Janet Yellen, chair of the U.S. Federal Reserve System

[ Cheers and Applause ]

>> PRESIDENT SCHLISSEL: This is the easiest I have ever quieted an audience.

So welcome everybody.

I am Mark Schlissel, the 14th President of the University of Michigan, and I would like to welcome you all to this conversation with Janet Yellen as part of our amazing policy talks at the Ford School series.

I would like to acknowledge several of our regents who are either here today or expected momentarily.  Regent Kathy White, Regent Ron Weiser and Regent Andrew Richner.

[ Applause ]

I would like to begin by thanking Dr. Susan Collins for her outstanding leadership of the Gerald R. Ford School of Public Policy.

[ Cheers and Applause ] 

As the Joan and Sanford Weill Dean of Public Policy for nearly ten years, she has led the school to ever higher levels of national and international prominence and impact.

She has recruited tremendous faculty, and the school’s research and educational programs emphasize making a difference in the world through discovery, the development of policy solutions and global engagement.  

Thank you, Dean Collins.

[ Applause ] 

I was in a meeting last week with our Provost, Paul Courant, and we were discussing the macroeconomic value of public research universities.

I asserted that, while there is a clear economic impact generated by the dollars we spend on research, the larger return on investment must take into account the new knowledge and innovations developed by our faculty and the productivity of the graduates we produce.

Paul, who is also a professor of economics at the Ford School, then proclaimed that I had passed my first exam in economics.

So I now feel very qualified to introduce today’s conversation between two outstanding economists:  Drs. Janet Yellen and Susan Collins. 

This event is the latest contribution of the Ford School to its impressive legacy of bringing world‑class speakers and critical intellectual discourse to the Michigan academic community.

This contribution reflects the highest ideals of the University of Michigan, and its alumnus and former U.S. President who is the namesake of the school. 

As a premier public institution, it is both our honor and our duty to examine the intersections of public policy, national prosperity, sovereignty and scholarship.

As President Ford said in 1977 during his final State of the Union Address:

“The task of self‑government is never finished. The problems are great; the opportunities are greater.”

The University of Michigan's academic strength is further enhanced by the Ford School's connections to the Federal Reserve. 

Many U of M students and graduates have interned or worked at the Fed, and three Ford School faculty members have served on or been nominated to prominent Board positions.

Dean Collins is a Board member of the Chicago Federal Reserve Bank and previously served on the Detroit Branch of the Chicago Fed. 

Two U of M graduates were recent Fed Governors, Don Kohn and Dan Tarullo.  Professor Kathryn Dominguez was nominated in 2015 to serve on the Board of Governors.  

And Ned Gramlich, the Ford School's founding Dean, served on the Board of Governors where he was known for expanding the role of research in decision making.

At a Ford School event in 2014, Douglas Elmendorf, who was then the Director of the Congressional Budget Office, and is now Dean of Harvard's Kennedy School of Government, said that Ned knew that getting the policy research right was essential for getting the policy right.

It is now my great pleasure to introduce today's special guest.  Dr. Janet L. Yellen has served as the Chair of the Board of Governors in the Federal Reserve system since February 2014.  She is also a professor emerita at the University of California, Berkeley.  Dr. Yellen is a member of the Council of Foreign Relations, and was elected to the American Academy of Arts and Sciences in 2001.

She graduated summa cum laude from Brown University with a degree in economics, and earned her Ph.D. in economics from Yale.

Two weeks ago, she spoke at the annual conference of the National Community Reinvestment Coalition.

The conference's title was "Creating a Just Economy".

Chair Yellen said that we must, and I quote, "recognize and address the barriers faced by low‑ and moderate‑income students trying to attain higher levels of education, barriers not typically faced by their more well‑off peers. 

"First, these students often do not have friends or family who have achieved higher educational levels, which matters because students whose parents did not attend college are much less likely to pursue a college degree themselves.

"Second, lower‑income students often pursue their education while working to support themselves and family members.

"Educational programs that help students balance these competing responsibilities go a long way to improving completion rates."

I could not have said this better myself.

Please help me welcome chair of the Board of Governors of the Federal Reserve System, Janet Yellen, and the Joan and Sanford Weill Dean of Public Policy, Susan Collins.

[ Applause ]

>> DEAN COLLINS: Well, first of all, thank you very much, President Schlissel, for that very kind introduction.  

And now such a pleasure and truly an honor, Chair Yellen, to welcome you to the University of Michigan.  We are just simply delighted that you are here with us.

Now, I know that our audience is eager to hear from you, and so I suggest we jump right in and get started.

>> JANET YELLEN: Great.  And thank you, also, to President Schlissel for those kind words of introduction.  And it is a pleasure, Susan, for me to be here to have the conversation with you.

>> DEAN COLLINS: Thank you.

Well, so we have an audience that includes people from a variety of different backgrounds, and so it seems that perhaps the place to get us started is talk just a little bit about the Fed.

Certainly everyone who is here has heard about the Fed, but I think many people really don't know exactly what it is or what it does.

So what do you think the general public should know about the Federal Reserve? 

>> JANET YELLEN: That's a great question, and let me start with values.

I think it is important for people to understand that the Federal Reserve is an organization that is designed to serve the public interests and to do so in a non‑partisan way.

The analysis on which we base our decisions, we try to have it be as research‑based as possible and make our decisions based on factual evidence and objective analysis.

Now, most people know about monetary policy, which is one of our main tasks.  And there I would say in a general way we try to set interest rates and financial conditions more broadly to result in or promote a healthy economy.  

And more specifically, Congress has assigned us two main goals.  We call it our dual mandate.

First, low and stable inflation or price stability and, second, maximum employment, which means we want an economy in which as many people as possible who are seeking work find a labor market where they can find work.

But beyond that, I think that's what the public focuses on most, but we have a wide array of other responsibilities pertaining to the financial system.

First, we supervise banking organizations and some other financial enterprises to make sure that they operate in a safe and sound fashion.

Second, we monitor potential threats to financial stability.

We certainly don't want to have another financial crisis, and we want to address threats in the environment that could lead to one.

Every day we process trillions of dollars worth of payments quickly and safely for banks and for the federal government.

And then tying in with President Schlissel's comments about the speech that I gave recently, we work with community organizations and banking organizations to promote financial literacy, to make sure that credit is available to all who seek it, and to promote community development more broadly.

>> DEAN COLLINS: So it is quite a long list. 

>> JANET YELLEN: It is a long list.

[ Laughter ]

>> DEAN COLLINS: I am going to come back to some of those topics, and I suspect that some of our general questions from the audience might touch on some of them as well.

One of the other things about the Fed that I think most people are at least somewhat familiar with is its role during the recent financial crisis and the Great Recession and the aftermath.  And I wonder if you would tell, as you think back, having been in leadership positions at the feds since 2004 ‑‑ so you were certainly there throughout that entire period ‑‑ what were the main takeaways for you?  How do you think that monetary policy should think of its role differently now as a result of lessons from the crisis? 

>> JANET YELLEN:  Well, to me, lessons from the crisis are, first and foremost, that the financial system and a well‑functioning financial system is essential to the economy.

It is essential for people to be able to take ‑‑ get jobs, for innovation, for economic growth.

And what we found out during the financial crisis is that when the incentives facing financial organizations aren't distorted, the decisions that are made can greatly harm the economy, and the consequence was the most severe financial crisis we have faced since the Great Depression.

We have a system in which banking organizations were not monitoring and controlling risk appropriately.

They had too much capital and were over‑leveraged.

They were highly reliant on short‑term borrowing to fund the loans that they were making, and they had too little liquidity.  And when the short‑term funding dried up, we found we had a financial system that was highly vulnerable to runs.

I think we also found that banking supervision and regulation wasn't doing what it needed to do to address the risks.

We were too focused on the health of each individual institution, and we failed to spot the build‑up of systemic risks in the financial system as a whole that made it vulnerable.

And so we have tried, in the aftermath, to greatly improve ‑‑ and maybe we'll be able to get into some details later on ‑‑ to greatly improve our system of financial supervision and regulation, and to make sure that we have a safer and sounder banking and financial system.

>> DEAN COLLINS:  So that certainly is one of the topics that I would like to come back to.

It also sounds as if there are very clear additional markers or metrics that you look at to assess how healthy the economy is.

So looking at where the U.S. economy is right now, how healthy is it?

>> JANET YELLEN:  Well, so that is a great question, and I am pleased to say that the answer, in my view, is it is pretty healthy.

By way of background, we suffered as a country through a very deep and very long recession.  

In the aftermath of the financial crisis, unemployment rose to over 10%, and it took many, many years in order to get it down.

We worked very hard to try to accomplish that.

But right now, with an unemployment rate that stands at 4.5%, that is even a little bit below what most of my colleagues and I would take as a marker of where full employment is.

Inflation, which for many years was running below our 2% objective ‑‑ the headline figure most recently hit 2.1%, but I would say a better forward looking measure of inflation is around 1‑3/4% percent, just still a little bit under 2%, but reasonably close, so in terms of the goals Congress has assigned us, I would say we are doing pretty well.

The economy has been growing at a moderate pace, mainly supported by consumer spending, but housing is a little bit healthier than it has been.  Investment spending, that had been quite weak last year, is showing a little bit greater strength, and the global economy, which was quite weak, now seems to be operating in a slightly more robust and healthier way.

So looking forward, I think the economy is going to continue to grow at a moderate pace, and our job is going to be to try to set monetary policy to sustain what we have achieved to make sure the economy continues to operate around full employment and that inflation stabilizes around 2%.  So I think we have a healthy economy now, but it has been a long time coming.

>> DEAN COLLINS: Long time to get there.

So I would actually like to ask you a little bit more about a number of the things that you just mentioned and maybe one place to start is that you could summarize what you just said as that the Fed has basically been successful.

It's targets have essentially been achieved, and all it has to do now is just maintain them.

Is it different to be roughly at your targets trying to maintain them in terms of policy than trying to achieve targets?

Do you think about that differently? 

>> JANET YELLEN: So it is somewhat different.

In the aftermath of the financial crisis, with unemployment at exceptionally high levels and inflation running well under our 2% objective, we really gave to monetary policy all that we had.  

We did everything that we possibly could to support the economy.

In December of 2008, we lowered our overnight interest rate target effectively to zero.  And at that time, if you had asked me or any of my colleagues how long the federal funds rate would be sitting at zero, I simply could not have imagined that it would be for as long as it turned out to be, which was seven full years.

But even lowering overnight interest rates to zero turned out not to be enough.  The economy just wasn't recovering rapidly enough.

So from there, we decided we would try to buy longer term assets, both treasury ‑‑ treasuries and mortgage‑backed securities with the aim of pushing down longer term interest rates.  Because although overnight rates were zero, long‑term interest rates were still substantially higher.  And we also tried to talk the financial markets into the idea that monetary policy would be very accommodative and short‑term interest rates would be very low for a very long time, longer than they thought.  And we called this forward guidance.  And the objective was to lower expectations to the path of short‑term rates to pull down longer term interest rates and stimulate the economy.  

So we did all of those things, and it took a long time, but as you say, we are near reaching our objectives.  

So now the focus is different.  And what we were thinking about is that, with the economy operating close to our objectives, what we want to make sure of is that we sustain the progress that we have achieved, and that the appropriate stance of policy now is something closer to ‑‑ let me call it neutral.

So whereas before we had a foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel; to give it some gas, but not so much that we are pressing down hard on the accelerator.  That is a better stance of monetary policy.  

So we have indicated that we think it is appropriate to gradually raise the federal funds rate towards a more neutral stance, if the economy continues to perform in line with our expectations.

Now, our assessment of what a neutral stance in short‑term interest rates is is actually pretty low.

And so although interest rates right now are low, just a little bit under 1%, our estimate of neutral is really not that high.

And so we have indicated that we think a gradual path of increases in short‑term interest rates can get us to where we need to be to a neutral stance.

But we don't want to wait too long to have that happen because if the economy ends up overheating and inflation threatens to rise well above our target, we don't want to be in a position where we have to raise rates rapidly, which could conceivably cause another recession.  So we want to be ahead of the curve in and not behind it.

>> DEAN COLLINS: So one of the things that I think there has been a lot of kind of interest in is the behavior of inflation.  And as you have just mentioned, you don't want to be behind that curve in terms of what inflation ‑‑ what direction it is going in.

Has your vantage point changed, your view of what the causes of inflation are?

>> JANET YELLEN: So I would say my thinking in recent years about inflation hasn't changed a lot, but the actual behavior of inflation has changed a great deal, and I will try to explain why.

If you compare current situation with the way things were, let's say, when I started as an assistant professor in the early seventies, and inflation was high and rising and was a huge problem, and now most of us don't think of inflation as being a significant problem at all.

So if you ask me what are the factors that influence inflation, I would point to first the degree of slack in the economy.

When there is a lot of slack and unemployment is high and product markets have a great deal of excess capacity, inflation tends to decline, wage and prices rise less quickly.  And so coming out of a long and deep recession, and only now regaining full employment, inflation fell below 2%.  And as I say, on a forward looking basis, although we are close, it is still slightly below 2%, in my estimation.

A second important influence on inflation is inflation expectations.  What people think inflation will be explains decisions they make in their own wage and price setting behavior, and so those inflation expectations matter to inflation.

And then ‑‑ and in recent years, this has been very important and causing gyrations in inflation ‑‑ movements in energy prices, sometimes food prices, and the dollar ‑‑ the dollar began to increase markedly in mid‑2014.  That pushed down import prices and held inflation down.  And that last set of factors should have a temporary but not a long‑lasting impact on inflation.  They have been highly important in recent years.

But I think my basic understanding of the forces driving inflation haven't changed that much.

But if we go back to the late sixties and the mid‑seventies, when the economy began to overheat, then we had a series of supply shots, inflation moved up, and then even when we had a recession and more slack developed in the economy and oil prices stopped rising, we were left with what seemed like endemically chronically higher inflation.

And it turned out that what was driving that was inflation expectations.  

When actual inflation moved up, people thought, okay, inflation is here to stay and inflation expectations moved up.  And then we found we were caught in a vicious circle in which people's expectations of high inflation gave rise to wage and price behavior that ratified that and left us stuck with high inflation.

Now, at the end of the day, it was the Fed's job to make sure that inflation came down to low and stable levels, and to anchor inflationary expectations so that they wouldn't just keep ratcheting up, moving up and down with actual inflation, but that was a hard lesson for the Fed to learn.

By the mid‑eighties, the Fed was highly focused on containing inflation, bringing it down, and anchoring inflation expectations.  And really since the mid‑eighties, the evidence suggests that population roughly expects inflation in the vicinity of 2%, and their actual expectations are not much influenced by deviations and inflation above and below it.

They expect those to be temporary and they have been temporary.  And we are focused on making sure that inflation expectations and actual inflation stay very well anchored.

And to emphasize our commitment to that, in 2012, the FOMC adopted a statement of its longer run goals and strategies.  And we said explicitly 2% is what we regard to be our inflation objective.

And we added last year that 2% is the so‑called symmetric objective.  That we certainly don't want inflation to linger indefinitely above 2% but, equally, we don't want it to linger below 2%.

So 2% is an objective.  It is not a ceiling.

It is where we would like the inflation rate and intend to make sure it is moving over time all the time.  And I think we have had good success in achieving that.

>> DEAN COLLINS: And I was just actually going to ask whether saw those as symmetric but you actually already responded to that.  So why don't we shift gears back to financial stability for a moment because, as you talked about earlier, certainly one of the huge lessons focused on the importance of financial stability.  In the aftermath of that we have had the Dodd‑Frank legislation, a range of different types of regulations and approaches to supervision.

A lot of controversy in that realm at the moment. 

>> JANET YELLEN:  Yes.

>> DEAN COLLINS: In particular about whether we should focus increasingly more on banks or whether we should still be focused on some of the other institutions and, shadow banking, the hedge fund concerns.  What are your views about that?

>> JANET YELLEN: So we are focused both on banks and on institutions outside the banking system.

Before the crisis, many investment banks were stand‑alone and not part of the banking system.

One thing that changed with the financial crisis is that some of the most important so‑called shadow banking institutions, namely the investment banks, are almost all ‑‑ at least all of the larger ones ‑‑ are now part of banking organizations and they are all subject to supervision by the Federal Reserve and other federal banking regulators, so the banking sector in some sense now is larger and incorporates more of what used to be the dangerous part of the shadow banking system.

But let me say we have accomplished a great deal, I think, to make the financial system and particularly the banking system and particularly the largest and most systemic banking organizations safer and sounder.

We have forced these institutions to hold much more capital and higher quality capital.

We have forced them to hold much more liquidity.

And whereas they used to be highly reliant on volatile short‑term funding, that is less true now.

We are also forcing them to better measure, monitor and control their risks.

And a completely new thing that we are doing that I think has greatly enhanced the quality of our supervision is that we conduct annual stress tests.  Stress testing was something that was invented in the middle of the financial crisis when people had no idea how much capital major banking organizations in the United States held, and they were afraid that they might not be strong.  

A decision was made by Secretary Geithner and Chairman Bernanke to subject the largest organizations to a rigorous stress test in which we would insist that they, and then we independently, would examine where these institutions would be, what their capital would be, if there were a highly adverse shock to hit the financial system.  And we developed the methodology necessary to look at each institution individually and to evaluate, after this very severe shock, say with house prices tumbling 40%, the unemployment rate rising another 8‑10%, highly adverse shock, would these institutions still have enough capital to lend and support the credit needs of the economy.  And in this first round, it was insisted that, if they didn't have that amount of capital, they would be forced to go raise it or else the government would inject it into these firms.

This was very successful.  The results were publicized and were credible and some of the banks did raise capital.  And I think it shored up confidence in the banking system, and this has become a staple of our supervisory program.

We conduct these rigorous tests and publish the results every year.  And we look in detail at the capital planning, processes of the large banking organizations to make sure that they retain enough of their earnings to make sure they do have adequate capital.

Our supervision has also changed in its character and is much, much better and focused on risks in the financial system as a whole and not on, let's say, each individual institution or the trees in the forest as opposed to the forest.

Other changes have also, I think, made the broader financial system and the shadow banking system safer and sounder.

The SEC adopted reforms to address weaknesses in money market funds, a crucial part of the shadow banking system where we saw runs during the financial crisis.

Derivatives markets and the arrangements surrounding derivatives have changed in a way that has made that system less risk prone and less ‑‑ less a source of systemic risks since the financial crisis.

And short‑term funding markets have undergone reforms that make them safer, so I think we have accomplished a lot, and we have a much safer system, but we always have to be aware of risks outside the perimeter of what we regulate.  And when we regulate one sector, there is a natural tendency for activity to migrate outside its boundaries, and so we do have to be attentive to what is happening in the shadow banking system as well.

>> DEAN COLLINS: So there are certainly some who would say that maybe that extensive supervision has gone too far and that all of the regulations are actually hampering lending and perhaps slowing down growth.

What is your view on that set of concerns? 

>> JANET YELLEN: Well, to start with, let me say I think we ought to tailor supervision so that it is appropriate to the risk of a particular organization, and the most systemic institutions really deserve and require the highest degree of rigor and supervision and regulation.

We are looking for ways ‑‑ we have tried to shield community banks from some of the supervision and regulation.  And for mid‑size banks, we try to tailor supervision so it is appropriate and what we expect of the most systemic banks doesn't drift down.

Community banks do feel overburdened, though, with regulation, and we have looked for ways to respond to that by lengthening exam cycles where we can, reducing our demands for reporting of information, and we are trying to develop a simplified capital regime.

But there, you know, there is a lot of focus on regulatory burden.

I don't think, if you look at objective data on lending, that it is possible to make the case that regulation has simply stifled lending.  Lending has grown in a very healthy way as the economy has recovered, and I think what we see is stronger banks that are better capitalized are in a better position to lend.

>> DEAN COLLINS: So growth as you know, the U.S. economy's growth has only been in the 2% range and that is certainly a concern.

What is your view of the U.S.'s growth prospects and has that changed recently? 

>> JANET YELLEN: So a depressing fact about the U.S. performance is that really throughout the recovery, growth has averaged 2%.

And that has been accompanied by an improving labor market or diminishing slack.

So 2% growth, which isn't as stunning in absolute terms, has generated a lot of jobs.

The fact we have got a lot of jobs is a good thing.  We wanted that.

But the fact that you could create that many jobs in the context of growth that is so low points to a significant problem, and the problem is the productivity growth is very low.

When it takes a lot of labor to produce not very much extra output, what that is pointing to is that output per worker is growing at a very slow pace.

So it looks like, at present, the economy's potential to grow with labor just growing at a trend pace, when we are not absorbing slack from the labor force ‑‑ from the labor market, is probably a little bit under 2% actually.

And I think of that as reflecting two pieces.  There is, first, how fast is the labor force growing?  And then, second, how fast is output per worker or per man hour growing?

Well, on the labor force, labor force growth has been slowing in the United States.

Partly that is a matter of demographics.  We have an aging population.  The labor force participation ratio in the United States has been declining for a number of years now, and due to an aging ‑‑ ongoing aging of the population, that is something that will continue.

The pace of immigration is also important and has contributed to labor force growth and will matter as well.

But we can't look to ‑‑ we are unlikely to be able to look to faster labor force growth to boost the economy's potential to grow.

And then, second, productivity growth has been very disappointing.

Since around 2011, output per worker has grown at about a half percent per year which is an extremely low pace.

By comparison, since 1970, output per worker grew at 2% per year.

So very slow in recent years.

My guess is that it will pick up, but we have also seen periods like the second half of the nineties where productivity growth was well above 2%.

Now, nobody really knows why productivity growth is to low, and that makes it hard to know what the future holds in store and whether it will pick up.

One factor that seems to be depressing it is many people think that just the underlying pace of technical innovation that shows through to output growth has diminished for reasons that are not easy to understand, but looks like it has diminished.

Second, educational attainment, it was rising at a very rapid pace and now it looks like it has leveled off, so we are no longer getting very much of a boost from a higher degree of educational attainment.

And then the third thing I would point to is that dynamism in the business sector.

One thing that drives productivity growth is that firms that are more successful and more productive tend to grow more rapidly at the expense of firms that are less productive and less successful, and that reallocation of labor from less productive to more productive firms tends to boost productivity growth over time.  And there is recent research that suggests that that pace of reallocation or the underlying dynamism of the U.S. economy, for reasons that are not well understood, looks to diminish some.  But it is not an encouraging, you know, prospects, but you know, it is conceivable that public policies that focus on raising productivity growth, that boost public or private investment, investment in the workforce or innovation could make a difference to that.

>> DEAN COLLINS: Well, I very soon want to turn things over to questions from the audience, but perhaps I could ask you two other questions which may not be quick questions, but ‑‑ so one is that you have said a number of times how important you believe the Federal Reserve's independence is, and there certainly are concerns that, you know, some have about that going forward, and I wonder if you would share your current views in that regard.

>> JANET YELLEN: So I do think that independence of a central bank to make decisions about monetary policy free of short‑term political pressures is very important and results in better decision making that is focused on the long‑term needs and health of the economy.

And I think this view is supported by a lot of research that has looked at central banks around the globe and seeing that those central banks that are more independent in those countries tend to enjoy stronger macroeconomic performance, stronger growth, lower inflation, lower and stable, and less volatile macroeconomic conditions.

So Congress wisely, in the late seventies, passed a law that said that the one aspect ‑‑ remember, we talked about many different things the Federal Reserve does.

The one thing where Congress said this should be something where the central bank has independence and Congress and its agencies don't engage in detailed policy reviews in real time of its decisions, that one area is monetary policy.

The General Accounting Office, which is Congress' essentially auditing agency, conducts audits in real time and evaluates all the other things we do but tactical decisions about monetary policy.

We are, of course, accountable to Congress, so independence doesn't mean a lack of accountability or a lack of transparency.

I go before Congress and testify on monetary policy regularly.  I have press conferences.  We issue statements.  We have minutes of our meetings.  We certainly try to explain in detail what we do and why.

But we make decisions independently, and I think it is very important.

The structure of the Federal Reserve system was designed to promote independence.  It is complicated, but we have a large committee, monetary policy committee, that includes the presidents of reserve banks who, as you know, were chosen by private sector boards.  It brings a diversity of opinion and information into our deliberations, and I think helps promote our independence.

But our independence is under some threat.

There is a bill called Audit the Fed that has been put forth in Congress for a number of years that would end our independence in making monetary policy decisions, and another bill that has passed the House of Representatives goes even further in interfering with monetary policy independence, would require us to follow a simple mathematical rule in setting interest rates, and if we deviated from it would call in the GAO to conduct audit.  

So I always worry about threats to independence, and I think our macro performance is better and the U.S. is well‑served by having a non‑partisan group shielded from short‑term political pressures making these important decisions.

>> DEAN COLLINS: Thank you.  So my one final question is, being Chair of the Fed is a very intense, stressful position.  What do you do to relax? 

[ Laughter ]

>> JANET YELLEN: So, you know, first of all, I try to come in to the office every day having had a good night's sleep.

So Arianna Huffington has written eloquently about the virtues of getting a good night's sleep.  I don't know how many of you are familiar with her work, but I am an ardent believer and have discovered over the years that unplugging from electronics and getting a decent night's sleep makes me feel calmer and better able to address during day what I need to do.

So that is a first tenet.

I have the pleasure of working with a very talented group of staff at the Federal Reserve that I am able to collaborate with, and so I am not on my own in trying to craft policy to address the various issues that we face, and I am in a very collaborative environment where I have wonderful colleagues that I can brainstorm with, and that is very important.

I guess outside of work, I don't have any stunningly original activities, but I certainly spend as much time as I can with my husband and friends.  I enjoy cooking and we like to eat out, but I don't have any remarkable activities, but I do try to relax as much as I can.

>> DEAN COLLINS: Well, Ann Arbor has wonderful restaurants just to make sure that you know that.

[ Laughter ]

>> JANET YELLEN:  Fantastic.

>> DEAN COLLINS: So I have seen a number of cards being collected and I know that there are also questions that have come in through Twitter, and so at this point I would like to turn things over to questions from the audience.

Two of the ‑‑ two of my colleagues, professors of public policy and economics, Kathryn Dominguez and John Leahy, will help facilitate the Q&A session, and then we have two Ford School students who will be reading the questions.  And so now I'd like to turn things over for them to introduce themselves and to have us get that part get started.

>> Hello, my name is Laurie Gilbert, and I am a joint Ph.D. student in the public policy school and with the department of economics.

First of all, thank you both so much for the fascinating conversation.

Our first question is the following.  You have been a Governor, a Vice Chair, a President of the San Francisco Fed and the Chair.

What unique perspectives do each of these positions bring to the table?

>> JANET YELLEN:  So the Federal Reserve has a complicated structure.  We consist of a Board of Governors with seven Governors, one serving as Chair and one as Vice Chair and then 12 regional Federal Reserve banks, each headed by a President that is selected by a private sector board.  

And as you mentioned, I have served in different positions on the Board of Governors, first as a Governor in the nineties, then I was Vice Chair from 2010‑2014, and as Chair so in three different positions, and also as President of the Federal Reserve Bank of San Francisco from 2004‑10.  

So I think in these positions I have gained an appreciation of all of the different things that the Federal Reserve does, and one is better able to understand different aspects of the Fed's work from different vantage points.

So my work at the San Francisco Fed, one of the important things I needed that was part of my work was to meet broadly with participants in the economy in the nine state region that the San Francisco Fed covers, so I met with business leaders, with people who worked in nonprofits, community development specialists, labor leaders, ordinary people working in the labor market and experiencing that members of the financial system, and tried to gather from them information that would be useful in forming monetary policy.  

And I think that gave me a chance to understand how ‑‑ let's call it anecdotal information.  It is not exactly systematic but talking to people who are experiencing the economy in real time does provide a body of insight that ‑‑ you know, Susan and I and our colleagues, those of you who have had Ph.D.s, we are trained in a lot of economic theory and that is very helpful.  It is hard to do a job like I have without having a good grasp of economic theory, but making the connection between economic theory and what is playing out in the real economy is important.  And I would say that some of the insights of my Directors in the years leading up to the financial crisis, they said things that made me worry about building financial imbalances.  

Now, it wasn't sufficient to have stopped the crisis, but it certainly was sufficient to have early on aroused my concern and suspicion about what was going on there. 

In my positions at the Board we, in contrast to the Reserve Banks, the Board of Governors, the Governors are responsible for writing regulations and conducting supervision.

And so I have had a pretty intense involvement in writing the Dodd‑Frank rules and thinking through what reforms we have needed to create a safer and sounder banking system, and how we would translate that into supervision and regulation.

I guess, as Chair, I have gotten much more perspective on the relationship between Congress and the Federal Reserve, and much more involvement in trying to manage that.

>> Thank you, Chair Yellen and Dean Collins, for the conversation. 

My name is Matt Hillard.  I am a first year Master student studying public policy at the Ford School.

Should the Fed more actively promote international policy coordination?  It seems like the current view is each country should look after itself, but that often leaves especially emerging market central banks at a disadvantage.

>> JANET YELLEN: Well, that is a very good and important question.

And let me first say that, while I wouldn't go so far as to say that policy is coordinated internationally, and I am not even sure that that would be possible if we wanted it to occur given our several separate legal mandates from our own, you know, our own governments, policy makers at the senior level do talk to one another on a very regular basis.

We meet ‑‑ the Central Bank Governors meet six times a year or more than that at meetings of the Bank for International Settlements, finance ministers and central bank governors meet at the G20, the IMF meetings twice a year, the G7 meets.  We exchange notes on what is happening in our economies, and we try to explain to one another how we are thinking about implementing policy to try to promote understanding and avoid surprises.

We all understand that our policies have spillovers.  That is certainly true for the United States.

We recognize and have seen that our policies have spillovers in emerging market countries, and obviously what happens abroad also greatly affects our economy.  So even from the perspective of narrow self‑interests, it is important for us to be mindful of those spillovers and spill backs of our policies, and to take them into account.

So policy coordination is difficult, and I am not sure that it is really, as I said, possible given our separate legislative mandates.  But there is close contact in attempt to promote understanding, and in crisis situations, when it is necessary to mount defenses because we are worried, for example, about an incipient financial crisis, that network of contacts has resulted, I think, in very close and effective coordination and cooperation that has been important in recent years.

>> Students are often told that inflation is, always and everywhere a monetary phenomenon, yet you listed three reasons for inflation, none of which were too much money.

What is the role of money in inflation?

>> JANET YELLEN: So I guess I would say that when there is too much demand for a limited supply of goods and services, that is a situation that creates inflation.

And it ties in in the framework that I articulated with economic slack, so if ‑‑ I would say, for example, now, just now, after all these years of promoting faster growth in the economy, and trying to diminish unemployment, probably now the labor market is in a normal state, but it likely would foster inflationary pressures if demand rose at a sufficiently rate, rapid pace, and on a longer basis such that we pushed against now dwindling labor resources.

That is one reason why I believe it is important for us to normalize or move monetary policy toward a more neutral level.

But simply in accommodative monetary policy, when it is not occurring in the context of an economy that is close to full employment, that isn't inflationary.

I remember when ‑‑ so first in the end of 2008, the Fed lowered its overnight interest rate to zero.  Then we started buying up longer term assets which swelled the quantity of reserves in the banking system, and people who reasoned that money causes inflation, but thought that that is somehow independent of the state of the economy, worried that our purchase of those assets meant that inflation was around corner.

Our response was to say, look, the unemployment rate is very high.  It is 10%, 9%, 8%, very high and, you know, maybe when the unemployment rate has declined to low levels, that is a legitimate concern, but it is not in the context of an economy with this much slack.

I think history proved the view that I just explained to be right.

So money doesn't cause inflation independent of the state of the economy.

>> This question comes to us from Twitter.

Has the effect of quantitative easing been underestimated?

>> JANET YELLEN: Quantitative easing I will interpret as the Feds' purchase of large quantities of longer term treasury and mortgage‑backed securities.

Our objective in purchasing these securities was to drive down longer‑term interest rates on treasury and mortgage‑backed securities, but that would also filter through to private securities in the market in general.

It is frankly ‑‑ there is a lot of research now, but it is difficult to unambiguously know just how large the impact was of those purchases.

I would say most research I read as finding that our purchases did succeed in driving down our longer‑term interest rates by a meaningful amount, and that as a consequence, our policies had the favorable effect of holding inflation up a little bit closer to our target, stopping it from falling quite so much, and lowering unemployment and the job growth was stronger.

There are other countries, also, Japan, the Bank of England, the ECB, that are engaged in similar programs, so now we have international experience to add to that in the United States, and I read all of that experience as saying that these programs are successful.  

But does it have a larger impact than we think?

I suppose there is some research at the larger end and some on the more skeptical end.

My assessment would be it had a favorable impact.

I don't want to exaggerate exactly how large it was, though, but I think it certainly was favorable.

>> With labor work force participation rates relatively low compared to recent history, do we change what we think about what constitutes full employment and how that dictates monetary policy decisions?

>> JANET YELLEN: I am sorry.  Did you say labor force participation rates? 

>> That's right.

>> JANET YELLEN: So the labor force participation rate has been declining for some time in general in the United States, and the underlying trend, because we have an aging population, is for it to fall further.

But what has been hard to know following a very severe financial crisis with very high unemployment is how much of the decline ‑‑ what portion of the decline we saw in labor force participation might reflect not just voluntary retirements but discouragement of people searching for a long time and then dropping out of the labor force because they were unable to find jobs.

So some of the decline in labor force participation might reflect a weak economy and be a kind of hidden unemployment.

And we saw a declining labor force participation not only among those who were in the retirement years, but also among prime aged working people.

And so the Fed recognized that we were uncertain about just how much additional slack there might be that was taking the form of depressed labor force participation.

We have monitored that very carefully, and we recognize that the unemployment rate itself might be a misleading indicator of the extent of slack in the labor market.

Now, I think there was something correct about the reasoning that labor force participation was a form of hidden slack.  Over essentially the last couple of years, the labor force participation rate has been flat, and even though the demographic trend should have been pushing it down, and that suggests that it as economies recovered, we have seen the unemployment rate fall but it hasn't fallen nearly as much as you might have expected.  In part we have created a lot of jobs and yet the unemployment rate hasn't fallen very much, and part of the reason is I think we have drawn people in to the labor force and the labor market who have been discouraged.  

So this is something we have watched very closely.  I think what we found over the last couple of years is our economy, because of that, had more room to run than we were certain it had and it has been a good development to see labor force participation improve to some extent, especially among prime age working people.

>> Unfortunately this is the last question we have time for.

You mentioned in your conversation the role the Fed plays in managing expectations.

To that point, it seems like, more than anyone in the world, you have to be careful about what you say.

How has this affected your life?

[ Laughter ]

>> JANET YELLEN: You are right.

[ Laughter ]

I guess ‑‑ I have had a fair amount of experience and training for this job having served as a Governor and Vice Chair in San Francisco and, you know, an important role that I have is to talk about monetary policy and to communicate as clearly as I can what the committee's strategy is and what our ‑‑ how we see the economy as unfolding.

So it is very important that in managing the problem of not ‑‑ on the one hand, I want to be careful not to say something that will needlessly roil expectations that I don't mean, but on the other hand I do want to talk about monetary policy because my job is to promote understanding of monetary policy.

So although that is a difficult path to hew, I try to do it to the best of my ability.

>> DEAN COLLINS: So before we wrap up, I know that there are so many students here, high school students, Ford School students, U of M students, many of whom are really committed to making a difference through public service, which is something that you have really dedicated your career for, and I just wonder if you have any words of wisdom for the young people interested in that way. 

>> JANET YELLEN: It is wonderful to see so many young people who are dedicated to education and many of you to public policy.

You know, I would say for me, the core of having a satisfying career, first and foremost, was finding something to do that I really loved and am really interested in.

I was lucky as an undergraduate to discover economics, which is a field I regard as endlessly fascinating.  And it is pretty true to say that almost every day of my life, I get up with a sense of enthusiasm about wanting to work on economic issues.  

And so the first piece of advice, for everybody, it is obviously not economics.  It can be many different fields that may capture your intellectual interests, but finding something you love, you are really interested in, want to focus a career around it, that's the starting point of having a good career.

I would say, second, people say to me, well, gee, don't you feel your career was a success because you got to be Chairman of the Fed?

And I would say, no, that is not the right way to look at it because one's career is about everything that you do along the way, and precisely where it ends up, even if I hadn't ended up in this role, I would have felt I had a great career I would have enjoyed, and I think it is important to choose things that you do at every stage of your career that you find interesting and engaging and rewarding.

In public service, I will say that at the Federal Reserve I have found ‑‑ and I think this is important.  Of course I found it at universities, too ‑‑ people that you work with, that you really admire, enjoy, you find you can brainstorm with, and that you can problem solve with, who you respect, who you like spending your time with, I think that is an important aspect of any job that makes it satisfying.

I have certainly found it in government, people devoted to the public interest and using public policy to advance the public interests.

And finally, I would say being affiliated with an organization that you feel proud of, that you think makes a contribution to society, and that's certainly true of being at a university.  Have no hesitation about feeling good about what universities do, and I have certainly felt the same way about the Federal Reserve, that I know we are an organization that really is devoted to the public interest and it enables me to feel good about how I spend my time and what we are engaged in.

>> DEAN COLLINS: Well, as we wrap up here, let me thank our audience for coming, for all of your questions.  I am sorry we didn't have time to get some more of them.

And then also a very special thank you to Janet Yellen for sharing her perspectives and also her public service through for so many decades.

Thank you very much.  We really appreciate it.

[ Applause ]