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Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation

Interest-Rates / US Interest Rates Nov 24, 2015 - 03:44 PM GMT

By: Bloomberg

Interest-Rates

Federal Reserve Board Governor Daniel Tarullo spoke with Bloomberg Television’s Stephanie Ruhle and David Westin on “Bloomberg <GO>” yesterday. He discussed when the Fed will begin raising rates and waiting for tangible signs of inflation before moving.

There’s “more than a pretty good chance” that banks will face “some net increase in the post-stress minimum capital requirements,” Tarullo said.

DAVID WESTIN: So we want to turn now to our special guest for this half hour, Federal Reserve Board Governor, Daniel Tarullo. Dan has been on the Fed now since 2009, I believe it is. He has served on the --


STEPHANIE RUHLE: An easy time period.

WESTIN: Yes, exactly. Not much has happened since 2009. He's been on the faculty of Harvard and at Georgetown. He was senior economic adviser in the Clinton Administration, including being assistant to the president for international economics. And you also were on Ted Kennedy's staff for employment at one point. So welcome once again to "Bloomberg Go." Dan, as Stephanie just said, a lot has happened, and a lot has happened particularly with respect to banking regulation during your tenure. Where are we in that process right now, and how much further do we have to go?

DANIEL TARULLO: Well, David, I think you have to distinguish between regulation for the very largest, most systemically important institutions and the regulation for the regional banks, and certainly the community banks. With respect to the latter, that is the regionals and the community banks, I think we have done everything that we probably should do. And, if anything, we probably need to take a look to see if there's some way to simple some of the regulation that's in place.

These are not the institutions that are posing a risk to the financial system. And while we want to keep track of common exposures to things like subprime mortgages, we certainly don't need to have the level and the intensity of regulation that we do for the largest institutions.

RUHLE: Is that in response to those community and regional banks simply saying we are getting strangled with these regulatory costs? We're going to get priced out of the market. Only JP Morgan can afford to pay these.

TARULLO: Well certainly, Stephanie, we have listened to them. I've always been an advocate of what I've called the tiered approach to regulation. I never quite understood, even when I was teaching banking, why it was that we have the same regulations applying to a half-billion-dollar bank in the Midwest as applied to JP Morgan.

RUHLE: Because JP Morgan has better lobbyists.

TARULLO: Well I'm not -- in those days I think it was actually just the sort of the language people thought about banking pre-crisis. So with respect to those largest institutions, though, I think we now see, and the banks can see the outlines of the framework that will be in place, but that framework is not fully implemented. We still have to do the resolution planning process, making sure that the banks can be resolvable.

We still have some liquidity regulations in the form of the net stable funding ratio to get out. And we also are going to of course implement the higher capital charges that are applicable to those largest banks. So although it's all yet implemented, I think we can see the outlines of the framework. And that now is just a matter of getting it in place and making those banks safer and sounder.

WESTIN: Is there a danger, or do you consider a possible danger of overregulation, of sort of overshooting the mark, and what would be the downside of that?

TARULLO: So certainly with respect to the banks that I was mentioning a moment ago that provide credit to American households and businesses, the committee banks, the regionals, I think there is such a danger. And that's why we've been mindful of it. And I hope that we'll over the course of the next couple of years be able to further simplify some of the already applicable regulation.

I think with respect to the largest banks, we do have to be mindful of the fact that the financial crisis and the great recession cost this country trillions and trillions of dollars. The estimates vary, but they go up to essentially an entire year's GDP of the country. And so I think it's incumbent on us to make sure that the vulnerabilities that could lead to widespread financial distress are addressed.

And those vulnerabilities rest into two principal places, one, the very largest institutions whose stress or failure could bring down the entire financial system, and two, modes of operating within the financial system, such as the widespread use of short-term wholesale financing, which can lead to a kind of domino effect themselves. So I think there is where we want to concentrate our efforts.

RUHLE: But risk-taking isn't leaving the system. It's just being transferred. And we've seen the shadow banking system grow exponentially larger in the last five years. At the end of the day, when the market cracks, somebody is left holding the bag. And even if it's not in the hands of JP Morgan, let's say it's in Blackstone or KKR, the investors of those kind of firms are state pension funds, teacher's retirement funds. So somebody is going to be the one holding -- with getting the short end of the stick.

TARULLO: Well, Stephanie, it's true that in some parts of the world the shadow banking system has been growing exponentially since the crisis, but not in the United States. The increase here has actually been pretty modest, and that was after a period of decline during the stress and crisis period themselves.

I certainly agree with you that we need to keep our eye on forms of intermediation outside the system that have a lot of leverage or a lot of funding vulnerabilities. I don't think we want to regulate just because there are people outside the regulated system. I mean, as you were indicating, risks should be taken. People should have the opportunity to gain or lose based on their assessment of risks. It's where the vulnerabilities exist for the system that we need to step in.

RUHLE: But do you think there is more regulation on the horizon for PE firms and hedge funds?

TARULLO: And P -- for the private equity funds and the hedge funds, I think right now, our focus at least, and of course we, the Fed, don't have any authority to regulate PE funds or hedge funds, as such. With respect to those institutions, I think we're looking more at transactions and systems; that is where, for example, securities financing transactions are taking place. And that's where I think there's an argument for applying a regulation to everyone, no matter who they are just to try to keep that funding safer.

WESTIN: So let's talk about some specific regulations on the horizon required by Dodd-Frank, several of them. For example, there is a new regulation, as I understand it, curtailing loans to individual institutions, as opposed to a broad-based loan.

TARULLO: Oh you mean counterparty credit, yes.

WESTIN: Exactly, the AIG, some people refer to it as the AIG.

TARULLO: Correct.

WESTIN: There is a new regulation coming out of that I think, maybe later.

TARULLO: Yes. We have -- there are several. This might be -- it might be more efficient if we tick down a few of them where we will be coming out. So I think counterparty credit limit, incentive compensation are two areas in which Dodd-Frank calls for regulation. We've had proposals and ideas out there that regulations are not yet final.

I will say though here I think a lot of work has already been done through the supervisory process. The incentive compensation systems at our large institutions are like night and day compared to what they were pre-crisis. So too through the stress tests and other mechanisms we have already been paying a lot of attention to counterparty exposure. So I think when those regulations become final they are not going to be -- not going to require dramatic shifts in what banks are doing because the banks have already adjusted.

WESTIN: But nonetheless, do you have a time horizon, roughly?

TARULLO: Yes. I think both of those are probably in the early part of next year.

WESTIN: Early part of next year. And what about physical commodities?

TARULLO: Physical commodities, of course something not required by Dodd-Frank as such, here again I think a lot has been accomplished just through our talking about this regulation. Many of the banks have pulled back or disposed of some of their commodities operations. And there, again, we want to be partly careful with commodities because a lot of the nonfinancial users of bank commodity business put comments in and said, make sure you don't stop them from doing things that are helpful to us.

RUHLE: Since regulation is like night and day from pre-crisis until today, there are many organizations that really do not want to become categorized as a SIFI. Why is it that MetLife is considered a systematically important financial institution and Berkshire Hathaway isn't?

TARULLO: Well the -- I don't want to get into specifics, although I will actually on MetLife because the F stock has made a decision and so it's on the public record. There I think, Stephanie, the emphasis, as always, is on the characteristics of the firm which could when it's in distress mean that there were problems for the entire financial system. And so there the emphasis has been with respect to MetLife, and Prudential and AIG the extent of their business, whether it's in derivatives or whether it's in some of their products which funding risk runs that the F stock placed its emphasis.

And that's just a judgment, although very well-documented judgment, about the participation of these firms in activities that are not traditional insurance activities, but that are instead activities that connect them with the rest of the system. And of course everyone watching remembers what happened with AIG in 2007 and '08.

WESTIN: Let me go back to something you referred to, which is capital surcharges. Talk to us about the stress tests.

TARULLO: So the stress tests -- I think the stress test has been the most important supervisory innovation, not just to come out of the financial crisis, but over the last in several decades. We of course started our stress test in the middle of the crisis on the run in 2009, but now other central banks around the world are conducting rigorous stress tests. The European Central Bank, the Bank of England prominent among them.

After five years, we thought it was a good opportunity to step back and say, where can we further improve and refine the stress test? How can we make the process of the stress test easier for both the supervisors and the banks who have to go through it every year? But also, David, importantly, how do we make sure that we're not missing something in the stress test?

The best, most rigorous scenarios can only capture so much. And so I think one thing we heard in our rather widespread consultations from academics, from analysts, from other people in other governments and then our own government was we need to think further about enhancing what we call the macro prudential element of the stress test, which means impact not just on the bank of a particular loss, but on the financial system.

And although we haven't decided exactly how to do that, I think there's a pretty good chance, in fact I think it's more than a pretty good chance that in the end day, whether through the incorporation or some or all of the capital surcharge as a post-stress minimum, or through other mechanisms such as the one you were alluding to earlier of more emphasis on shared counterparties that there will be some net increase in the post-stress minimum capital requirements.

RUHLE: How embedded in the financial system is Dodd-Frank at this point? We've seen presidential candidates like Hillary Clinton call for doubling down on Dodd-Frank, and others like Donald Trump say he would repeal it if he were president.

TARULLO: So I think Dodd-Frank has probably, Stephanie, become a bit of a symbol for regulation more generally. David was asking a moment ago about commodities, which of course are not really mentioned in Dodd-Frank. What we did on capital in 2010 was not explicitly called for by Dodd-Frank. So I think we all have to specify where the regulation we think needs some ways to go, where perhaps we would like to modify it, and oftentimes that's within the province of the banking regulators, and where people think it's just about right.

RUHLE: So let's get back to our very special guest for the half hour, Federal Reserve Board Governor, Daniel Tarullo. Governor Tarullo, it seems that we're going to get this rate hike in December. Where has it been? We have gotten so much positive data for such a long time. Doesn't it seem at this point like let's get this over with already? I mean the fact that we're getting more and more information, conflicting news from different members of the Fed, enough already.

TARULLO: So, Stephanie, and let me being by saying, as you said, have just embodied, there has been an awful lot of talk about specific months over the last year, I actually think probably a little bit too much talk to be as useful in conveying the views of the Fed to markets. Having said that, I think I can say a few things about how I assess the changes in the outlook over the course of the last couple of months.

When we came out of the September meeting, as you will of course recall, there was an enormous amount of uncertainty in the global economy. After all the market churning of August it was unclear, I think, to everybody whether that would be a more or less transitory event or whether there were one or more shoes remaining to drop.

There were questions about the impact obviously on the U.S. economy and on our own inflationary environment. And in the intervening months, things have obviously not devolved in the way that some might have feared at the time. And the U.S. economy, as shown by the latest jobs report, seems still to be chugging along with modestly above-trend growth.

So some of the fears that many people held in the August and early September period have not been realized. Having said that, I think it's still a mixed picture. We've certainly seen continued improvement in the labor market, but the environment for inflation is still one where there is a lot of uncertainty.

Obviously we are still not meeting the inflation target. We're not close to meeting the Fed's own stated inflation target. There's a school of thinking that the depressing effect on inflation from the dollar and from oil prices is more or less transitory, and that as those forces dissipate there will be a push up in inflation, as the output gap narrows there will be a push up in inflation. Others, myself included, have thought that it might be better to wait for some more tangible evidence that we're going in that direction.

RUHLE: But, Dan, what about the fears around unintended consequences of rates being so low for so long?

TARULLO: Well you want to watch to see whether some of those unintended consequences are being realized. Remember, there can be unintended consequences of any policy action or failure to take policy action. And I think the analysis that we and the Fed collectively, but each of us individually has been doing for the last several years are whether the risks to inflation, financial stability and growth are roughly balanced, whether accommodation, more accommodation is appropriate or less accommodation is appropriate.

And I just want to get back and say that I think, as I noted at the outset, probably too much attention being paid to particular months, particular meetings, not enough attention paid to what's going to be the trajectory of rates when we do begin to raise rates. And I would say with respect to inflation in particular, when we do raise rates I think it will be particularly important to be watching carefully for the effect on inflation, and whether the expectations that inflation will continue to rise back to two percent are being met or are not being met.

WESTIN; So talking about that, that pathway beyond whatever happens in December, if you were to look out, and I understand this is asking a lot, it's the end of 2016, where would you expect, given where we are right now, rates to be, inflation to be?

TARULLO: Well I'm not going to give a personal prediction because I don't have to until the December SEP. I'll just point you back to the September SEP by all of the members, or all the participants, actually, in the FOMC. And if you look there, you will see that the norm was for three or four incremental hikes probably over the course of the year, and for inflation still not back to two percent by the end of 2016, in fact not close to two percent.

WESTIN: And you haven't seen anything in the data between September and now that would change that sort of view.

TARULLO: Well there's -- in September, as I said, I think if anything there was some sense that all that could be slowed down even further. What we've seen since then, as I noted, is not the realization of some of the fears that existed in September, but I think there's still a fair amount of balance, and the data kind of goes both ways.

It's hard to overlook the fact that both market-based measures of inflation compensation and surveys-based measures of inflation expectations are sort of near historic lows. And that's why I think as you look at that trajectory it will be important for us to keep our eye on both of those kinds of measures.

WESTIN: So, Dan, I want to ask a question that Stephanie and I have talked with various people about. It seems to us sitting here that there are a lot of members of the Fed who are giving a lot of speeches that seem to be going in different directions. And we wonder whether that's really helpful to the marketplace. Is it giving more clarity? Is more information necessarily making us more informed?

TARULLO: Well I think that it's important I think for members of the Fed to share their economic analyses, their outlooks so that market, market participants can assess the outlooks of the Fed members against their own outlooks. So if we say, here's how we're looking at the economy. Here's the circumstance in which we expect to provide less or more accommodation, markets can say, look, we just -- we think those guys are wrong, we're going to grow faster or less fast. As I said earlier, I think where probably we all could profit would be a little less focused on moves in particular months, as opposed to outlooks and trajectories.

Some people make the argument that because the Fed has been here holding rates low for so long, investors haven't focused on market fundamentals. As long as they have this idea that the Fed is doing whatever it takes, has this safety blanket around us, a safety net, you can keep going long the market. Isn't that a very big risk?

TARULLO: Well certainly one of the things that we have been monitoring carefully for some time now is what is happening with assets and with leverage of assets. And I think you've seen over the --

RUHLE: Going up.

TARULLO: -- course of the last several years, you've seen some surges in assets, sometimes with more or less leverage, which have then calmed down a little bit, sometimes because of supervisory guidance, sometimes not., but obviously that is a risk associated with low for long. And I think there's been a lot of attention paid to financial stability considerations, which themselves of course have a big potential effect on employment and inflation.

WESTIN: So, Dan, you have been there for six years. You are a scholar. You've studied this institution before. From what you've learned, are there things we should be thinking about with the very structure of the Fed?

TARULLO: Well I think the Fed, like central banks around the world, is an artifact of our political system and of our political history. And I think right now probably what we all want to do is the job that Congress has given us and to try to do that as well as we can.

RUHLE: And we don't want history to repeat itself, or at least not from the financial crisis. Thank you so much for joining us, Federal Reserve Board Governor, Daniel Tarullo.

DAVID WESTIN, BLOOMBERG NEWS: So we want to turn now to our special guest for this half hour, Federal Reserve Board Governor, Daniel Tarullo. Dan has been on the Fed now since 2009, I believe it is. He has served on the --

STEPHANIE RUHLE, BLOOMBERG NEWS: An easy time period.

WESTIN: Yes, exactly. Not much has happened since 2009. He's been on the faculty of Harvard and at Georgetown. He was senior economic adviser in the Clinton Administration, including being assistant to the president for international economics. And you also were on Ted Kennedy's staff for employment at one point. So welcome once again to "Bloomberg Go." Dan, as Stephanie just said, a lot has happened, and a lot has happened particularly with respect to banking regulation during your tenure. Where are we in that process right now, and how much further do we have to go?

DANIEL TARULLO, MEMBER, BOARD OF GOVERNORS, FEDERAL RESERVE BOARD: Well, David, I think you have to distinguish between regulation for the very largest, most systemically important institutions and the regulation for the regional banks, and certainly the community banks. With respect to the latter, that is the regionals and the community banks, I think we have done everything that we probably should do. And, if anything, we probably need to take a look to see if there's some way to simple some of the regulation that's in place.

These are not the institutions that are posing a risk to the financial system. And while we want to keep track of common exposures to things like subprime mortgages, we certainly don't need to have the level and the intensity of regulation that we do for the largest institutions.

RUHLE: Is that in response to those community and regional banks simply saying we are getting strangled with these regulatory costs? We're going to get priced out of the market. Only JP Morgan can afford to pay these.

TARULLO: Well certainly, Stephanie, we have listened to them. I've always been an advocate of what I've called the tiered approach to regulation. I never quite understood, even when I was teaching banking, why it was that we have the same regulations applying to a half-billion-dollar bank in the Midwest as applied to JP Morgan.

RUHLE: Because JP Morgan has better lobbyists.

TARULLO: Well I'm not -- in those days I think it was actually just the sort of the language people thought about banking pre-crisis. So with respect to those largest institutions, though, I think we now see, and the banks can see the outlines of the framework that will be in place, but that framework is not fully implemented. We still have to do the resolution planning process, making sure that the banks can be resolvable.

We still have some liquidity regulations in the form of the net stable funding ratio to get out. And we also are going to of course implement the higher capital charges that are applicable to those largest banks. So although it's all yet implemented, I think we can see the outlines of the framework. And that now is just a matter of getting it in place and making those banks safer and sounder.

WESTIN: Is there a danger, or do you consider a possible danger of overregulation, of sort of overshooting the mark, and what would be the downside of that?

TARULLO: So certainly with respect to the banks that I was mentioning a moment ago that provide credit to American households and businesses, the committee banks, the regionals, I think there is such a danger. And that's why we've been mindful of it. And I hope that we'll over the course of the next couple of years be able to further simplify some of the already applicable regulation.

I think with respect to the largest banks, we do have to be mindful of the fact that the financial crisis and the great recession cost this country trillions and trillions of dollars. The estimates vary, but they go up to essentially an entire year's GDP of the country. And so I think it's incumbent on us to make sure that the vulnerabilities that could lead to widespread financial distress are addressed.

And those vulnerabilities rest into two principal places, one, the very largest institutions whose stress or failure could bring down the entire financial system, and two, modes of operating within the financial system, such as the widespread use of short-term wholesale financing, which can lead to a kind of domino effect themselves. So I think there is where we want to concentrate our efforts.

RUHLE: But risk-taking isn't leaving the system. It's just being transferred. And we've seen the shadow banking system grow exponentially larger in the last five years. At the end of the day, when the market cracks, somebody is left holding the bag. And even if it's not in the hands of JP Morgan, let's say it's in Blackstone or KKR, the investors of those kind of firms are state pension funds, teacher's retirement funds. So somebody is going to be the one holding -- with getting the short end of the stick.

TARULLO: Well, Stephanie, it's true that in some parts of the world the shadow banking system has been growing exponentially since the crisis, but not in the United States. The increase here has actually been pretty modest, and that was after a period of decline during the stress and crisis period themselves.

I certainly agree with you that we need to keep our eye on forms of intermediation outside the system that have a lot of leverage or a lot of funding vulnerabilities. I don't think we want to regulate just because there are people outside the regulated system. I mean, as you were indicating, risks should be taken. People should have the opportunity to gain or lose based on their assessment of risks. It's where the vulnerabilities exist for the system that we need to step in.

RUHLE: But do you think there is more regulation on the horizon for PE firms and hedge funds?

TARULLO: And P -- for the private equity funds and the hedge funds, I think right now, our focus at least, and of course we, the Fed, don't have any authority to regulate PE funds or hedge funds, as such. With respect to those institutions, I think we're looking more at transactions and systems; that is where, for example, securities financing transactions are taking place. And that's where I think there's an argument for applying a regulation to everyone, no matter who they are just to try to keep that funding safer.

WESTIN: So let's talk about some specific regulations on the horizon required by Dodd-Frank, several of them. For example, there is a new regulation, as I understand it, curtailing loans to individual institutions, as opposed to a broad-based loan.

TARULLO: Oh you mean counterparty credit, yes.

WESTIN: Exactly, the AIG, some people refer to it as the AIG.

TARULLO: Correct.

WESTIN: There is a new regulation coming out of that I think, maybe later.

TARULLO: Yes. We have -- there are several. This might be -- it might be more efficient if we tick down a few of them where we will be coming out. So I think counterparty credit limit, incentive compensation are two areas in which Dodd-Frank calls for regulation. We've had proposals and ideas out there that regulations are not yet final.

I will say though here I think a lot of work has already been done through the supervisory process. The incentive compensation systems at our large institutions are like night and day compared to what they were pre-crisis. So too through the stress tests and other mechanisms we have already been paying a lot of attention to counterparty exposure. So I think when those regulations become final they are not going to be -- not going to require dramatic shifts in what banks are doing because the banks have already adjusted.

WESTIN: But nonetheless, do you have a time horizon, roughly?

TARULLO: Yes. I think both of those are probably in the early part of next year.

WESTIN: Early part of next year. And what about physical commodities?

TARULLO: Physical commodities, of course something not required by Dodd-Frank as such, here again I think a lot has been accomplished just through our talking about this regulation. Many of the banks have pulled back or disposed of some of their commodities operations. And there, again, we want to be partly careful with commodities because a lot of the nonfinancial users of bank commodity business put comments in and said, make sure you don't stop them from doing things that are helpful to us.

RUHLE: Since regulation is like night and day from pre-crisis until today, there are many organizations that really do not want to become categorized as a SIFI. Why is it that MetLife is considered a systematically important financial institution and Berkshire Hathaway isn't?

TARULLO: Well the -- I don't want to get into specifics, although I will actually on MetLife because the F stock has made a decision and so it's on the public record. There I think, Stephanie, the emphasis, as always, is on the characteristics of the firm which could when it's in distress mean that there were problems for the entire financial system. And so there the emphasis has been with respect to MetLife, and Prudential and AIG the extent of their business, whether it's in derivatives or whether it's in some of their products which funding risk runs that the F stock placed its emphasis.

And that's just a judgment, although very well-documented judgment, about the participation of these firms in activities that are not traditional insurance activities, but that are instead activities that connect them with the rest of the system. And of course everyone watching remembers what happened with AIG in 2007 and '08.

WESTIN: Let me go back to something you referred to, which is capital surcharges. Talk to us about the stress tests.

TARULLO: So the stress tests -- I think the stress test has been the most important supervisory innovation, not just to come out of the financial crisis, but over the last in several decades. We of course started our stress test in the middle of the crisis on the run in 2009, but now other central banks around the world are conducting rigorous stress tests. The European Central Bank, the Bank of England prominent among them.

After five years, we thought it was a good opportunity to step back and say, where can we further improve and refine the stress test? How can we make the process of the stress test easier for both the supervisors and the banks who have to go through it every year? But also, David, importantly, how do we make sure that we're not missing something in the stress test?

The best, most rigorous scenarios can only capture so much. And so I think one thing we heard in our rather widespread consultations from academics, from analysts, from other people in other governments and then our own government was we need to think further about enhancing what we call the macro prudential element of the stress test, which means impact not just on the bank of a particular loss, but on the financial system.

And although we haven't decided exactly how to do that, I think there's a pretty good chance, in fact I think it's more than a pretty good chance that in the end day, whether through the incorporation or some or all of the capital surcharge as a post-stress minimum, or through other mechanisms such as the one you were alluding to earlier of more emphasis on shared counterparties that there will be some net increase in the post-stress minimum capital requirements.

RUHLE: How embedded in the financial system is Dodd-Frank at this point? We've seen presidential candidates like Hillary Clinton call for doubling down on Dodd-Frank, and others like Donald Trump say he would repeal it if he were president.

TARULLO: So I think Dodd-Frank has probably, Stephanie, become a bit of a symbol for regulation more generally. David was asking a moment ago about commodities, which of course are not really mentioned in Dodd-Frank. What we did on capital in 2010 was not explicitly called for by Dodd-Frank. So I think we all have to specify where the regulation we think needs some ways to go, where perhaps we would like to modify it, and oftentimes that's within the province of the banking regulators, and where people think it's just about right.

RUHLE: So let's get back to our very special guest for the half hour, Federal Reserve Board Governor, Daniel Tarullo. Governor Tarullo, it seems that we're going to get this rate hike in December. Where has it been? We have gotten so much positive data for such a long time. Doesn't it seem at this point like let's get this over with already? I mean the fact that we're getting more and more information, conflicting news from different members of the Fed, enough already.

TARULLO: So, Stephanie, and let me being by saying, as you said, have just embodied, there has been an awful lot of talk about specific months over the last year, I actually think probably a little bit too much talk to be as useful in conveying the views of the Fed to markets. Having said that, I think I can say a few things about how I assess the changes in the outlook over the course of the last couple of months.

When we came out of the September meeting, as you will of course recall, there was an enormous amount of uncertainty in the global economy. After all the market churning of August it was unclear, I think, to everybody whether that would be a more or less transitory event or whether there were one or more shoes remaining to drop.

There were questions about the impact obviously on the U.S. economy and on our own inflationary environment. And in the intervening months, things have obviously not devolved in the way that some might have feared at the time. And the U.S. economy, as shown by the latest jobs report, seems still to be chugging along with modestly above-trend growth.

So some of the fears that many people held in the August and early September period have not been realized. Having said that, I think it's still a mixed picture. We've certainly seen continued improvement in the labor market, but the environment for inflation is still one where there is a lot of uncertainty.

Obviously we are still not meeting the inflation target. We're not close to meeting the Fed's own stated inflation target. There's a school of thinking that the depressing effect on inflation from the dollar and from oil prices is more or less transitory, and that as those forces dissipate there will be a push up in inflation, as the output gap narrows there will be a push up in inflation. Others, myself included, have thought that it might be better to wait for some more tangible evidence that we're going in that direction.

RUHLE: But, Dan, what about the fears around unintended consequences of rates being so low for so long?

TARULLO: Well you want to watch to see whether some of those unintended consequences are being realized. Remember, there can be unintended consequences of any policy action or failure to take policy action. And I think the analysis that we and the Fed collectively, but each of us individually has been doing for the last several years are whether the risks to inflation, financial stability and growth are roughly balanced, whether accommodation, more accommodation is appropriate or less accommodation is appropriate.

And I just want to get back and say that I think, as I noted at the outset, probably too much attention being paid to particular months, particular meetings, not enough attention paid to what's going to be the trajectory of rates when we do begin to raise rates. And I would say with respect to inflation in particular, when we do raise rates I think it will be particularly important to be watching carefully for the effect on inflation, and whether the expectations that inflation will continue to rise back to two percent are being met or are not being met.

WESTIN; So talking about that, that pathway beyond whatever happens in December, if you were to look out, and I understand this is asking a lot, it's the end of 2016, where would you expect, given where we are right now, rates to be, inflation to be?

TARULLO: Well I'm not going to give a personal prediction because I don't have to until the December SEP. I'll just point you back to the September SEP by all of the members, or all the participants, actually, in the FOMC. And if you look there, you will see that the norm was for three or four incremental hikes probably over the course of the year, and for inflation still not back to two percent by the end of 2016, in fact not close to two percent.

WESTIN: And you haven't seen anything in the data between September and now that would change that sort of view.

TARULLO: Well there's -- in September, as I said, I think if anything there was some sense that all that could be slowed down even further. What we've seen since then, as I noted, is not the realization of some of the fears that existed in September, but I think there's still a fair amount of balance, and the data kind of goes both ways.

It's hard to overlook the fact that both market-based measures of inflation compensation and surveys-based measures of inflation expectations are sort of near historic lows. And that's why I think as you look at that trajectory it will be important for us to keep our eye on both of those kinds of measures.

WESTIN: So, Dan, I want to ask a question that Stephanie and I have talked with various people about. It seems to us sitting here that there are a lot of members of the Fed who are giving a lot of speeches that seem to be going in different directions. And we wonder whether that's really helpful to the marketplace. Is it giving more clarity? Is more information necessarily making us more informed?

TARULLO: Well I think that it's important I think for members of the Fed to share their economic analyses, their outlooks so that market, market participants can assess the outlooks of the Fed members against their own outlooks. So if we say, here's how we're looking at the economy. Here's the circumstance in which we expect to provide less or more accommodation, markets can say, look, we just -- we think those guys are wrong, we're going to grow faster or less fast. As I said earlier, I think where probably we all could profit would be a little less focused on moves in particular months, as opposed to outlooks and trajectories.

Some people make the argument that because the Fed has been here holding rates low for so long, investors haven't focused on market fundamentals. As long as they have this idea that the Fed is doing whatever it takes, has this safety blanket around us, a safety net, you can keep going long the market. Isn't that a very big risk?

TARULLO: Well certainly one of the things that we have been monitoring carefully for some time now is what is happening with assets and with leverage of assets. And I think you've seen over the --

RUHLE: Going up.

TARULLO: -- course of the last several years, you've seen some surges in assets, sometimes with more or less leverage, which have then calmed down a little bit, sometimes because of supervisory guidance, sometimes not., but obviously that is a risk associated with low for long. And I think there's been a lot of attention paid to financial stability considerations, which themselves of course have a big potential effect on employment and inflation.

WESTIN: So, Dan, you have been there for six years. You are a scholar. You've studied this institution before. From what you've learned, are there things we should be thinking about with the very structure of the Fed?

TARULLO: Well I think the Fed, like central banks around the world, is an artifact of our political system and of our political history. And I think right now probably what we all want to do is the job that Congress has given us and to try to do that as well as we can.

RUHLE: And we don't want history to repeat itself, or at least not from the financial crisis. Thank you so much for joining us, Federal Reserve Board Governor, Daniel Tarullo.

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