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Audience Q&A Transcript—February 4, 2019

Federal Reserve Bank of Cleveland President and CEO Loretta J. Mester
Transcript: Audience Q&A at the 50 Club monthly meeting, Cleveland OH
Q: Thank you for a great presentation. Thanks for being here. I don't know whether you can comment on
this, frankly, but we have an unprecedented situation in the country with a leader of the executive branch
who has threatened to fire the chairman of the Fed for adopting policies that the president didn't approve
of. I guess my question is simply, do you pay any attention to that or do you simply do your job and focus
on what you think you need to focus on?

Mester: So, I've been going to FOMC meetings since a long time, end of 2000, so that's a long time. I can
tell you that we focus on setting monetary policy to meet and promote our dual mandated goals, which are
given to us by Congress. We don't let these other things that are going on affect our decision-making, and
I've been going to meetings before I was sitting at the table, and over many chairs of the Fed, and I can
tell you that it just doesn't become part of the calculus. We really focus on trying to do the best work we
can in terms of analyzing the economic information that we receive, using our models, using data
collection, survey data, understanding financial market developments, so that we're always setting policy
to promote price stability and maximum employment, and that's how we go about our business and I have
every confidence that that's going to continue to be the way we go about our business.

Q: In a rational economic universe, the levels of government debt and fiscal and monetary stimulus that
we've seen in recent years would be highly inflationary. Historically that's been true but at this time, in
this economy, it's not. Why? Or are we in for a very unpleasant surprise ahead?

Mester: I don't think we're in for a very unpleasant surprise ahead. You're right, it used to be that a very
tight economy, tight labor markets, extra stimulus which made us grow above trend, could be inflationary,
we've seen that in the past. This time it doesn't appear to be that's the case. Part of it is because our

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Audience Q&A Transcript—February 4, 2019
inflation expectations have been very stable. That's why it's important to maintain our focus on doing
policy to hit our goals, because basically you then can have inflation remain at 2 percent even though by
all indication, labor markets are tight, the economy is growing strongly. So, it's going to be important that
the Fed going forward when they're looking at what the policy decisions we make to maintain that
stability and inflation expectations. But that's been the anchor. We've been able to do that, and the way I
like to explain this is if you think about how deep we were in a hole in the recession, there were very bad
times, very sharp declines, you could've said that we could've been in a deflationary period during that.
And we did not see that. Yes, inflation went down, but we didn't get into a bad deflationary problem.
That's because inflation expectations were maintained at 2 percent, so again that's going to be the key
going forward. We need to set policy that, so that people and businesses understand that we're going to
maintain--set our policy to keep focused on those goals. And I think that explains what's going on in the
inflation. The Cleveland Fed just started a new center on inflation precisely because there are these
changes in inflation dynamics and we want to better understand them and want to promote work in that
area, so you were right to point out that there's been this change, and it's something that obviously as
monetary policy given our goals, that we need to be aware of and keep on top of.

Q: What work does the Federal Reserve do in the area of stability on capital markets, liquidity. So with
the advent of market participants using ETFs, and arguably, some of them are already mismatched on the
liquidity side, whether it's an ETF for high-yield bonds, or leveraged loans, it's easy to see a stable market
with markets going up, the natural seller is the one with the profit, and buyers are there. Markets going
down could have very adverse effects, without proprietary trading there could be huge pockets or holes
with lots of liquidity in these types of things. Has the Fed studied that in the way of looking at stability in
capital markets?

Mester: We do look at market stability. We do look at financial market stability. And we do try to look at
liquidity issues in these markets. So for example, the Fed has been rolling off securities in our portfolio,

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Audience Q&A Transcript—February 4, 2019
and there have been some who question whether that's led to tightening financial conditions in the market
and liquidity issues. Our analysis suggests that that's not the case, that markets have remained liquid and
that's not a cause of some of the changes that happened in the markets in the fourth quarter but we are
focused on making sure that markets stay liquid, that there aren't these disruptions in the markets, and that
is a focus of our work. The New York Fed, of course, being in the center of things, has a group that
actually focuses on, and markets, and focuses on our own participation in those markets.

Q: Maybe you could brief us how the Fed impacts or speaks into the conversation around tuition costs
and how you invest in education, you spoke of the transformative power of education. Does the Fed have
a role in this? When we think about Pell funding and other funding coming to students and the investment
in education, the return on investment, could you speak to that as well please?

Mester: Our Bank and several of the Reserve Banks around the country do have people who are looking
at student debt problems and the issue of student debt and how to finance, and some policies that might
actually examine the problem and address sort of what could be a solution to those problems. Of course,
we don't set policy in those areas, but what we can do is contribute to the research in those areas,
document how much of it's a struggle for students and their families and then think about solutions to that
problem. So there's an ongoing research effort both at the Cleveland Fed and at other Federal Reserve
Banks that try to actually look at how much of an impact that is and if there's better solutions to try to
solving some of that. So yeah, that's something that it's certainly on our research agenda for our
community development work.

Q: Thank you. Our country is very blessed to have a Fed and a System, and the Fed is very blessed to
have some wonderful leadership and staff and over the years. The Fed however has limited tools and it
seems to me that those tools are a barrier to handle the typical inflationary forces that come about from
imbalances in supply and demand in the marketplace. But as I look out longer term, maybe 20 years, what

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Audience Q&A Transcript—February 4, 2019
worries me most is that the inflationary forces will be caused by our own politicians. A combination of
the annual deficits, the accumulated deficits, and the unfunded liability, are measured in over a hundred
trillion dollars, and when I say how are we going to solve that, I'm afraid that politics being what it is, it
will not be solved by causing the root causes, overpromising what we can deliver, and changing that, but
that it will be solved by printing money. And every country I can see that has fallen into this situation and
printed enough money has run into hyperinflation. Does the Fed have the tools to deal with that?

Mester: So I agree with you that coming up with a sustainable federal fiscal situation position is going to
be important. So I agree with you that if we don't get that control that we may end up into a bad situation,
so I don't disagree with that. The question is, is the country ready to do it, and how they would do it.
That's certainly not a role for the Federal Reserve, but I agree with you that that's something, putting our
fiscal situation in, on a sustainable path is going to be important for the future, and it does impact, flow
back into the Federal Reserve in terms of what long term interest rates are, which of course then affect
what we do, so I agree with you.

Q: My question is about high technology and its impact on the workforce. As we all know, we lost a lot of
well-paying blue-collar jobs in the past, because of advancements in technology. Now with artificial
intelligence and robotics and maybe some other new technologies, I think we're probably going to see that
in the white-collar sector as well, and I think that blue-collar job losses has really stoked a lot of the
tensions in our politics, and I'm concerned that losing a huge number of jobs in the white-collar workforce
will add to that tension. So how closely is the Fed monitoring this and what do you think about this
problem for the future?

Mester: I do agree that we have to be cognizant of these transitions into new kinds of work, and new
kinds of jobs, and new technology. I think a lot of areas that have not been focused on that have been
harmed by the fact that they haven't been prepared, and I think the educational system and the training has

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to come with it, but I don't think it's all doom and gloom because if you think of other industrial
revolutions, you ended up being better off and better jobs and more jobs. So again, I'm hopeful and I'm a
positive person in the sense that I think the technological change that we're having is going to be a
positive for the economy and for the nation. On the other hand, you have to prepare everyone for that. So
the transitions from getting where we are to where it's going to go doesn't necessarily have to go smoothly
unless you focus on it. So it's really important that we make sure that people have access, which is why
the student debt issue is relevant. People have to have access to the right training, people have to have
opportunity to actually educate themselves, and people have to be willing to sort of re-educate themselves
all through their lives now. It's not just you go to school and you're done, right? It's going to be changing
rapidly. So I'm hopeful because I think in all the past periods where we've had these big technological
advances, it's been good for the country. I do think we have to be cognizant of it and we have to make the
transition easier for people to be able to get there.

Q: So what are you excited about?

Mester: What am I what?

Q: What are you excited about? Give us one good fabulous thing to end the evening.

Mester: Barbara (Snyder) mentioned I'm on the board of the orchestra. I'm excited about the Cleveland
Orchestra. I think it's a fantastic organization, and that gets me very excited. I'm excited about the opera.
You've got to love the opera. They're doing the Ring cycle at the Met this year--I'm excited about the