CPD IN THE NEWS

Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, sat down for an interview with The Wall Street Journal’s Michael S. Derby on Thursday, Oct. 13, 2016. Here is a transcript of the exchange, lightly edited for length and clarity.

MICHAEL S. DERBY:  So we already talked about a lot of the economic and monetary policy stuff.  And we just met, so I’m not going to keep getting you to say the same things over and over again.  And since I knew this – we were going to be talking after, you know, the speech – I thought we might sort of take a step back and think about, you know, you’ve been in the job a year and a – I mean, a little over a year now.

And, you know, you come to the position from a different background than some other central bankers do.  I mean, there’s a lot of economists and research directors who’ve come up, or people from the financial sector.  And so I figure I’d start off by asking you just your sense of, you know, like how it’s been, you know, coming in, and what kind of things you’ve learned about the job, and the challenges you’ve faced so far as you, you know, come to lead this institution.

You know, a little bit about my background.  While I have degrees in engineering, I also have a degree in economics.  I’m published a lot in spatial economics, so micro/spatial economics, what are called Takayama-Judge models or all-trade models.  So – (laughs) – yeah.  And then – and in addition to that, I’m a quant.  So it’s not as though I came to the job with no understanding of the economics that underlie what we do.  So let me start with that.

It’s been a really great first – little over first year for a couple of reasons.  One, this role is not only important at the national level with respect to monetary policy, which is always the headline event for the Fed and the (Federal Open Market Committee), but I really enjoy the work we’re doing at the regional level, and really trying to create a better environment for job creation and economic mobility and inclusiveness for the economy here.  You know, and Philadelphia, the Third District, is uniquely challenged given that we are the poorest top 10 city in America.  We have communities throughout our district that are struggling.  And so I think the Fed, through our research capability, our ability to convene people, we can have meaningful conversations about that and really start to create more and more opportunity.  That’s why we launched this Agenda for Poverty and Prosperity, right?

So we’ve got a challenge here.  I think that challenge is also national, but we have it uniquely here in Philadelphia, in the region.  And even despite the fact that Philadelphia as a city itself is doing quite well, we need to start bringing more people into the economy productively, first and foremost for those people, but also for the economy.  I mean, as I discussed in the speech just prior to this, we need more people in the workforce.  And so immigration may be part of that solution, but a substantial component of that, just you look at the numbers, are bringing more people – unskilled people into job-training programs and workforce-development programs to get the jobs they need, and then have those jobs for them, and that they’re able to live somewhere near those jobs, right?  It’s no good to have the jobs and have the skills and not be able to get to the job, right?  So I think it’s a three-legged stool that we’re trying to develop here.

You know, and that’s – this is a – the other thing, to answer your specific question, is this is an incredible team of people.  I mean, I’ve been really – I got to know them a little bit when I was director here, but you only get to meet certain people, right?  Now I’ve been out and about in the Bank and in the community and see what we do, and, boy, it’s really impressive what the Philly Fed does.  And I think you multiply that across the system.

MR. DERBY:  What have you been doing to – I mean, if you come – like, as you say, you do have the M.A. in economics and you’ve done – you’ve done work in that area.  But, like, as you’ve been – and you were director, obviously.

MR. HARKER:  Yes.

MR. DERBY:  So you weren’t unattached to what the institution was doing.  But your predecessors – say Charles Plosser, I mean, he had some very strong views on monetary policy and the economy.

MR. HARKER:  Yeah.  Yeah, yeah.

MR. DERBY:  And what have you been doing to come into your own on that front?

MR. HARKER:  So I tend to be more of a pragmatist.  And first you start with a little bit of humility on what we really know and the state of theory and practice when it comes to macroeconomics.  Despite a lot of advances – and we’ve made a lot of advances in the field – there’s still a lot of things we don’t know, I mean, at a fairly fundamental level, right?  I mean, we still debate questions on measuring inflation and inflation dynamics, measuring GDP and GDP – what’s happening with productivity.  So you come into this understanding that while we have a deep bench of theorists and empiricists that need to inform policy, at the end of the day you need to base your judgment not on an ideology, but on the facts on the ground, right, as best we know them.  And I think that’s what I bring to the table.

And then part of that is, you know, engineers are inherently pragmatic by nature.  You know, the old engineering joke, the optimist says the glass is half-full, the pessimist says it’s half-empty, the engineer says you’ve got twice as much glass as you need there.  (Laughter.)

MR. DERBY:  I haven’t heard that joke, but yeah, that’s a good one.

MR. HARKER:  So I think – and it’s part of, I think, the portfolio of talent that the Fed has attracted.  You don’t want everybody to have the same background.  You don’t want everybody to have the same life experiences.  So you need some people in the room who have come from different experiences.  You need some people in the room, I believe, who have actually worked on the other side of the financial markets – actually participating in the financial markets, not just regulating them, right, and theorizing about them.  So I think you need – it’s the mix that makes for the richness of the conversation that happens in the room.

MR. DERBY:  Has the Fed been too dominated by academics, and especially academic economists?  Because that’s been one of the criticisms the Fed has faced at various points over the years.

MR. HARKER:  So that’s an interesting question because I think that the Fed has – over time it cycles.  You need some base knowledge of economic theory to be able to meaningfully participate in the conversation, but you can get that in different ways, right?  You also, I think, need some understanding of markets and market functioning, right?  And you can learn that, but it’s better if you’ve had some of that experience.  And lastly, I think you need in the room – not everybody brings – you know, not everybody has all three of these things I’m saying at once, right, but it’s the mix of people.  You need people with practical industry experience.  And again, you can either get that by having run large institutions, for-profit, nonprofit; being on corporate boards, so they get some sense of how that decision process – that all has to be in the mix.  But at the base we still need those economists, right, because ultimately we are dominated by, you could say – but really for a good reason – that base of economic talent because that’s the business we’re in.

MR. DERBY:  And does the Fed have a good balance on that front right now, or could it –

MR. HARKER:  I think so.

MR. DERBY:  I mean, there’s obviously an opening in Atlanta coming, although he – I mean, Dennis was a markets guy.

MR. HARKER:  Yeah.  So I don’t know.  I mean, that’s up to the board in Atlanta, obviously, to decide the choice they’re going to make, in conjunction with the governors.  But I think right now we have a good balance.  I mean, the conversation around the table is diverse in terms of people’s perspectives, and that’s healthy.

MR. DERBY:  Is your – is the pragmatism that you bring to this, is it leading you to have any firming thoughts about how you think the economy works and how monetary policy should be conducted?

MR. HARKER:  Right, so our best theory of the economy, right, is embodied in something like a DSGE model, right?  And in that model, the two key words in there, it’s “dynamic” and “stochastic,” right?  So there’s a lot of uncertainty in those models.

So what you know, having been an engineer and done control theory and optimization theory, right, you know the limits of those models as well, right?  In any kind of dynamic control environment, which is embedded in that model and the way we think the economy works over time, a key component of any kind of complex system like that is that you need to learn by doing.  That is, you can’t step back and say the model is a perfect or near-perfect representative of the system you’re trying to control or manage.  You have to tweak it, move, learn; tweak it, move, learn, right?  And so that’s what we know not even in economics, but in large dynamic stochastic systems.

I don’t think that’s any different with respect to macroeconomic policy.  I think, as we move toward normalization, and if we believe the risks are balanced, which I do, then – and there are some risks that I’m worried about, such as some distortive effects of a low interest rate environment – then it’s time to move, and then see what happens, and then move.  And so that’s what I mean by pragmatism.  It’s understanding that theory, which I understand well.  And as that applies to macroeconomics, it brings a more experimental flavor, I think, to the way you think, as opposed to an ideological point of view.

For me, I think that’s healthy because I know those kind of systems are inherently complex.  The nonlinearity alone is complex, and then you add the stochastic nature, and there you should have a lot of humility to say we really don’t know exactly what’ll happen.  That’s why we move cautiously, but move, to see what happens.

MR. DERBY:  Well, in that way of thinking about things, I mean, there’s always been that axiom, you know, monetary policy works with long and variable lags.

And if you’re confronted with lots of uncertainty and you’re, you know, move, see what happens, but those see what happens are dynamics that play out over a long period of time –

MR. HARKER:  They are, but then you see some of that future in things like expectations, whether they’re inflation expectations, market expectations.  So you’re right, you’ll never perfectly know what’s going to happen, say, 18 months from now after you make that move, but you can get some glimpse of it with how markets respond and expectations become anchored or unanchored relative to such a move.

MR. DERBY:  It seems as if there’s been – we see in the markets a lot of grumbling about the Fed communications or the guidance that the Fed has given, in that the Fed has not done with rates what the dot plot suggested it was going to do in December.  Some market participants are, like, we were right, you know, we won, the Fed was wrong.

MR. HARKER:  (Laughs.)

MR. DERBY:  What do you think the dynamic is between financial markets and the Fed right now?  Is it – is it a healthy dynamic?  Or is there – is there a problem?

MR. HARKER:  I don’t think there’s a problem.  I do think the market is possibly underestimating the rate of normalization, but we’ll see, right?

And part of the challenge is, when it comes to communication, the dot plots are all forecasts, but people take the path of the Fed funds rate as a policy statement, not as a forecast.  And we have not made that clear, right?  We’re asked to forecast what we think the Fed funds rate will be.  That’s a different question than saying, you know, what will the Fed funds rate be?  And so that one dot plot I think causes us some problems when it comes to communication.

MR. DERBY:  The December?

MR. HARKER:  No, I’m just saying the path of the Fed funds rate.  I think that causes us some communications challenges, because nobody says our dots for inflation or (gross domestic product) are anything other than a forecast.  They take this one – and really, you think about what we’re asked:  Given the path of the economy as we best know it, forecast it today, what do we think the Fed funds rate will be?  But that’s not a promise that it will be that, right?  And I think that’s been a challenge for us, because as things happen – as shocks, large or small, hit the economy – we have to react accordingly.  We can’t stay on that predetermined path because it’s not a predetermined path.

MR. DERBY:  So how do you fix it?  I know (Cleveland Fed President) Loretta Mester’s talked about confidence bands. I know it’s a matter that the Communications Committee is considering.  I don’t know if you’re on it. What would you like to see done differently?

MR. HARKER:  So there are a lot of options.  One is to add even more information with confidence bands.  That’s one alternative.

The other – but it would be very difficult to do, that other central banks have done – is just get a consensus view.  But we’re a large, diverse Committee.  So that may work, but you know, we’d have to think about that carefully.

I mean, there are various options on how to do that.

MR. DERBY:  So, but yeah, I mean, there’s nothing you particularly favor –

MR. HARKER:  No, not at this point.  I think we really – I need to weigh the pros and cons of that.  We’re not far enough along, at least in my mind, to be able to make that decision.

MR. DERBY:  And just the overall state of communications.  I know there’s also been, you know, I mean, days when you’ll have four and five Fed officials speaking.  The Dallas Fed had a paper that talked about maybe collectively people need to speak a little bit less and pick their – pick their spots a bit more.

MR. HARKER:  Well, what do you think about that?  (Laughs.)

MR. DERBY:  Ah, you know, I mean, we take it as it comes.  So, I mean, that’s not our place to rule in on that.

MR. HARKER:  I don’t know, right?  I mean, you have to be careful because the way the way the system is set up is to have – especially with the regional banks – is to have a diverse, independent view.  And I think it’s – is it incumbent upon us to distill that view and to – or limit that view, or is it incumbent upon the public to distill that view, right?  I mean, that’s the question, right?  Should we limit what we communicate in terms of our diversity of views, or should we let the public and the media work with those diverse views?  I’m more in the camp of the latter, because I think the more information we put out there it’s – the better, even if it’s not all – we’re not all saying the same thing in the same way.

MR. DERBY:  OK.  Well, back to the pragmatism question again.  I mean, do you feel that that leaves you – and I’ll just ask this because this is often how central bankers get, you know, graded – but it does lead you to be so far more hawkish or dovish?  I suppose in that you favored a rate rise in September that didn’t happen, that –

MR. HARKER:  Yeah, I would tend to be because, again, I – as we discussed earlier, with the lags that we know are in such a dynamic stochastic system, I think it’s important that we take some move now and have a gradual path of normalization, as opposed to wait, wait, wait, and then have to have a steeper rise.  I just think that’s prudent.  And being a Philly guy, I’m more an Eagle.

MR. DERBY:  Oh, yeah.  (Laughter.)  OK.  I got to remember that one.

But on the other side of it, I mean, the Fed has undershot its inflation target for years.  And the New York Fed just had a report yesterday that showed some – another little trailing off in inflation expectations.  And I know they’ve – that report has shown at various points softening.  And I know energy’s a big part of all of this, but you talk about the dual mandate, and one side of that mandate is still – still seems rather elusive.

MR. HARKER:  But I’m seeing signs with some increase in health care inflation and others that that 2 percent target is – remember, there’s a long lag to that too, right?  So I think we’re within the zone, with 1.7 percent core (personal consumption expenditures), where it is prudent to make a move sooner rather than later.

MR. DERBY:  So you’re not a whites of their eyes type of –

MR. HARKER:  No, because I think the lags are pretty long.  And we know that, historically.  So we could get behind the curve.  And again, we’re talking about a 25-basis-point increase, which would leave policy still quite accommodative.

MR. DERBY:  One of the things the Fed forecast changed was lowering the long-run – long-run growth rate.  And I wanted to know where you – what you thought about it, because that was a – struck us as a fairly meaningful shift.

 

MR. HARKER:  Yeah, and I lowered mine too primarily because of the neutral funds rate, right, R-star.  Until we see that start to move up, and with that productivity, it’s hard to forecast that we’re going to see a robust growth.  So we’ll – again, that is – we have to take that as it comes, because we don’t move R-star.  Other policies do that.  So we just have to accept that fact and do the best we can, given that we – in my view, as I said in the speech earlier, we don’t have a set of policies that are necessarily conductive to economic growth at this point.  There are some challenges there.

MR. DERBY:  Does the change in that view tell us anything about the Fed’s assessment of secular – I’m sorry – the secular stagnation argument?

MR. HARKER:  The secular stagnation assumes there’s nothing that can be done to move R-star, right, by definition.  I don’t believe that.  I just don’t think monetary policy can move it.  But I think there are things we can do to increase the potential of the economy.

MR. DERBY:  So I’ve noticed that – I mean, you – that has been an emergent theme in a number of comments from Fed officials recently, about the limits of monetary policy and what could be done on the fiscal front or the other side of the equation.  And why are we hearing more about that?  Because you’ve spoken about it several times as well.  So why –

MR. HARKER:  Well, it is true, right?  (Laughs.)  And so I think, first, it’s true.  And also it’s important that we communicate what we can’t do, right, because often people look at the Fed for solving problems that are really outside of not just our mandate, but, with the tools we have of monetary policy, our ability to effect that change.

MR. DERBY:  Can you point to some examples of that?

MR. HARKER:  Well, go back to the speech I made earlier, right?  If we want long-term growth, it comes from population increase and productivity increase in the long run, right?  If we don’t have population increase – and we know that’s been a pretty large part of what we’ve seen – we should expect slower growth.  Just look at Japan as an example.  There is nothing, in my view, monetary policy can really do if your economy is shrinking because the number of people you have is shrinking.  You may be able to affect per capita GDP, but you can’t affect headline GDP if you – if you have a smaller population, unless you have some extraordinary productivity growth that, at least in the foreseeable future, in the planning horizon, is hard to see.

MR. DERBY:  Do you think people are asking the Fed to do some of these things in part because the political process is so gummed up or paralyzed?

MR. HARKER:  Yes.

MR. DERBY:  So that’s part of it?  And also, the extraordinary actions taken during the financial crisis, I’ve gotten the sense from some quarters, have given people the belief the Fed can do more, or is the magic thing that can fix everything, and so why not ask them to target this and target that now.

MR. HARKER:  Right, right.  And that is not – we can’t do that in theory nor in practice.

MR. DERBY:  Well, what would you say to, say – I’m sure you’ve met with the Fed Up people, and then they’re pressing you not to raise rates because they want the –

MR. HARKER:  Right.

MR. DERBY:  – in their view, the recovery to spread out to everybody, and they think if you raise rates that’s not going to – that’s not going to happen.

MR. HARKER:  No, I understand their frustration.  I think the frustration is very real.  I’ve been out and about in the community, not just meeting with Fed Up but meeting lots of people throughout the district.  But the long-term solution there is back to this Agenda for Poverty and Prosperity that we have.  It’s that three-legged stool.  It’s jobs, skills that can – individuals can have, and the housing and the environment that they can live in to be productive.  That’s going to – that’s going to move the needle.  I think if – whether we change the Fed funds rate or not will have a – not anywhere near the effect that that set of changes in policy around workforce development, job creation and housing would have.  And that’s why we’re really focused on that here.

MR. DERBY:  Does that mean you have to interact with the political system more than otherwise would have been the case, say, in the past?

MR. HARKER:  Well, I don’t know.  I wasn’t here in the past, OK?  (Laughs.)

MR. DERBY:  Oh, well, but I mean just as – I mean, as a student of the institution.

MR. HARKER:  Yeah.  I think what – I think what we need to do is provide the intellectual research capability that the Fed has a lot of and train it – you know, put our lenses firmly on these issues, for two reasons.  One is I think it’s the right thing to do.  We’re not going to write the policy.  We’re not going to decide the policy.  But we can do the research that lays out the parameters of what most likely will and won’t work, right, and the costs and benefits of those.

But also, we’re not going to have the long-term growth if we don’t reach full potential.  And a big part of reaching full potential in the economy is we can’t leave a lot of people behind, all right?  It’s just – it’s not just going to hurt those individuals; it’s going to hurt the economy overall.  That’s why I think it’s so important.  If our job is maximum employment, we got to bring those people into the workforce.  And I think just moving the Fed funds rate or holding it steady is not going to be very effective in doing that.  It’s going to be these other issues.

MR. DERBY:  Have you spoken with elected leaders –

MR. HARKER:  Oh yeah.

MR. DERBY:  – and got any sense that this is getting through?

MR. HARKER:  Oh, they get it.  Yeah, yeah.

MR. DERBY:  OK.

MR. HARKER:  But, you know, it’s a complicated time in our country.  And again, this is not what – this is particularly one of these issues that’s not just a national issue.  We tend to think of it as a national issue, but it’s community by community, city by city.  You know, dealing with state leaders, city leaders, it’s really important.

You go across the river to Camden, and I spent some time over there and my mother was born in Camden.  There’s a place that has a plan that they’ve put together with the administration in a bipartisan way – with the Christie administration to really bring Camden back, and do it in an inclusive way so you’re not just saying, oh, well, they’re gentrifying, but where do the gentrified go?  We’re not solving the problem if the gentrified just get pushed to the edges.  And so they’ve got a plan, and they’re executing that plan.  And we’re doing some research there to sort of see how it plays out over time, what we can learn.  That’s the kind of thing the Fed can do.  We can step in and say, let’s bring our analytical capability to these issues and see what we can learn from these changes.

MR. DERBY:  Well, at the national level, I got the sense from your remarks earlier today that political paralysis, or just an unwillingness of the two sides to engage, or the unwillingness of one side to engage with the other side, is a major problem for the economy right now.  Did I hear that accurately?

MR. HARKER:  Yeah.  I mean, if – I think – you know, I think – I’ll put my citizen hat on, right, and not my Fed hat.  (Laughs.)

MR. DERBY:  OK.

MR. HARKER:  Of course.  That’s frustrating to everyone.  And again, we see this in this partisan conflict index.  We measure this.  We know that this is elevated and it’s stayed elevated.  And we know the implications of that, the results of that on economic growth:  it’s not good.  And so it – that’s where I think we are the Fed, with our research capability, can at least be a voice of nonpartisan, here are the facts as we know them, and you have to make use of these facts or not.  It’s up to you.  But this is what we know will or won’t work.

MR. DERBY:  Well, in desiring to be nonpartisan, I mean, the Fed has been drug into the – or has been pulled into this election campaign in a way that I haven’t really seen before.  I mean, does that – does that alarm you?

MR. HARKER:  Yes.  I can honestly say, in my (Federal Open Market Committee) meetings to date and my daily interactions around here, politics never enters the equation.  I’ve just not seen that, right?  Now, I don’t know what’s inside people’s heads, but I’ve never, ever seen it articulated in any way.  People are just trying to do what they believe is the right thing with the right policy.  So I think it’s unfair that we’ve been brought into this political situation because I think the strength of the Fed is that we stay independent and we stay nonpartisan.  And I think the leadership of the Fed, myself included, are deeply committed to making sure that happens.

MR. DERBY:  Do you think the Fed is well-suited that if it were to come under – I mean, if it were to come under strong political pressure to follow a certain policy line, would it be able to withstand that pressure?

MR. HARKER:  I can’t speak for everybody else, but I could.

MR. DERBY:  OK.  I just figured I’d ask.

I wanted to ask you about the inflation target.  There’s been some talk about raising it recently as one possible way to help address the R-star argument, among other things.  So I’m curious where you stood on that matter.

MR. HARKER:  Well, first, it would be good to get to 2 percent and then have that.  (Laughs.)  But I’m not sure increasing the inflation target will move R-star as much as just economic growth will move R-star.  In which case, it would be nice if growth was that robust where we started to have the inflation target exceeded on a routine basis, and we’d have to rethink what that is.  But we’re not there right now.

MR. DERBY:  Right.  But I thought part of the idea was that you communicate – in that you say this, that it exerts an influence.

MR. HARKER:  Yeah, there are all – look, expectations are clearly a critical part of macroeconomics.  That may have an effect.  I’m more – and I won’t dismiss that effect.  But I think the other policies will have a larger effect over time.

MR. DERBY:  So you’re not looking for any changes in how the Fed approaches its inflation target right now?  I know there’s another idea of, like, ending the bygones policy.

MR. HARKER:  I don’t think right now.  Until we get past where we are now towards something that one may consider more normal, I think it’s – then it’s time to revisit that.

MR. DERBY:  OK.  And I know we’ve talked a lot about – or just you’ve confronted these questions before – but just the Fed being ready or having tools in case it confronts another economic downturn.

MR. HARKER:  Yeah.  I mean, I – that’s another reason I am supportive of a slow but consistent path toward normalization, so we can get further and further away from zero.  I think there are risks of hanging around zero too long.  And if the economy can withstand it, I think it’s appropriate to move.

MR. DERBY:  What would you say to people that say the entire reason why the stock market is at the levels that it’s at is because of near-zero rates and Fed actions, and –

MR. HARKER:  Yeah, I’m always skeptical of somebody who says that the sole reason – the only reason is this.  I think it is a contributing factor.  Is it the only factor?  No.  But I do believe it’s a contributing factor.  And I say that going back to my previous life as a corporate director.  Again, you are looking at shareholder value, and you’re looking at shareholder value and how to enhance it.  Well, in the long run, it is investing in new businesses, investing in new plant and equipment.

But you also can return value to the shareholder through dividends or stock buybacks.  And if the debt is that cheap, it’s one of the things that your – one of the arrows in your quiver that you’re going to use.  When debt is that cheap, you’re going to make that switch from equity to debt.  And I think there is some truth in the fact that the equities markets reflect those individual decisions by companies that are perfectly rational for those companies to do in this low-rate environment.

MR. DERBY:  Do you worry, though, that raising rates, as it starts to affect that calculus, starts to deflate or cause the stock market to sell off, and then that’s a negative input for confidence and it just causes things to come from that?

MR. HARKER:  Not if we do it – not if we do it cautiously and pace the rate of normalization.  If we have to do it quickly, I’d worry about that.  But that’s why I don’t want to have a wait and then rapid rise later policy.

MR. DERBY:  And do you believe – I mean, it sounds like from the meeting minutes people are coming around to there’s going to be an action relatively soon.

MR. HARKER:  Yeah, again, I can’t speak for the Committee.  But for me, I would like to see that sooner rather than later.

MR. DERBY:  Take another step back and talk about some of the reform proposals that have been directed towards the Fed.

MR. HARKER:  Sure.

MR. DERBY:  One of the ideas – we’ll just go down them by the list – this will actually be (Dartmouth College economics professor) Andy Levin’s list in a way, but just because it kind of pulled together a lot of different things.  But the quasi-private status of the regional Federal Reserve banks, I mean, that has been long something that has – outside critics have criticized the Fed for.  You know, you hear arguments the Fed is just doing the work of the bankers that own it.  If the Fed were to be made – regional Fed banks were to be made fully part of government, would it help address that criticism?

MR. HARKER:  I don’t think so, because I – we’ll start with the fact that I don’t think the bankers – I can only speak for myself – influence my policy decisions, other than the information they give me on what’s happening in their communities.

And so one of the reform proposals is to remove bankers from the board, right?  That would be part of this proposal.  And I think that’s a mistake, because if I think about my board, we meet every 14 days, they vote on the discount rate, and I get information from them about what is going on in their communities.  And that information, to me, is very important because data, by definition, is backward looking, right?  You can only have data about what happened.  They give me information about, for example, one banker was involved with a health care institution in his community.  Nurses were getting a 9 percent raise and they were getting – teeing up for a possible other increase in their wages because they couldn’t find nurses.  That’s actually helpful information.  As we start to tease out the picture of where we’re seeing wage pressure, OK, that’s only one anecdote and you have to be careful of solo – you know, caution about anecdotes, but it still – it gives you some sense of the right questions to ask, right?

Similarly, asking the bankers and others on the board what they see with respect to business investment.  We have a lot of data on that, but what are they seeing on the ground?  What are people doing and not doing?  And again, in our case, all the bankers are community bankers.  They’re not (Large Institution Supervision Coordinating Committee) institutions.  They’re institutions that are serving their local communities, and they’re part of the fabric of those local communities.  Those voices are really important to me, and I’d hate to lose those.

MR. DERBY:  You can’t have them on an advisory council and meet with them –

MR. HARKER:  You could, but not every 14 days.

MR. DERBY:  OK.

MR. HARKER:  You’re not going to have any advisory council – (laughs) – I mean, we have a great advisory council, our Economic Community Advisory Council, chaired by Madeline Bell, who’s the head of Children’s Hospital here, one of the leading if not the leading children’s hospital in the world.  But again, we meet on a regular basis, but not that frequently.  And so I worry about losing information in that process.

MR. DERBY:  OK.  But on the matter of Fed ownership, I mean, you don’t see that – any conflicts coming from that structure?

MR. HARKER:  It’s never affected – again, I can only – it’s never affected anything with respect to our policy stance – my policy stance.

MR. DERBY:  And how do you ensure that, say, board members don’t get information about the policy outlook that other people – like, if it’s not being distributed, you know, broadly?

MR. HARKER:  Yeah, I mean, they get the same economic update that we would give to any group as we run around the district and talk about – you know, our economists talking about issues.  They don’t get any proprietary information.  Everything we present to them, at least here in Philly, is publicly disclosed information.

MR. DERBY:  There was a change that the New York Fed had made on its – how it handled the –

(Break.)

MR. DERBY:  There we go.  The New York Fed had made a change in how it briefed, or made – the president no longer gives a recommendation on what the discount rate should be, so that whatever the board votes from is entirely self – it comes from them now.  And that way they don’t have any – they can’t draw an inference from what the president – say, President Dudley – tells them.  Do you have that same policy here?

MR. HARKER:  No.  And I don’t get the sense, though – my board is quite independent.  And as a director, I was quite independent.  So I’m not sure that it has that kind of influence, at least in Philadelphia.  I can’t speak for any other bank.

MR. DERBY:  So you – just to be clear, I mean, you do it the traditional – you make a recommendation to them based on –

MR. HARKER:  And the board is quite independent in their perspective on that.

MR. DERBY:  OK.  Actually, that is a question.  I mean, from your – what’s different from – what’s changed in your perspectives from being on the board to being a president?  What do you know now about how this all works that you didn’t know then?

MR. HARKER:  I know a lot.  (Laughter.)

So I think the biggest issue is outside of monetary policy.  It’s just the complexity of the Federal Reserve system and everything that we do, right?  When you sit in a board room, you have some sense of that, but you don’t get a deep dive in everything we’re doing in the community.  And by definition, the board members have no access into supervisory information, right?  Because we do – there is a real strict wall of separation there, other than anything that’s public information.  So obviously, on this side, as the supervisors, as the regulators, I have a lot more information now than I ever had as a board member.

MR. DERBY:  So it’s mostly an informational difference?

MR. HARKER:  Yeah.

MR. DERBY:  I think what people might find interesting:  How much of your time do you spend on actual economic and monetary policy thinking and working, compared to the other demands of the job?

MR. HARKER:  So, of course, it goes in cycles, right.  There’s, I think, for me, eight times a year (inaudible) the FOMC.  Then we have a conversation with the team here after the FOMC, just a sort of after-action report of, you know, what’s happening.  I would say in any given cycle of eight times a year.  So think of that roughly as six weeks; so a little more than a third.  We may even be bumping up to half of that is spent on monetary-policy issues.  Another big chunk of that is spent on regional development issues and community development issues, which I think feed into that view.  And then there’s the day-to-day running a bank.

MR. DERBY:  Yeah.  I mean, it’s a large organization with a lot of stuff to do in services and –

MR. HARKER:  Right.  Right, right.

MR. DERBY:  Yeah, interesting.

Back on the reform front, one thing we didn’t talk about was diversity.  And that is now coming even more into the fore with what’s happening down in Atlanta with the congressman writing about, you know, their hopes for the pick down there.  Can the Fed – can and should the Fed do better in terms of diversity, especially at its top leadership levels, again, when it comes to governors and bank presidents?

MR. HARKER:  Yes.

MR. DERBY:  OK.

MR. HARKER:  So I think about Philadelphia.  We’ve had a 20 percent increase in the diversity of our top leadership team here, and we’ve – and if I think about the board, we’ve tried to increase diversity there both in terms of ethnicity and gender.  Our Economic Community Advisory Council, which gives us an insight into what’s happening in communities, but also an opportunity to engage people possibly being board members, that is quite diverse.  Sixty percent of those members are either women, minorities, or both, because there’s overlap.

So I think we’re making progress, and I think with the staff as a whole.  But there is an issue at the top, and as you mentioned, at the senior leadership within at least – I can only speak for this bank.  And there’s a matter of working hard to bring people – bring them into the Fed system, get them the experiences they need to grow in leadership in the Fed, and to be prepared for those next steps.  I think that’s an area I’m very committed to, because it starts with recruiting a diverse workforce here, or, in the case of directors, diverse directors, and having sort of feeder systems for that, whether it’s inside the bank and the system or outside that you could then draw from.

MR. DERBY:  Well, I’ve heard the case made one of the problems is because the academic profession is tilted in the way that it is that academic economists have been historically tilted towards white men, and that’s just – that is the reality of who is in the profession.  And so, therefore, as you’re looking for people to move up through it, it’s – that creates a –

MR. HARKER:  I mean, as a former university president, it’s not just economics; (science, technology, engineering and mathematics) disciplines generally.  That’s a problem.  I think, in terms of gender, that’s starting to change in those disciplines.  But it’s still a challenge for underrepresented groups.  So I think that is a challenge.

But we need to then therefore look for leadership not necessarily out of that channel, right, and look for others, whether it’s coming from experience in the financial-services industry or other parts of academia or other industries altogether.  I think we need to start broadening our thinking about that if we’re going to really change the nature of the leadership of the Federal Reserve.  And I do think it’s important to do.  I mean, we’re very committed – I’m very committed to that here.  We’re making some progress, but we need to keep pushing.

MR. DERBY:  Has the lack of diversity had any policy implications so far?

MR. HARKER:  Well, in addition to diversity of ethnicity, gender, et cetera, it’s also important to have diversity of thought.  And so I am concerned about avoiding group-think.  So that, I think, has more policy implications than other forms of diversity, although I do think we need to have appropriate and important understanding of low-, moderate-income communities and what they’re facing.  I think that is important.  And that’s why we have really enhanced our efforts here in our community development, in this agenda, to really get a deeper, deeper understanding of what’s going on there, because that has to inform our policy as well.  And so the leadership has to be informed by that.  They don’t necessarily have to come from that.  But they could, right?  They potentially could.

MR. DERBY:  Do you think the Philadelphia Fed is fixed to be a leader on, say, understanding the plight of low and –

MR. HARKER:  I hope so.  Yeah, I hope so, for two reasons.  One, I think we have the talent here to do that.  And second, it’s important to this district.  If we’re going to serve the district, which is part of our charge, we have challenges in this district.  We have a lot of opportunity, too, in Philadelphia, but we’ve got some challenges.

MR. DERBY:  OK.  Well, I often do this towards the end of interviews sometimes, but to ask if, I mean, if there is any issue or thing that you would like to see people talk about or point that you feel that you’ve been trying to make that might not be getting through.  Kind of an open-ended question there, but I mean, is there something you think people need to understand about the Fed that they’re – it’s just not getting through?  Is there anything like that?

MR. HARKER:  I’d go back to our earlier conversation.  I do think that people don’t quite understand the limits of what monetary policy can do, and therefore what the Fed can do.  And we’re – we create the environment, the platform for the economy to grow, but we’re not going to drive that growth.  As I said earlier in the Q&A after the speech, I think people – we don’t have the secret sauce all by ourselves that’s going to make the economy grow.  It’s just not the way it works.  And I think people don’t necessarily understand that.  And I’m worried about that because I think we’re being asked to do more than we’re capable of.

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