C. Peter McColough Series on International Economics With Lisa D. Cook

Lisa D. Cook discusses the U.S. economic outlook and monetary policy.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

FROMAN: Well, good afternoon, everybody, and welcome. It’s great to see you all here for this meeting, which is part of the C. Peter McColough Series on International Economics.

It’s a great pleasure and a personal honor to have Doctor Lisa Cook with us, member of the Federal Reserve Board of Governors since May 2022. Before that, she was a professor of economics and international relations at Michigan State University, among other places, and served as a senior economist, so we worked together when she was a senior economist at the Council of Economic Advisers between 2011 and 2012.

We’re joined today by people not only in this room but on Zoom. It’s a hybrid meeting. Dr. Cook, Governor Cook, is going to give some remarks, and then she and I will engage in conversation, and we will open it up for questions. And it’s all on the record.

Yes, come on up, Dr. Cook. Thank you. (Applause.)

COOK: Thank you, Mike. I’m honored to be back at the Council on Foreign Relations. I would like to congratulate my friend Mike Froman on becoming president of this august body. I have known Mike for some time. In fact, he helped me when I was a graduate student working on my dissertation on Eastern Europe when I was at Berkeley and visited the Treasury Department. Basically, I was running him down, saying, Dr. Froman, Dr. Froman, we’re going to be here in six months. (Laughs.) Could you please help us out? So it was extremely generous of him. And I really thank you for your generosity during that time, and throughout my career.

I also want to thank the Council on Foreign Relations for awarding me a post-doctoral IAF, an international affairs fellowship, that allowed me to serve at the Treasury Department. This fellowship provided a transformational experience. And today, as a Federal Reserve governor, I often draw on the significant lessons I learned during the 2001 period—2000-2001 period. I’m glad to see this important program still going strong.

To set the foundation for our discussion today, I will offer my outlook on the economy and share my views on the path of monetary policy. I will then put my thoughts in a global context by briefly examining how we can apply cross-country lessons learned during the pandemic recovery to the current period. The U.S. economy is still on a firm footing, but uncertainty has notably increased since the beginning of the year. The latest data indicate that unemployment continues to be low, while inflation remains somewhat above the Federal Open Market Committee’s 2 percent goal.

However, there is evidence that changes to trade policy are starting to affect the economy. I do not express views on the administration’s policies, but I do study the economic implications, which appear to be increasing the likelihood of both higher inflation and labor market cooling. In this environment, monetary policy will need to carefully balance our dual mandate goals of price stability and maximum employment. Former chair Ben Bernanke said that in times of uncertainty policymakers must consider a range of possible scenarios about the state of the economy. The resulting policy decisions, he said, may look quite different from those that would be optimal under certainty.

Let me start by looking at one part of our mandate. Inflation has declined from its pandemic highs but remains somewhat above target. The most recent data show that inflation was 2.1 percent for the twelve months ending in April, and 2.5 percent when excluding food and energy. Price increases tied to changes in trade policy may make it difficult to achieve further progress in the near term. One year inflation expectations have risen sharply this year. So far, most measures of longer-term inflation expectations have moved less significantly. I will continue to monitor these developments carefully. The recent post-pandemic experience with high inflation could make firms more willing to raise prices and consumers more likely to expect high inflation to persist.

I will now turn to the other part of the dual mandate. The labor market has remained resilient, at least through early spring. The unemployment rate in April had held steady at 4.2 percent, an historically low level. Payroll job gains average nearly 150,000 per month through four months this year, a moderation from last year. Trade policy changes could alter hiring plans in the near future. Changes to global trading patterns could also have a negative effect on U.S. productivity, though, as I noted in recent remarks, productivity gains associated with the introduction of AI in the workplace could potentially, at least in part, counter that effect. In terms of overall activity, U.S. GDP moved lower in the first quarter after solid growth last year. However, private domestic final purchases, which exclude net exports, inventory investment, and government spending, grew last quarter at a rate consistent with recent readings.

Looking ahead, I anticipate a slowdown in the expansion of economic activity from last year’s pace. The ultimate level of tariffs remains unknown because policy changes are still developing. However, the effects are already noticeable. Manufacturing output decreased in April. Orders for heavy trucks plunged. Firms reported a drop in capital expenditure plans for 2025. Measures of uncertainty have increased on net this year and household and business sentiment has declined, despite some recent improvements in both. While the economy remains solid, the economic environment could become highly challenging for monetary policymakers.

At our most recent policy meeting last month I supported the FOMC’s decision to leave our policy interest rate unchanged. The current stance of monetary policy is well positioned to respond to a range of potential developments. Trade policy changes and the response of financial markets, firms, and consumers suggest risks to both sides of our dual mandate. As I consider the appropriate path of monetary policy, I will carefully consider how to balance our dual mandate. And I will take into account the fact that price stability is essential for achieving both long periods—achieving long periods of strong labor market conditions.

In light of the fact that the current paths for the U.S. and global economy are uncertain, I think it is helpful to study a recent period when that was also the case, the pandemic downturn and the inflation that followed. To launch our discussion, I will highlight two lessons from cross-country experiences that might apply today. One lesson is that the inflation environment can change abruptly, especially in a world with global shocks.

The pandemic revealed how large global shocks can generate severe supply and demand imbalances that, in turn, can cause surprisingly persistent inflationary pressures across economies. Yet, these factors were underappreciated during the post-pandemic economic recovery. As a result, forecasts around the world underpredicted inflation. Forecasters may be able to do better in the future by tracking new indicators regarding shortages, various sources of pressure in supply chains, and changes in the frequency of price adjustments, especially when price setters see an upside risk to inflation.

A second lesson is that credible inflation targeting is essential to keep longer term inflation expectations anchored. Inflation targeting by central banks proved important during the post-pandemic economic recovery in achieving the monetary policy credibility that kept longer-term inflation expectations anchored. Recent research has provided support for this finding in both advanced and emerging economies. And that is precisely why I am committed to supporting a monetary policy that keeps longer-term inflation expectations anchored.

To summarize, I see the U.S. economy as still being in a solid position. Nonetheless, heightened uncertainty poses risks to both price stability and unemployment. I will continue to monitor developments closely as I consider monetary policy decisions. When making decisions, I think it has been valuable to remain a student of economic history. Our recent past has provided some useful lessons for decision making during periods of high uncertainty and elevated risks to our dual mandate goals. Thank you. I look forward to our discussion. (Applause.)

FROMAN: Terrific. Thank you so much. Very carefully articulated—(laughter)—as is appropriate for a Fed governor. Now, I’ve seen you in these different roles over the years.

COOK: Right. Right, right, right, right. That’s correct.

FROMAN: This is a new challenge, to be able to articulate these concepts so carefully. Let me pick up a few of the points that you said. You mentioned Q1 of this year we saw the GDP was down by 0.3 percent, coming off of a pretty strong fourth quarter of last year of 2.4 percent. What is your assessment, your outlook, for the economy? How likely do you think a recession is? And a recession is two negative quarters, is that the definition now?

COOK: I’d say it’s the back of the envelope calculation.

FROMAN: We’re in June. Second quarter is almost over. You want to give us a highlight of where you think the economy is heading?

COOK: Sure. (Laughs.) So I just want to be careful about the GDP data. You know, they’re very volatile. Certain components are very volatile, including government spending, inventories, and net exports. And that’s why we use PDFP, the figure that I was talking about. That was much—that was much stronger and much more consistent with recent reading. But apart from that, certainly I see higher inflation and slower activity as a result of these tariffs. So there are many implications of slower GDP and slower economic activity. And we’re monitoring all of this very closely.

FROMAN: And Chairman Powell has actually said he thought stagflation was possible with these tariffs. Do you agree with that?

COOK: That’s right. Yes. I also agree that forecasters have, at the beginning of the year, increased their probabilities of recession. And then—and they’ve come down since. But, you know, that’s been moderate in some cases, and more dramatic in others. Say the Bloomberg survey of economists went from 25 percent to 45 percent to around 40 percent. So still hovering around, you know, greater possibility than before of a recession. So outside forecasters are looking at the same data we’re looking at. So I think a range of possibilities is possible.

FROMAN: I mean, I was going to ask you about that, because it seems like—I’m looking in the audience to see which bank economists we have here—but that the banks have been revising their probability of recession on even the slightest bit of good news on tariffs. So it was—I think JPMorgan had it at fifty/fifty sometime earlier in the year, and it’s now down to 40 (percent). And other banks were a little bit lower than—lower than that. Can you make changes in forecasts on such uncertain and isolated data like that?

COOK: I can’t.

FROMAN: Yeah.

COOK: I can’t. Like, my head is spinning. So I have to update my priors before an FOMC meeting. And that’s when I do, right, to inform my decision. But otherwise I’m seeking clarity, just like everybody else. I don’t mean to—they have a completely different job. It is—you know, in a sense you have to produce something for people to read. I worked at Salomon Brothers before in equity research. Had to produce something for people to read, right? So I understand that. And take into account the thoughtfulness, right? But I am very reluctant to change my priors based on one set of data. We take into account the totality of data at any given point. So that’s what I will continue to do.

FROMAN: You mentioned in your remarks that tariffs were having an effect on the Fed’s dual mandate to maximize employment, to maintain price stability. Isn’t that kind of a nightmare scenario, that you’ve got pressure for increased inflation and—for sustained inflation, and downward pressure on employment? How is the Fed thinking about the impact of tariffs on its dual mandate?

COOK: Well, I think that we are probably thinking similarly with respect to higher inflation and slower economic activity. I think that was in the statement. But I think we may have different scenarios in mind, which kinds of tariffs would have what kind of effect, the economic implications, the incidents. I mean, there’s a lot that we don’t know. So, yes. You’re right. This is a very challenging situation. And since I’ve been here, so for three years, we have dealt with largely one part of the dual mandate at a time, right?

So, you know, rarely unemployment—you know, when I got there certainly the pandemic was in recovery. So we didn’t have the large unemployment numbers that we had at the height of the pandemic, but we did see inflation kicking up. So we were able to address that. And inflation targeting was very good for that. But we didn’t have this tension that seems to be arising between the two sides of our dual mandate. The coming days, the coming weeks, the coming months are going to be challenging. That’s absolutely right. But we have to see how the tariffs play out—the incidents, the speed, the scope, all of it. We have to see how all of it plays out.

FROMAN: And would you expect that the tariffs to—the impact of the tariffs to be transmitted largely through consumer sentiment or investor and corporate decisions about whether to expand? Or how would you—where would you be looking for data on the impact of the tariffs?

COOK: No, that’s a good question. So we look in several places. We listen to earnings calls, just like everybody else, right, to hear how CEOs are thinking about investment. Listen to investors and how they are thinking about investment. We listen to consumers. And that is through consumer sentiment surveys, and we consult a broad range of them. And, you know, typically there’s this distinction made between hard and soft data. The soft data that is survey based, hard data, official data, often backward-looking.

I don’t think that that delineation is particularly useful because, in some of the business sentiment surveys, for example, there’s actual information being asked of, say, purchasing managers. Say, the ISM Purchasing Managers Index. How many orders did you place, right? These are hard data. That’s hard data. So I think we should be really careful about relegating everything to sentiment and how businesses and consumers feel, when we’re actually asking them for hard data. But, you know, we’re going to keep watching a number of different surveys. And the surveys aren’t always uniform. The University of Michigan survey is very pessimistic on the consumer side. The New York Fed survey of consumers is a little bit more optimistic, but still declined from earlier this year.

FROMAN: As a former professor at Michigan State, are you allowed to use the University of Michigan data?

COOK: Can’t we all just get along? (Laughter.)

FROMAN: Yeah, exactly. The Fed’s Beige Book, the most recent Beige Book, used the term “uncertainty” forty-five times. Most times, as far as we can tell, in history.

COOK: That’s right. That’s right. Yeah.

FROMAN: So the challenge you were pointing to before, of having to deal with both parts of the dual mandate, which has been unusual in the recent past, added on top of that the uncertainty about policymaking and where, in fact, the policy is heading, how—when you’re sitting around that big, beautiful table at the Fed, with all the other governors, how do you guys talk about uncertainty and how to incorporate uncertainty as a factor into your decision making? There’s always some uncertainty in the world. It’s never 100 percent. But this is at a whole new level.

COOK: No, that’s right. That’s right. That’s right. That’s right. We had unprecedented mentions of uncertainty in the past two Biege Books. So this is—this is another level. And this is why we incorporated uncertainty, a line about uncertainty, into the previous FOMC statement—not the most recent one, but the previous one. This is another level. But I talked about you and I meeting during the time that I was working on Russia. And I sort of cut my teeth working in an environment under uncertainty, in the 1990s in Russia, right? So that’s a level of uncertainty that I wouldn’t wish on any economy, but here we are, right? So it’s difficult to make decisions.

But the first thing I do is look to the literature. And that’s what I was doing before I started writing my dissertation. Uncertainty is a tax. It is a tax. It is a tax on businesses. They can’t plan. They don’t know how to invest in this environment. And it keeps changing. So if, you know, this is a—it’s difficult for consumers. I mean, if they’re bringing forward purchases that they may have made later, when the optimal time to buy was maybe in December, and they bought things in now, May, April, you know, that’s not optimal.

So I think that when I am talking about uncertainty, I’m typically talking about the recent experience that we’ve had, uncertainty during the pandemic, uncertainty in other environments. We have to keep our focus on the dual mandate. And we have to look—not look through the uncertainty, but be aware of it and try to figure out how to make monetary policy in that environment. Which is why I voted to not change the fed funds rate during the last meeting, like my colleagues did.

FROMAN: Let’s talk about the pandemic. You’ve talked about, written about the lessons of COVID, and synchronicity among the major economies of the world. It was a remarkable instance where everybody was going through the same thing at the same time. Must have been a great time to be a central banker. You’re all on the same page. You’re all trying to do the same things. Now we’re sort of in different places, the United States from several of the other countries. How does that challenge manifest itself for the central banks? When you get together your fellow governors of other central banks, how do you think through what the differences—how to manage the differences between what’s going on in one economy versus another?

COOK: I think I have two answers to that question. First, we’re all seeking clarity. And we all are doing scenario planning, right? So I think in that sense there is a common feature with respect to central bank policy. But our initial conditions are going to be different. So, first of all, our mandates are different. Most, at least in advanced economies, have a single mandate, which is inflation. They consider unemployment, but they don’t have a dual mandate like we do. So that’s one initial condition that’s different. The other is that the tariffs that are being imposed will be more of a supply shock for us and a demand shock for the rest of the world. So, you know, if you are thinking about a reaction function, they’re going to have a different reaction function, even with their different mandate.

So when we’re sitting around we are all looking for clarity and thinking about the different ways in which tariffs could manifest themselves, and the economic implications of those tariffs. So that’s what we’re thinking about when we’re talking.

FROMAN: And are the forums that one used to rely on for international economic cooperation—G-7, the G-20—are they still useful forums for doing this? Or without the U.S. playing a leadership role, maybe the U.S. is playing a leadership role still in those—is there a lack of center to the system to help the bankers work more closely with each other?

COOK: So Jay definitely went to the G-7 meetings. And my assignment is one of the OECD committees. And we’re still going. We’re still participating. We’re still giving the independent Federal Reserve view and outlook of the U.S. economy. So we’re still participating and we’re still engaged.

FROMAN: And are there other mechanisms that have grown up to sort of substitute for what’s needed, either in terms of regulatory cooperation or other areas?

COOK: That I’m not aware of. I’m not aware of—

FROMAN: This is interesting. We had all the military chiefs here couple weeks ago, right, in Washington. We asked them about how alliances were doing. And their answer was pretty much the same, that whatever’s going on at the political level, military to military everyone’s—everything’s the same. We’re still doing the same exercises as—you would say the same thing about the way the central banks have been coordinating with each other, and the finance ministries?

COOK: That’s been my observation, yes. Yeah. Right.

FROMAN: Let’s talk a little bit more about the U.S. economy, perhaps two pieces of it. One is, you recently gave a really interesting speech at, was Hoover or Stanford, on artificial intelligence—potential implications for artificial intelligence with the economy. Is this going to be our savior when it comes to productivity? Is this going to—whatever the other problems are in the economy, there’s going to be such a great move upward in productivity because of AI, we’re not going to worry about our fiscal situation, our debt situation?

COOK: (Laughs.) Bad roads?

FROMAN: Bad roads, yes, exactly.

COOK: (Laughs.) Anything. Well, you know, I spent twenty years before I got to the Fed, working on the economics of innovation. So I think, in comparison to other governors, I’m considered a techno-optimist. But I’m not blindly a techno-optimist. And I’m not trying to calculate every day when AGI will happen, or when artificial general intelligence will happen. But I think that there are some practical applications of AI that we’re seeing in the workplace, and adoption of AI in the workplace, that I think can be useful. And I don’t—I guess the first thing I should say is that I don’t see this as just job displacing, because I think that you have to think about tasks as the unit of observation, rather than occupation.

So there may be a range of tasks that everybody does that AI can handle and, you know, low risk, and so on. You know, of course I wish AI would do my laundry, but it can do some of my email. OK, that’s great. And what we’re learning from a lot of surveys is that these lower-end tasks, that will allow us to be more productive, are getting done by AI. So that is in the near term. That’s the kind of future that I see. And that’s where I think the productivity gains may come. But the estimates for aggregate productivity gains are wide—between 1 percent and 18 percent over a decade, right? And they’re aggregate. So this doesn’t mean, by individual. It doesn’t mean by individual industry. It could vary a great deal. But I think that there’s a lot that we can do—and I’m speaking as a person who’s still a researcher—there’s a lot that we can do with AI, with care, with guardrails, and with thoughtfulness.

FROMAN: And so, to take it back to the Fed’s dual mandate, how do you see—how do you incorporate AI into your assessment of trying to maximize employment and trying to stabilize prices? Is it helpful on one and not helpful on the other? Or is it a challenge in both sides?

COOK: It could have an effect on both sides of the dual mandate, you’re absolutely right. So what I was expecting before tariffs came along was that AI might help us with disinflation, in the medium run, right? Because if you’re making more products with fewer resources, as—you know, with AI—then we could see disinflation accelerating. But that was—that was a question with respect to what the medium term was. Was that in a year? Was it two or three years? That was a big question about AI. Now the way I am interpreting the use of AI is not—it may help dampen some of the effects with respect to inflation related to tariffs, but, you know, this is highly uncertain. These estimates are highly uncertain.

With respect to labor, we’re going to see what happens. You know, let’s say that AI could have been—was useful in making us more productive, and making people—helping people to move up the productivity chain with respect to jobs, right? But that was helped by immigration, right? So if you have people coming in at the lower end, immigrants coming in at the lower end, such that people could take advantage of higher productivity jobs, then that efficiency may be compromised by new immigration policy. So we have to—we have to wait and see. We have to wait and see. So on both sides, we have to wait and see. But I think that, for me, the main takeaway with respect to the labor market is that it is not automatically job-displacing.

FROMAN: As you mentioned, this innovation has been something you’ve been very much focused on in the last couple of decades. This administration has taken a particular approach to research and development funding, NIH, NSF, universities. How do you see this affecting the long-term innovation ecosystem and competitiveness of the U.S. economy?

COOK: I think this is very, very serious. And I think we’re thinking about the dual mandate. Our long-term growth comes from the ideas that we’re able to incorporate into the economy, right? So it takes—I think the last calculation I did was that it took about twenty years to get from lab, to patent, to commercialization. That’s twenty years. You’ve got to invest that time. And let’s think of some good examples. Eric Schmidt led a lab that Larry Page and Sergey Brin belong to. And they were being supported by, you know, these government funding. And I don’t know exactly which type of government funding.

But those ideas take a long time. You have to invest in graduate students. You have to invest in labs. You have to invest in universities. But, you know, again, these policies have not yet—well, let’s say that the outcomes are still uncertain. So I will reserve judgment.

FROMAN: There’s that “uncertain” word again.

COOK: I know. I know. I know. Even I use it too many times. That’s probably right. But I think this is something that we should really be careful about.

FROMAN: All right. Before I open it up to the audience, you’ve now been governor three years. Worked at the Council of Economic Advisers, the White House. You worked at the Treasury Department. Which is the best institution? (Laughter.) And which job—which job did you like best? And what have you—what have you found most surprising about being a Federal Reserve governor?

COOK: Most surprising is that I learn something new every day. And, you know, having taught macro for, you know, more than twenty years, I am surprised that I’m learning something new every day. But, you know, I think this is Ben’s comment—Ben Bernanke’s comment as he was walking out of the door, that he learned something new every day. So I am—you know, I remain curious and remain grateful for this—for this job. And I would just say, because I am at a certain stage, I think that the Fed job is the best.

FROMAN: There you go. (Laughter.) All right. We won’t tell Treasury or CEA.

COOK: (Laughs.) Exactly.

FROMAN: Let’s open it up to the floor. Yes. Dante. Dante Disparte.

Q: Thank you. Thank you, Mike.

And, Governor, as a technology optimist at the Fed, I’m curious if you could comment on some of the tensions central banks around the world have felt, including the Fed, around to what degree does the Fed innovate, for example, in the payment system. The United States wasn’t spared the to CBDC or not to CBDC question—central bank digital currencies, for the audience. I’m just curious about that mandate as well, of the Fed as a provider of either first or last resort in the payment system, in the banking system, and that innovation agenda that’s been very real for the Fed here—

FROMAN: And questioners should identify themselves.

Q: (Laughs.) Yes. Dante Disparte with Circle. Thank you.

COOK: With Circle.

FROMAN: Circle. (Laughter.)

COOK: With Circle, OK.

FROMAN: Which is a major stablecoin—

COOK: Thank you for having him clarify. OK.

So first I want to say that at the Fed our experimentation with AI is very limited and very careful. We have sandboxes and we’re doing this with a lot of guardrails. Now, we can see—just as many can—that AI can, for example, increase vulnerabilities with respect to, say, cybersecurity and fraud. And this is something that, of course, we’re interested in. And as chair of the Committee on Financial Stability, I’m really interested in. So I think that we’re experimenting ourselves in a very deliberate way. But the extent to which we can innovate, as you know, depends on regulation. And that is being worked out now. So let’s talk again in six months or a year.

FROMAN: Let’s go to an online question, and then we’ll come back to the room.

OPERATOR: We will take our next question from Tara Hariharan.

Q: Thank you so much. My name is Tara Hariharan. I work at NWI, a hedge fund based in New York. Dr. Cook, thank you so much for your comments.

Let me ask you this. As a financial market participant, I’ve noticed that we, in the markets, are purely focused either on whether the Fed will hold rates or maybe cut rates in coming months. But should we be considering the possibility that the Fed might even find itself in a position where it needs to hike? And I ask you this because, as you also pointed out, we are watching inflation and inflation expectations closely. And one of the subjects that did not come up today, although I know you may be limited in how much you want to talk about it, is the expansionary nature of the U.S. fiscal, and whether the big, beautiful bill, you know, maybe expansionary enough that it’s inflationary, and further, you could say, complicate Fed calculus. So just wanted to ask you to just opine on a possible scenario where the Fed might actually have to hike instead of cut. Thank you.

COOK: Thank you for your question. We have to be open to all possibilities. We don’t know how tariffs are going to play out. So all of those scenarios could be possible. One could imagine the scenarios of cutting, staying, or hiking happening. And we certainly saw in the past that—during the last round of tariffs—that the Fed cut. But initial conditions matter. You’ll recall that we had 1.6 percent core PCE inflation in 2019, when we were cutting before, and it had been 1.6 for the five years prior. So you can’t—this is a different situation. It’s much higher now, 2.5 percent now. The initial conditions matter. And we take into account the totality of data before we walk into an FOMC meeting. So we’ll make that decision at that time. Certainly can’t prejudge what I will do and certainly can’t prejudge what my colleagues on the FOMC will do.

FROMAN: Here? Yes, Andrew.

Q: My name is Andrew Gundlach. I’m the CEO of Bleichroeder. Thank you for your comments.

How does the Fed take into account consumer affordability, in the sense that so many residential and also other forms of debt are done at historically low rates and haven’t reset yet? But the real market for mortgage and other types of consumer loans are really double or sometimes triple, depending on the underlying credit of the person. Hasn’t shown up in any of the data, but you can feel it in the behavioral characteristics that you see in the economy. And I’m just curious how you take that into effect, as a forward-looking indicator. Thank you.

COOK: So that’s a—that’s a good question. So we monitor very closely in our financial stability report, for example, the condition of households. And certainly, we’ve seen LMI households more stretched than others. So we see auto delinquencies climbing. We see—and this has been happening for some time. And the same is true for credit card delinquencies. One thing that I am reading about is delinquencies in BNPL, buy now pay later, which I thought was happening. But we don’t have as good data on BNPL. And we’re learning that many students are on—are delayed on—delinquent on their student loans, right? So student loan repayment. So there are pieces of evidence in many different corners, and we try to take into account as many indicators as we can. So we’re watching this very closely. Absolutely watching it closely.

FROMAN: There you go. Right there. And then I’ll come over here.

Q: Arthur Rubin with Sumitomo Mitsui Bank.

Purported sightings of bond vigilantes seem to be ebbing and flowing roughly in line with the volatility of rates. I wonder, how concerned are you and your colleagues that bond vigilantes could really push up the long end of the curve, despite what the Fed is doing at the front end?

COOK: So, as the chair of the Committee on Financial Stability at the board, I am always concerned about activity in bond markets, and all markets. And I’m concerned about market functioning. So, on April 7 we saw problems with liquidity, stress, but not dysfunctional. So the bond market, like other markets, seem to be resilient. I have no idea what’s going to happen in the future. Have no idea. But I would say that we have our eyes on this market functioning in general. We’ve written quite a bit since 2019 about liquidity challenges in the bond market—in the treasury—in the treasury market, let me be specific. So this is something that we’ve been monitoring for some time and will continue to monitor closely.

FROMAN: Yes. Right here in front. Microphone.

COOK: Thank you. Niso Abauf, Pace University.

As you would know, the Fed’s reaction function is designed to offset demand shocks not supply shocks, as is currently the case with tariffs. As your colleague Austan Goolsbee has said, the Fed can respond to many situations, but cannot prepare breakfast. So what would you do under these supply, demand—supply shock conditions?

COOK: He said we can’t prepare breakfast?

Q: That’s correct. (Laughter.)

FROMAN: Breakfast. Austan has always been—had a way with words.

COOK: Tell him to speak for himself. (Laughter.) I used to have a cooking school. I founded a cooking school called the Cook School. So I can do that. (Laughter.)

But to your point, yes. Our tools are more designed to address issues related to aggregate demand. That’s absolutely right. But we can’t ignore what might happen or what is happening with respect to supply disruptions, as was the case at the peak of the pandemic. So we remain prepared. We watch very closely to see what those effects might be. If there are inflationary pressures that might build up, for example, due to supply conditions. So we’re watching all of it very closely.

FROMAN: Let’s go online for our next question.

OPERATOR: We will take our next question from Beatrice Rangel.

Q: Thank you. My name Beatrice Rangel. I am the managing director of AMLA Consulting, a firm that advises on business development matters in small- and medium-sized enterprises in Miami, Florida.

My question to you is, I would like you to imagine—just imagine the possibility that we step into a world of universal 10 percent tariffs. How big would it be the boost to the global GDP if that happens?

COOK: OK. So this would be a better situation than exists right now, right? I mean, if this is universal tariffs for everyone, this is—this is what I think I understood, 10 percent for everyone, for every country.

FROMAN: Yeah, as a baseline.

COOK: As a baseline. So, you know, I don’t want to comment on the taxes themselves, but certainly it seems to me that the more certainty and—the more certainty the better. This is policy uncertainty that is driving what we are thinking about with respect to higher inflation and lower economic activity. Personally, I’m not—I’m really having a hard time thinking about what 10 percent across the board would do. But that would be better. That would be a better scenario. And if you’re talking about monetary policy decisions and better or worse scenarios, this could be a better scenario for our dual mandate. But, again, not commenting on the administration’s policies. I’m commenting on the hypothetical situation that you posed in your question.

FROMAN: And that’s because of greater certainty, not because the level is necessarily—the 400 percent increase over what previously existed, so.

COOK: Right. Right. So the uncertainty tax, that I think is large, would be reduced. And all the calculations that firms have to make, and so on. So, you know, a better situation in some regards, and possibly not in others.

FROMAN: Yes, in the center.

Q: Kevin Chen, chief economist at Horizon Financial. Also adjunct professor at New York University.

So my question for Governor Cook is that since COVID the Federal Reserve increased the balance sheet dramatically. And for the last two years the balance sheet had come down quite substantially. So is there any plan going forward to target a certain area of kind of optimal size of a balance sheet? Or you want to keep shrinking it until, let’s say, before, COVID level? Thank you.

COOK: So we have included in our recent statements our plans for the balance sheet. And that hasn’t changed. So, as you know, we lowered the cap for Treasurys. Agency MBS hasn’t changed. But that’s our plan. And when we—when we change the plan, you’ll be the first one to hear about it.

FROMAN: You, and everybody else in the world, at the same time. (Laughter.) Unless you have an announcement you’d like to make right here at this time?

COOK: (Laughs.) Right? Exactly.

FROMAN: Yes, here in the back.

Q: Thank you very much. Henry Engler with CUBE. We had Circle. Now we have a CUBE.

I wanted to get back to the discussion about AI. Your colleague, Michael Barr, several weeks ago gave a talk at the New York Fed where he raised concerns about what he called concentration risk among the AI providers. That we have this small group of very powerful firms that are, you know, basically leading the charge. And as an economy, you know, businesses are beholden to them in terms of how they incorporate what they’re producing. How much does the board talk about those kinds of risks, and whether or not they pose some sort of financial stability risk as well?

COOK: Good question. We have—we talk about this a lot. So in the financial stability report we’ve raised this. And certainly those in supervision and regulation have thought about it a lot. And they’re acting on it, asking banks—making sure that banks understand the risk they’re taking on, because their providers are often concentrated. And this is an even bigger problem for the smallest banks, because they’re more reliant on these third-party providers. So we’re constantly thinking about it. And that’s part of our AI work. And we are thinking about the guardrails for everyone, not just for us, not just for the Federal Reserve System.

FROMAN: Questions here? Can I raise an international issue? I’m sorry, go ahead. Here comes a—here comes a—for our virtual audience.

Q: I’m James Heimowitz, president emeritus of China Institute.

And I wanted to ask you a question about the way we’re being asked to think about DEI at a national level. So you’re a woman of color in a leadership position at the Fed. I want to know, does the Fed—you know, are you in some way inoculated? How are you being asked to think about DEI at the Fed? And if you care to share with us, how has it had any impact on you at a personal level?

COOK: That’s a super good question. Every Federal Reserve Board tries to align itself with whatever administration comes in. So that’s the—and that’s true across administrations. That’s not new. That happened with Biden. It happened with Clinton. It happened in Trump one. So that’s our policy. So we are working as—and that’s, to the greatest extent of the law. So we still have to follow the law. For example, we still have to report OMWI data—data related to the number of minorities, the number of women, and so on, who were employed by the Federal Reserve System. So we followed the statute. And I think it’s been—you know, it’s been an interesting time.

This is—this is not—OK. Let me back up. This is the first time that I’ve ever been in a situation where I’ve not been able to do what I did as a professor. I mean, in addition to being very carefully worded, as Michael was saying. But we have to keep thinking about recruiting, for example. And if we are recruiting, we’ve got to make sure that we find the best talent. Now there’s a hiring freeze. So we’re not—(laughs)—we’re always going to be looking for the best talent. But I think that this is just—and my history of my career—this is just, for me, an unusual time. So I’m still absorbing what is happening around me. And I’ll continue to do, personally, whatever I can—whatever my commitments are. I spoke at a women in macro conference two weeks ago. And, you know, I’ll continue to recruit, to the extent anybody wants me to help recruit, in the way I have been recruiting before—finding the best talent, wherever it is.

FROMAN: Yes. Gentlemen there.

Q: Pete Marton, Fireblocks. It’s a crypto infrastructure firm.

My question is around the Fed and the joint statements we’ve seen from previous administrations with the OCC and the FDIC. We’ve seen the repealing or rescinding of a number of interpretive letters at the OCC, as well as the FDIC. You had mentioned, you know, come back in six to twelve months, but it seems like the other agencies have moved quite quickly in this new administration. I’m just wondering how I’m supposed to think about that in the context of the Fed, from a supervision and regulatory perspective.

COOK: That’s a good question. And I think the—I don’t know how long you’re going to have to wait, but I think this is imminent. Miki Bowman has been nominated and has had her hearing. So she will articulate the direction in which she’d like to take supervision and regulation. So I will defer to her, since that’s her position and that’s her call. But lots to come in the next six months or so.

COOK: Great. Yes. Right here.

Q: Hi. Ann Harrison, University of California, Berkeley.

Well, you say you’re a crypto-optimist. Governor, I used to be a globalization optimist, but after seeing what’s happened in places like Michigan, for example, I’m less of an optimist. So I’m wondering, what probability do you attach to reversing your position on being a techno-optimist when it comes to AI?

COOK: So, Ann, first of all, thank you for clarifying before I had to clarify about being a techno-optimist versus a crypto-optimist. (Laughter.)

FROMAN: We have a crypto corner over here.

COOK: Exactly. We have a crypto corner over here. I don’t want to be attacked. You know, I would say that being a techno optimist at the Fed is not being a techno-optimist out in the rest of the world, right? This is from a very low base. (Laughter.) Which is why I find it funny—

FROMAN: Everything’s—

COOK: I find it—right, exactly. Which is why I find it very funny that I’m being called a techno-optimist, right? So I would say that, you know, I’m not suggesting, for example, that AGI will happen in the next two to five years. I keep hearing that. And my closest friends in the tech industry are saying, not in my lifetime, right? So I’m a bit more skeptical. So when I experiment with AI at home on my own devices, not at the Fed, I run several different types of experiments. And if I didn’t know the subject matter, it would not be useful to me. So I’m just saying that humans—I don’t think humans are going to be gotten rid of. I don’t think RAs (sp) are going to go away. I don’t think that coding is going to be—as a profession is going to go away altogether. These things have to be checked.

And they have to—now, will they get better? Yes. Agentic AI will help improve performance, absolutely. But I just think that there has to be a human in the middle always, especially for decision making. You know, I was horrified to hear a person who was explaining a new AI model to me, Well, I can just ask it to do this in Python, and I don’t even know Python. Like, well, how do you know it’s any good? How do you know it’s not going to destroy the Earth? Like, really? Like, so I’m teaching myself Python on the weekends, right, so that I can judge whether the output is what I want. That’s just one thing. But I don’t think we can, at this juncture, take the human out. And I think it’s just—yeah, let me—let me leave it there. I think it’s far away. I think that’s far away.

FROMAN: One last question. A word that we haven’t mentioned yet here is “China.” Go back to your days as an international economist, development economist. When you look ahead, given the significance of China to the global economy, what do you see as the prospects that we’re going to be able to find economic models that allow China, the U.S., the rest of the world to actually engage constructively?

COOK: So, you know, the models that that you have framed in your framework would be political economy models, right? And luckily, I don’t have to pay attention to those. (Laughter.) China is a big part of the world economy. So we have to understand what is happening in the Chinese economy, its effects on the rest of the world. So I would—I would argue that, in a sense, we’re already doing that. So what we have to understand is how firms in the U.S. are going to respond to firms in in China, for example. So I think that, in the purest economic sense, we’re already doing that.

And we have political uncertainty indices that we consult, obviously. And some of them had been developed by economists at the Fed. But those are a part of the models that we are using. So I think, in a sense, we’re already doing that. But I’ll leave it to the political scientists and others, those who are experts in international relations—scholars in international relations, to do that.

FROMAN: Governor Cook, thank you so much for spending time with us. It’s great. You were both very careful and very insightful, and we appreciate that. (Laughter.) Please join me in thanking her. (Applause.)

COOK: Thank you. Thank you. Thank you so much.

(END)

This is an uncorrected transcript.