
But it was the first one.
So that's, I think,a good concrete example.
So an academic might have said, yeah,sure, Secretary O'Neill, in 14 months,
I think I might be able to have somethingthat I could send off to a journal.

(37:05):
But we had that up andrunning in a couple of months, and
it was quite useful, it was the firsttime within the US government.
I was told that briefings wereactually being done not based
on a forecast buton an explicit weekly updated nowcast.

>> Jon Hartley (37:26):
Wow.

>> Richard Clarida (37:27):
So that's an example of that, yeah.

>> Jon Hartley (37:32):
Fascinating history about the origin of nowcasting,
I didn't realize that nowcastingwent back as far as the early 2000s.
That's quite amazing.

>> Richard Clarida (37:42):
Well, I'll share another anecdote with you.
So O'Neill was very proud of this, andhe got on the phone with his good friend
Alan Greenspan and he said,Alan, you got to see this guy.
Rich Clarida works for me andthey've got this thing, nowcasting, and
our nowcast was much betterthan your forecast [LAUGH].
So Greenspan invited me over,cuz that was a huge

(38:06):
honor to have a private meeting with him,and he was respectful.
But I think I'll leave it at sayinghe wasn't actually persuaded that
there was any incremental value innow casting versus the beige book.
And of course beige bookhas its value as well.

(38:26):
But of course now the Fed isa world leader in Nowcasting,
but not quite yet in those days.

>> Jon Hartley (38:35):
Well, it's fascinating, and certainly I think perfection
can be the enemy of the good in thesevery tight policy turnaround times.
Amazing that you're at the Reagan CEA,Marty Feldstein was leading it, and
folks like Larry Summers and Paul Krugmanand John Cochrane and Greg Mankiw.

(38:57):
All those people and yourself, and many,many others, were there during that era.
I'm curious, I want to sort of focus onyour time at the Federal Vice Chair and
maybe a lightning round,a few questions for you.
Certainly one of the major contributionsyou made while at the Feds

(39:17):
was the Fed's framework review,this released four years ago.
And the new framework that wasintroduced is that flexible average
inflation targeting are fate.
The idea that you should be targetingan average inflation target of 2%
over the years, andthis grew out of the period in the 2010s,

(39:37):
inflation fell short of the target.
The idea that runninga bit over 2% was okay.
There were some questions about howflexible the target is over what time
period we're doing the averaging for.
And then we got thismassive inflationary surge
in well above 2% in 2021, 2022, CPI.

(39:59):
Since then, fate is, I think,gain its fair share of critics.
I'm curious, in your mind,what's the legacy of fate, and
what do you think the next Fed frameworkreview should do differently, if anything?

>> Richard Clarida (40:11):
Sure, well, it won't surprise your listeners and
viewers to hear that I've donea lot of thinking about this.
I've also done a fairamount of writing about it.
So I've just completed a piece for
an NBER conference that willbe coming out in the JME, but
the working paper version isavailable on my personal website.

(40:33):
And I did an international Journalof Central Banking article and
an NBER working paper that alsosummarizes a lot of my thinking.
So for those who want the deeper dive,it's out there in print.
But briefly,I'll say the following things.
First of all, I always thoughtof fate as being an evolution,

(40:55):
not a revolution, that clarifiedthat under certain circumstances,
it would make sense forthe Fed to not only tolerate,
but to actually put in placea policy that would allow
a modest overshoot ofthe 2% inflation target.

(41:16):
And those circumstances,as you summarized, were if the economy
has been in a prolonged period,operating below the target.
And also when policy has beenconstrained by the zero lower bound,
then the alternative to allowing for
an overshoot is the real risk thatinflation expectations drift lower.

(41:39):
The way I put it at the time was,
suppose that outside of beingconstrained by the zero bound,
you are on the Mount Olympusof monetary policymakers,
in that you can always get inflationquickly to two from below,
and for any shock, it will never go above.

(42:00):
But your only problem is thatthe zero lower bound is a constraint.
So in those circumstances, if you do notallow policy to tolerate an overshoot,
then you are guaranteed to haveexpected inflation fall below 2%,
because inflation can only be below 2% ortwo, it can never be above.

(42:24):
And if you repeat that game cycle aftercycle, you can get into the risk that
I think occurred in Japan and that wasbeginning to occur in the eurozone,
that inflation expectations drift down.
And then, of course,as inflation expectations drift down,
actual inflation drifts down.
And so what it said is that under thosecircumstances, if you've been below 2% for

(42:49):
a long time andyou've been constrained by the zero bound,
then policy should not only toleratean overshoot, but it should,
essentially, allow an overshoot.
Now, it was explicitly asymmetric,and that was clarified in a dozen
speeches that I and others gave afterthe fact, in the sense that once you're

(43:11):
away from the zero bound, andonce you're satisfied that inflation and
is in a neighborhood of 2% from above,then you just run traditional policy.
In fact, in the Fed models,you run a Taylor rule.
It was very closely linked to andmotivated by a proposal of
Ben Bernanke's around that time->> Jon Hartley: With the temporary price

(43:35):
level targeting>> Richard Clarida: Temporary price level
targeting, which is, if you're notconstrained by the zero bound,
just do what you always do, but if youare, don't lift off rates until you have
either been at or above 2% for some time,and there are different flavors of it.
So that's the first point.
So, fast forward to today,is fate relevant to the Fed today?

(44:01):
No, because we have not gone through aperiod when inflation has been below two,
it's been above two.
And so fate is silent.
In fact, what fate says is just do whatyou would always do under inflation
expectations, if the problemis not inflation is too low.
The second thing I'll point out aboutthe post pandemic surge in inflation, and

(44:23):
this is specifically discussed in myrecent paper that's coming out in JME,
is what's striking, and what I'm sure,
what I'm confident future monetarypolicy scholars will look at,
even though many current monetarypolicy scholars have ignored it.
What's striking is the similarityacross advanced economies

(44:44):
in the inflation surge andin the central bank reaction function.
So here's some facts.
Among all the advanced economy centralbanks, no advanced economies central
bank began to hike rates before inflationhad exceeded the top of its target range.
So by that metric,
all advanced economy central banks underinflation targeting fell behind the curve.

(45:08):
Secondly, all but two advanced economiescentral banks, Switzerland and Norway,
delayed hiking rates until core inflationhad exceeded the top of the target range.
And so if the recent episodeis an indictment of fate,
it's also an indictment of inflationtargeting as practiced by Canada,

(45:31):
by the UK, by the eurozone, by Sweden,by Australia, and by New Zealand, okay.
What I say in the JME paperis I don't think that this
episode tells us much about fateversus inflation targeting, or
about single versus dualmandate central banks.
I think what it tells us isthat this was an enormous and

(45:52):
unusual shock,in that it influenced aggregate supply.
It triggered a policy responsewhich boosted aggregate demand, and
it also changed equilibriumrelative prices.
And with the exception of the Swiss,other central banks, essentially,
given that the prior decade hadbeen where inflation was too low,

(46:15):
delayed lifting off beyond whattheir inflation targeting or
fake frameworks would have tolerated.
But I do think there are lessons learned,and in particular,
I think the lessons from the Fed's caseto be learned are much less about fate.
Indeed, I really don't expectmajor changes to flexible average

(46:39):
inflation target.
Another thing that perhaps useful,Jon, for
your listeners and viewers,is that within the Fed system and
culture of the Fed,the reserve banks and the board,
there is a real distinction,both conceptually and

(47:01):
in discussion between the Fed'sframework statement and
the way the Fed tries toachieve its goals through
FOMC decisions on ratesin the balance sheet.
So one of my colleagues, who I won'tmention, but I think he would not mind,

(47:21):
said to me when I got to the Fed, andJay Powell had said he wanted me to
quarterback the framework review,he said to me, he said, Rich,
this is great, but one thing you shouldknow about the Fed is that the framework
statement is a crown jewel andis a quasi-constitutional document.

(47:41):
It lays out broad goals and priorities.
It doesn't say do you cutthe funds rate 25 or 50.
It doesn't say do you do an open-endedQE program or a finite program.
It doesn't say should you usethreshold forward guidance?
It doesn't say any of that.
Those are FOMC Decisions that needto be consistent with the framework,

(48:04):
but they are not compelled by it.
And so the framework statement itself,I think, holds up quite well.
It was released andunanimously approved in August of 2020.
However, the committee,in the depths of the pandemic collapse,
millions of people dying,no vaccines in sight.

(48:26):
And I very much supported this,the committee in September of 2020,
after the new frameworkstatement was released,
did make FOMC decisions that deployed andcommunicated very,
very muscular andbinding forward guidance.

(48:48):
Now, those decisions were decisionswere certainly consistent with
the new framework, butthey were not compelled by it.
Indeed, two members of the committee,Neil Kashkari and Rob Kaplan,
who supported the new framework,voted against the FOMC decisions precisely
because they thought it went beyond whatthe new framework necessarily required.

(49:12):
Or called for under those circumstances.
I do think there are lessons learnedin terms of forward guidance.
In particular,as with anything in economics,
there are always costs and benefits,there are always trade offs.
And I do think that an important lessonlearned is in deploying muscular

(49:33):
forward guidance, as in the Fed will notlift rates until inflation exceeds to,
and the labor market isreturned to full employment.
Ex post, there was a cost to that guidancein the face of a huge supply shock.
And it's not clear in retrospectthat the incremental benefit from

(49:55):
that guidance outweighed the cost inthe scenario that we got hit with.
And I would say with even greaterconviction that that applies to
the forward guidance the committeeoffered in December of 2020,
that it would not even begin to slowthe pace of QE until it had made

(50:16):
considerable progress towardsits dual mandate goals.
Again, it's not clear to methat the incremental benefit
of making that commitmentexceeded the ex-post cost.
Cuz the ex-post cost,
as I actually discussed in a talk Igave at Hoover several years ago,

(50:38):
and I do in this IJCB paper,the cost is that we basically said
we're not gonna begin to hikerates until we end QE, but
we didn't start to roll backQE until the fall of 2021.
However, one last thing I say on this is Ido think that in the big scheme of things,

(51:00):
although in retrospect,you can always go back and
talk about this meetingversus that meeting.
The reality is, even in real-time,[COUGH] the committee
did not have a sufficientlyuseful signal of the persistence
of the inflation surge till arguablythe September of 2021 meeting.

>> Jon Hartley (51:25):
At that point, it was clear it wasn't just kind of used car.

>> Richard Clarida (51:29):
It wasn't just used car, yeah-

>> Jon Hartley (51:31):
[CROSSTALK] Other
things that were rising, too, by then.

>> Richard Clarida (51:34):
And I've given public comments in which I've said correctly that
in March and April of 2021, almost allthe inflation overshoot was used cars, and
I wasn't prepared to throw people outof work as used car prices went up.
But anyway,certainly by September of 2021,
it was clear that this was broad based,
that the labor market wasdefinitely beginning to reflect it.

(51:59):
I think one can make a case, and indeed,
something that will resonate at Hooveris that if the Fed had just been
outsourcing policy to the Taylor rule,at least the inertial Taylor rule.
As Patel andPradhan have shown in real-time,
Taylor rules would have said,start lifting off in September 2021.

(52:21):
So were really just talking aboutSeptember 21 versus March of 2022.
And of course, as youre going through itin real-time, that seems like a long time.
But in the big scheme of monetary history,
I think it turned out notto be that important.
One thing that is importantis the Fed said, and
I was a charter member at team transitory,we said that we thought in

(52:45):
May of 2021 that the inflationovershoot would be transitory.
That was wrong, and it's factually
true that we have a lot of company, but
that doesn't make it any less of a mess.

(53:05):
And so I think that is also a fair point.

>> Jon Hartley (53:08):
Lemme ask you one last question about groupthink and
just sort of talk about maybe,why was it that so
many people thought thatinflation was maybe transitory,
that inflation would come back down on itsown without any kind of fed rate hikes?

(53:30):
And I'm just gonna spitball a fewdifferent kind of ideas here.
Just thinking about Federal Reserve,I don't want to say reform, but
just things that some people thinkthe Fed should do differently.
One of those things is, for example,
there not being enough dissent.

(53:53):
For example, we just were in September2024, today, the Fed just its first rate
hike since the 2020 inflation cycle began,the super size cut of 50 basis points.
But notably, it was the first FOMC meetingin almost 20 years where a Fed board
member actually dissented.
And I'm wondering,
people say personnel is policy,there were three republican nominees, or

(54:16):
likely nominees that didn't get throughSenate confirmation during the Trump era.
And one would think maybethe composition of the FOMC
would look very different if thosenominees actually got through.
Perhaps there's a lack of sort ofdiversity of thought on the Fed,
I'm curious if you haveany thoughts on that.

(54:38):
Also, do you have any particularthoughts on, for example,
just how fed communication is done forexample, there's now eight press
conferences a year, one after every FOMCmeeting there's four under Bernanke.
Before that under Greenspan,there were none.
There's increasingly fewer economiststhat are actually on the FOMC now as

(55:02):
well as compared, say,1020 years ago I mean,
some might say that that's a welcome thingand that would maybe have less groupthink.
But I'm not totally surethat that's the case.
I mean, some people mightsay there's also a dearth of
talent from the GOP economicpolicy side of things.

(55:24):
And as part of why some of thesecandidates didn't get through
the confirmation.
I'm curious if you have any thoughts onall this, particularly as we go to another
election, whether it could be anotherrepublican administration where for future
personnel discussions become central ifnot the next election or future elections.

>> Richard Clarida (55:44):
I think there were five parts to that question,
and so lemme give it a try.
On groupthink descents are not unusual,but historically in the last 20 years.
Before this week, dissents had alwaysbeen by Reserve bank presidents.

(56:06):
If you go back in the longer historyof the Fed, that was not true.
Indeed, there were some cases duringVolcker's time when not only were there
dissents, but his vice chair dissented.
And so why that has evolved.
Larry Meyer has written on this.
One thing I can only commenton during my time at the Fed,

(56:28):
but the Pal Fed J Pal,before each FOMC meeting,
has a private bilateral meetingwith each person on the committee.
And so oftentimes folks who mightbe on the bubble between 25 and
50 will have a chanceto convey their views.

(56:49):
And oftentimes there'san intertemporal dimension as well.
And so there are ways to signalthat through the projections or
through the communication.
So rate decisions are relevant.
But there are other elementsof communication and

(57:09):
policy that are also subject to back andforth.
So I think that's one piece of it.
In terms of groupthink,I think there was an aspect of groupthink
both among central bankers andamong private sector forecasters.
My one example of thatis in April of 2021,
after the American Rescue Plan passed,the Wall Street Journal gave its

(57:33):
75 economists a chance to updatetheir forecast, and they did.
The average forPCE inflation was revised up to 2.1.
And the highest projection,that is the most,
the highest rate of inflationprojected for 2021 was, I think, 2.6.
So this was not just thatthe average economist got it wrong,

(57:53):
every got it wrong.
So I think that's another subject.
In terms of Senate confirmation,
I've been through it twice,it is an intense process.
Senators do take the advice andconsent role very seriously.

(58:13):
But certainly in the caseof the time I was there,
Jay Powell, Rich Clarita, Randy Quarles,
Mickey Bowman, andChris Waller were all nominated
by Republican presidents andgot confirmed.
In terms of, in terms of your lastquestion, in terms of a perceived

(58:38):
imbalance between, you know,GOP and democratic leaning folks,
in terms of serving in Washington,that's an important one,
but one I think maybe we can takeup in a future conversation.

>> Jon Hartley (58:53):
Well, that's fascinating.
And too, I guess, on the pressconferences, I've often wondered, too,
why we need so many, in the sense thatyou compare the Fed to the Supreme Court.
If the Supreme Court makes a pronouncementand it doesn't have a press
conference where journalists cansort of second guess the decisions.

(59:13):
And I think it's good to have some healthyamount of questions and things like that.
But to me, it seems like each pressconference is like an opportunity for
maybe more volatility infinancial markets than needed.
A real honor to have you on, Rich, andto hear about your career and ideas.
I think you perfectly embody whatGreg Mankiw calls an economist as

(59:34):
a scientist and engineer or what EstherDuflo calls an economist as plumber.
You've had such an amazing career,both in academia,
coming up with such great macroeconomicideas and then putting them into practice
in your various policy rules, and as vicechair in your various policy rules and
as vice chair ofthe Federal Reserve in Washington.

(59:57):
Thank you so much for joining us today.

>> Richard Clarida (59:59):
Thank you.
And look forward tocontinuing the conversation.
Thank you, Jon.
Been a pleasure.

>> Jon Hartley (01:00:04):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.
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