William C Dudley: Transcript of Fireside Chat at York College in
Queens
Transcript of a discussion between Mr William C Dudley, President and Chief Executive Officer
of the Federal Reserve Bank of New York, and Dr Olajide Oladipo, Professor and Chair of the
Business and Economics Department, during the Fireside Chat at York College in Queens, New
York City, 24 March 2017.
* * *
Dr. Olajide Oladipo:
President Dudley, can you please share with us the purpose of your trip here today to Queens?
President Dudley:
So, there are 12 Federal Reserve Banks around the United States, and one of them is the
Federal Reserve Bank in New York that sits downtown in Manhattan, and near Wall Street. Our
Second District consists of New York, Northern New Jersey, Fairfield County, Connecticut,
Puerto Rico, and the Virgin Islands. Haven't gotten to the Virgin Islands yet.
As part of our Mission, we want to represent the communities in our District, and so four times a
year, I get on the road, and I go out to visit people, to find out what's really happening on the
ground. It's meeting with businesses, meeting with people from educational institutions, going to
visit manufacturing facilities, community development organizations.
It's really designed to do two things. One, explain sort of a little bit of what we do - like for
example there, in the introduction, talking about this BIS. What the heck is the BIS? Well, BIS is
a bank for central banks that sits in Basel, Switzerland. In fact, what did I do last weekend?
Well, I was in Basel, Switzerland, at the BIS. This is where central bankers get together from
across the world, exchange information with one another.
So, the first thing is to explain ourselves to people in the community. Because the Federal
Reserve is pretty mysterious in terms of - when I went to grad school even, I wasn't really sure
again what the Federal Reserve was. Had to be explained to me.
The second thing we do in the community, and this is the more important piece, is to really learn
what's going on, on the ground, in the community. What's happening in terms of businesses -
are they successful? If they're having trouble, what are the reasons for the trouble? Do they have
access to the credit? Can they find people with the job skills they need to support their
businesses? What are the challenges in the community, in terms of education, in terms of
transportation?
Queens, one of the issues is that if you're not located near a subway line, it's pretty hard to get
around in Queens, and that has pretty significant implications for people's ability to get to and
from work, which is important in terms of economic development.
Another issue is the affordability of housing. Queens is actually doing quite well. If you look at the
employment growth in Queens over the last few years, it's been very strong. Just like New York
City as a whole. But one of the consequences of economic development can be gentrification,
where richer people move in and they make housing less affordable for people who have been
living here for a much longer period of time.
So, all these type of issues that we talk about when we visit. And oftentimes I get some personal
stories and anecdotes that are actually pretty valuable to me in terms of how I think about how
the economy is operating and what we need to do as the Federal Reserve in terms of how we
set monetary policy.
Dr. Olajide Oladipo:
Thank you. The economy is coming out of a serious crisis that started in 2008. From your
perspective, where do you see the greatest growth in the economy right now?
President Dudley:
Well, the good news is the economy is actually in a pretty good place right now. Not for
everybody, but if you think about the unemployment rate today, it's 4.7%, which is pretty close to
what we think is full employment. You could probably push that unemployment rate even lower,
but if you did, you'd probably start to have an inflation problem. So, that would not be something
that you could sustain over the longer term. The Federal Reserve has two missions: maximum
sustainable employment and price stability. And so we're trying to find that balance. Right now
we're doing pretty well. We're pretty close to both our objectives. In fact, if you could tell me that
we could just stay here for the next 20 or 30 years, I would be very happy with that.
So, things are going pretty well. What's driving the economy? I think in the local economy in
Queens, it's very dependent on transportation, very high level of transportation employment, in
part because of La Guardia and JFK. Those industries are doing quite well.
Tourism is important to this region, so New York City has really benefited from tourism. And the
fact that people want to live in cities now as opposed to live in suburbs or more rural areas is
also helping a lot.
In terms of actual employment in this area, you have the transportation component. Healthcare
is also very, very important. A lot of uncertainties on that front. Maybe we'll get some resolution of
some of those uncertainties today. Also business and professional services is a very important
driver of growth in this area.
Dr. Olajide Oladipo:
Thank you. From your perspective, which sector do you think is actually propelling the growth?
President Dudley:
Well, I think - one thing that's been really good for New York City over the last few years, it's
become much more diversified as an economy. In the old days, New York City was sort of rise
and fall, depending on how the financial services industry was doing, especially the securities
industry. And what's happened in the last few years is the securities industry employment has
been pretty flat. And the securities industry, while they're making some money, it's not at all as
profitable as it was back in the days of 2005, 2006, before the great financial crisis. Now that
profitability was a little bit ephemeral because it was not built on a strong foundation.
Since then, the city I think has become a lot more diversified. Tourism has become more
important. Technology - the technology sector really is about the same size now as the financial
services sector. We still see pretty good manufacturing. The hollowing out of the city in terms of
manufacturing seems to be over. In fact, manufacturing employment is actually doing pretty well
in the city, in certain parts of Queens. It's actually quite supportive.
So, in general, it's a pretty positive story. The city still faces challenges. I think one of the most
significant ones is going to be: how does the change in the conversation about trade and
immigration affect people's willingness to visit New York City?
I think there is some prospect that international tourism to New York could decline over the next
few years, and that would be something that would hurt the hospitality industry in New York City.
So, that's something that we're going to have to keep a close eye on.
Dr. Olajide Oladipo:
Thank you. The Dodd-Frank Act, which is often referred to as the Dodd-Frank Wall Street
Reform and Consumer Protection Act, placed regulations on the financial industry. I wanted to
ask you, do you think the removal of the Dodd-Frank Act would be productive for the economy?
And if so, why?
President Dudley:
So removal of the Dodd-Frank Act be productive for the economy? I'm going to give you a little bit
more nuanced answer. I don't think it's a question of either the Dodd-Frank Act or no Dodd-Frank
Act. I certainly wouldn't want to go back to the world we were in 2006, 2007, because that
financial system led to the worst financial crisis that we've had since the Great Depression, and
as you know the economy suffered greatly. The unemployment rate climbed over 10%. So
clearly, we don't want to go back to that.
But at the same time, is the Dodd-Frank Act as it exists today perfect? I doubt it. What I tell
people is we really want to be careful not to throw the baby out with the bathwater. What we want
is a system where we have banks with adequate capital, adequate liquidity - number one - so
the probability of a large bank failing is a lot lower today than it was back in 2006 and 2007.
Number two, we want a system where if a large bank were to get into difficulty, we have the
ability to resolve it in a way that it doesn't threaten to take down the rest of the financial system.
The Federal Reserve intervened in a very unusual and aggressive way in 2008 because the
failure of a large financial institution was threatening to basically push the U.S. economy into a
Great Depression. We didn't do it because we wanted to save the institution. We did it because
we wanted to save the economy. We don't want to be in that situation again. So we need to have
a regime in place, so if a large institution were to fail, it doesn't threaten to take down the rest of
the financial system.
And the third thing we need is we need to a financial system that's robust and resilient to bad
economies, to financial stress. One of the things that the Dodd-Frank Act does that I think is
important is it mandates central clearing of derivatives activity. Now derivatives activities are
things where corporations exchange interest rate payments, fixed income interest rate payments
for floating interest rate payments, et cetera. During the pre-Dodd-Frank era, most of these were
firm-to-firm. Financial institution to financial institution. Now they're all cleared centrally. This is a
tremendous innovation because it reduces the amount of risk in the financial system. The
DoddFrank Act has one of its chapters or titles all dedicated to the clearing of over-the-counter
derivatives.
And finally, we have some entities called financial market infrastructures. What is a financial
market infrastructure? So, let's say I buy a stock, and then that stock has to be transferred to me
through some entity that actually clears and settles that stock transaction. The entity that actually
manages that stock transaction - you selling stock to me, or me selling stock to you - that's a
financial market utility. They have to be robust as well. And one of the things the Dodd-Frank Act
does is it allows the Federal Reserve to have some oversight capacity to make sure that those
financial market utilities are sound.
So, there are definitely things that could be changed. I think you could definitely relax the
regulatory burden on smaller banking organizations because I don't think they pose a systemic
threat to the U.S. financial system. I think you could take a look at certain regulations like the
Volcker Rule to see if they could be administered in a less aggressive way.
So, it's not in my mind a question of Dodd-Frank or no-Dodd-Frank. I think it's a question of better
financial reform legislation.
Dr. Olajide Oladipo:
Thank you. Just like you said, the economy is picking up now, and at the same time, we are
experiencing a kind of upward trend in interest rates. I wanted to ask you, do you think the current
movement in interest rates is politically-driven? If not, what is the business reason for the
upward movement?
President Dudley:
Well, if I said it was politically-driven, that would be an unbelievable news story. Because we try
to stay as apolitical as possible and set monetary policy, not based on the political winds and
fortunes of the different political parties, but what we think is appropriate to keep the economy on
an even-keel and to achieve our goals of maximum sustainable employment in the context of
price stability. So, we're basically trying to set the level of interest rates in a way that will keep the
economy close to our objective of full employment, with relatively stable price. It's 2% inflation.
That's sort of where we are right now. So, why are we raising interest rates a little bit? First of
all, I would point out that the interest rate rise that we've had in place has been extraordinarily
gradual. The short-term interest rates that the Federal Reserve sets, the federal funds rate, that
range is three-quarters of a percent to 1%. If you lived like I did through the 1970s and '80s, you
realize that that's an extraordinarily low level of interest rates.
Monetary policy over the last few years has been what we think is accommodative. In other
words, it's been supporting economic activity. As we get closer to full employment, we want to
make monetary policy a little bit less accommodative because if monetary policy were too
accommodative, we would actually get an inflation problem over time. Then the Federal Reserve
would have to slam on the brakes, we'd have a recession, people would be thrown out of work.
Not a good situation.
So, the idea is to have an economy that moves in a smooth way. And so by taking out a little bit
of that accommodation, moving up interest rates just a little bit, we think it's more likely that we'll
achieve a soft landing and keep the economy about where it is today in terms of employment.
So, it's a delicate adjustment. It's not something that's very harsh. We think it's appropriate and
necessary. But I think the economy will be able to adjust to this just fine.
Dr. Olajide Oladipo:
Thank you. Sometime ago, I think that was 2012, 2013, I took some students to the Federal
Reserve Bank. And you do have annual events at the Fed which I attend every year, often in
March. A question that came to mind is that the students were very excited when they went to the
Federal Reserve Bank. The question I wanted to ask you is what are the skills required to work at
the Fed?
President Dudley:
Well, there's lots of different parts of the Federal Reserve. There isn't one particular skill. There's
a lot of economists because we think about how the economy is working and operating and the
conduct of monetary policy. There's a lot of people that work on overseeing banks. Supervision is
one of our biggest groups. We have a lot of bank supervisors who typically get degrees in public
policy or business, and come and work at the Federal Reserve and become bank examiners.
We have a lot of people in the Markets Group, which I ran prior to becoming President of the
Bank. We monitor the markets. We talk to market participants to understand what's going on.
We execute monetary policy on behalf of the Federal Reserve System. We have people that are
in Operational Risk, who assess risk. We have people who manage custody accounts for foreign
and central banks. We have about $3 trillion of foreign central bank assets in custody at the New
York Fed.
We have the largest holdings of gold in the world in the vault of the New York Fed, so someone
has to protect that. We have a number of people in the Protection and Law Enforcement
Services that make sure that the gold is safe regardless of what one of the Die Hard movies
implied, that it could be robbed pretty easily. That's not the case.
When I became the President of the Bank, I actually rented out the Die Hard movie because I
wanted to see if it was plausible - the way they stole the gold from the New York Fed, and it
turned out that they sort of glossed over that. There was apparently supposedly a subway line
that was really close to the gold vault, and so they just had to punch a little hole in the subway
tunnel and the gold vault was right there. But it doesn't really actually work that way. So sorry.
My point is, there's a lot of different activities that we do. Obviously in education, Bachelor's or
Master's, is sort of I think probably a good place to start. The more analytical skills you can get in
terms of math and economics and business - those are the skills that are very attractive to us.
Training and public policy because that's what we do, is very important.
It's a great place to work. The typical New York Fed employee joins the Bank and says I'm going
to be here two, three years. And then the next stop I ask them how long have you been here? "25,
30 years." Which I think means that it has - it's a good place to work. Reasonable pay, good
benefits But mainly, a great culture. People are very committed to what we do. People have a
strong sense of mission and integrity.
I tell people that one of the great things about working at the New York Fed is there's no moral
ambiguity at any day about why I'm going to work. We're there to serve the public interest, and
that's a nice thing to think about every day when you go to the office. You don't have to think
about, well, why am I doing this exactly? Well, we're trying to serve the public interest, keep the
economy on an even-keel, and execute on our mission as the New York Fed.
The New York Fed is a little different than the other Reserve Banks because we're really the
operational arm of the Federal Reserve System for many, many different things. So, it's sort of
interesting. We do policy, and we do operations. Very unlike most central banks around the
world, where the policy and operations are all in headquarters down in Washington. In the
Federal Reserve it's split, with the New York Fed doing a lot of the operational activities of the
Federal Reserve System. It's a pretty cool place. Check us out!
Dr. Olajide Oladipo:
I will surely do. The Federal Reserve has been around since 1913. How would you compare the
1929 Depression to that of 2008?
President Dudley:
Well, very different outcome. In 1929, the stock market crash led to a widespread banking panic,
where people basically tried to get their money out of banks because they were afraid the banks
were going to fail. And of course in the process of trying to pull all those deposits out of the
banks, the banks didn't have enough money, so a lot of banks actually did fail. And in fact, in
1933, FDR declared a national banking holiday where all the banks were closed for a period of
time.
Fortunately, we didn't get to that point during this crisis. The Federal Reserve, and many other
people around the world, pulled out all the stops to avoid the collapse of the banking system, of
the financial system, and as a consequence, we had a bad recession - worst recession that
we've had since in the post-WWII period, but far short of what happened in the Great
Depression.
The Great Depression, the unemployment rate I think climbed above 20%. The price level, the
level of prices dropped by about I think a third. So it was a really absolutely horrendous
experience. If you talk to someone like my mother, my mom's 94 years old, she was a relatively
young girl during the Depression. She still remembers and talks about it, just incredibly searing.
People were out of work for really until WWII. The Crash started in 1929, the U.S. economy really
didn't get back to close to full employment, only in the 1940s, and because of WWII.
Dr. Olajide Oladipo:
Thank you.
President Dudley:
So this time was quite a bit different, thank God.
Dr. Olajide Oladipo:
I'm sure that everybody here invests. And they are ... students in economics and finance. We talk
about investment. I wanted to shed light or your perspective on how the fixed income investor
performed in the last eight years, please.
President Dudley:
Well, the fixed income market has been a good place to be because, basically, interest rates
have been generally coming down, if you look at long-term bond yields. So, we would like to look
at the government debt issue by the U.S. Treasury. Ten-year government debt is trading today
about 2.4% which is pretty low, and credit spreads have narrowed over that period. So, fixed
income has been a pretty good place to be invested in over the last 8 years.
Same thing with U.S. equity market, though, for that matter. If you bought the U.S. equity market
at the very bottom in 2009, it's more than tripled in price since then. As an investor, you've done
pretty well if you've stayed invested through that entire period.
Now, I would expect that fixed income investing is going to be less attractive going forward
because interest rates still are at a very, very low level. So, some of the gains that people have
seen in fixed income have been really prices going up because interest rates were declining. And
I think that you're probably not going to see prices going up a lot because interest rates are
declining going forward.
So I would guess most likely, most people think that short-term interest rates will gradually rise
over the next couple of years. That certainly is what the Federal Open Market Committee
expects, and as that happens people generally expect that longer-term interest rates will
eventually rise. And so that means that there will probably be a little bit less good returns in the
fixed income market compared to the last 8 years.
We've had a bull market in fixed income really going back to 1982. My first house I ever bought,
mortgage rates at the time were 17%. They're now around 4%. I got financing from the seller. I
got a 12% mortgage. I thought it was a really good deal. So now mortgage rates are around 4%.
We've had a very, very long bull market in fixed income. People are debating now whether this is
the end of that bull market or it's going to go on for a little bit further. So, we'll see.
Dr. Olajide Oladipo:
Thank you. If you look at the global economy, it's looking buoyant now. Also the national
economy, which is the United States economy, is looking buoyant now. I wanted to ask you,
looking at the United States, which region do you think is growing at the moment?
President Dudley:
I would answer that question, which region is growing at the moment, in two ways. Regionally, in
terms of the geography of the United States, it's really the South and West, and this has been a
pattern for a long time, that there has been sort of a migration to - when they invented
air conditioning, they made the South a lot more attractive to people. And so the South and West
have been growing faster than the country as a whole for a very long time.
Now there are some pockets of weakness there because we had a big collapse in energy prices,
so some of the areas in the South and West that are very dependent on the energy sector are
probably a little bit less robust. So, that's the first way I would describe it.
The second way I would describe it is rural/suburban/urban. There's been a tremendous shift in
people's enthusiasm for living in big cities, and that's really one reason why New York City is
doing so well because people basically want to live in the big cities, especially younger people.
And so you're seeing the cities, especially the big cities, outperform the smaller cities and
outperform the rural areas. New York City has actually been very much a beneficiary of this,
relative to many other parts of the country.
Dr. Olajide Oladipo:
Thank you. I'm sure now that we may have questions from the audience. To my right we have -
a stand there. And to my left, we have another. If you have questions, please, students,
colleagues? It's time for Q&A. If you have any questions, please.
Audience Member:
Good morning, and welcome to your college. Although the Die Hard scenario may not work in
reality, cybercrime has been a greater threat to the financial system. And recently, it was
reported that North Korea was able to illegally transfer monies from a Bangladesh account at the
Fed to an account at the Philippines. What's being done to protect funds that are held not only at
the Fed but also at other financial institutions?
President Dudley:
Well, that's a good question. Cybersecurity is a really important activity for us at the Fed. We
want to make sure that not only is the Federal Reserve well-protected but also the banks that we
supervise are also well-protected against cyber-risk.
This is a particularly hard risk to evaluate on any given day because we're trying to improve our
defenses, but the bad guys are also improving their capabilities. So, we do a lot of different
activities within the bank to make sure that we're secure from a cyber-perspective. For example,
we phish our employees, and we send them emails that sort of suggest that if you'll click on this,
and if you click on this you get a message from our Information Technology Department that
you've been phished and you learn that you have to be a lot more careful about what you actually
click on. That's important because a threat can both come from outside, but it can also come
from within.
The other thing we've done is we're spending a lot of time internationally to try to make the
financial system safer by making sure that the payment executer, their systems are secure. So,
think of that as Bangladesh. That the messenger, who the person is who's transmitting the
payment, this is SWIFT, is secure. And the receiver. So in this case, the New York Fed is
secure. That goes for anybody who is executing payments. It doesn't have to be Bangladesh,
through the SWIFT, to the New York Fed. It's anybody executing a payment through any payment
medium to any receiver.
The thing that we're trying to work on internationally is to try to make sure that everyone
understands their responsibilities in that chain. So, it's really important that the person executing
the payment, that their facilities are secured.
What seemed to be the case in the Bangladesh situation was their facilities were not secured, so
someone executed a payment that looked completely authentic through the SWIFT pipes to the
New York Fed. It was an authentic payment - it looked like an authentic payment when we
executed on some of those payments - not all of those payments.
So, we need to make sure that that first leg is buttoned up, and also we need to make sure that
everyone understands their responsibility along that chain.
So, this is something that we take very seriously. We're working also with the institutions that we
interact with. One of the things that the Federal Reserve runs - the New York Fed runs - is
called FedWire, so if you have to wire money, if someone needs the money immediately, you
can wire that through a New York clearinghouse in the CHIPS system, or you can wire that
through FedWire. It's really important that - and FedWire interacts with lots of institutions around
the country. We need to make sure that all those institutions that interact with FedWire also have
their systems secured.
So, it's a big issue. We spend a lot of resources on it. We're going to continue to spend a lot of
resources on it. We take it very seriously.
Audience Member:
We welcome you to Jamaica. I'd just like to ask, there have been some other regulatory
measures taken over the past couple of decades. As I understand it, they repealed the
GlassSteagall Act and also passed the Sarbanes-Oxley laws. Would you say that these things had any
effect on the 2008 recession, or has Congress been more responsible than not for the
recession?
President Dudley:
I think that - well, I think Sarbanes-Oxley is actually - was basically about good financial
reporting, good financial accounting. Accountability of the people at the top of the house for all the
financial records and statements. The Federal Reserve is not subject by law to Sarbanes-Oxley,
but we actually follow Sarbanes-Oxley nevertheless. We think it's good governance. So, I would
say Sarbanes-Oxley generally makes the system safer because it makes it much harder for
people to - it really deters fraud and manipulation of financial accounts in a way that I think is
very, very positive.
The second part was?
Audience Member:
Glass-Steagall?
President Dudley:
Glass-Steagall. Well, I think that - the Glass-Steagall Act was an act that was passed in the
1930s that basically said that you could either be in commercial banking or you could be in
investment banking. You couldn't be in both. And so this is an act that basically forced the
Morgan Company to separate into Morgan Stanley and J.P. Morgan. Now what happened was
many years later in the 1980s, I actually was involved with this because I was working at J.P.
Morgan at the time, people started to say, "Look, if I'm a big commercial bank like J.P. Morgan,
I'm losing all my customers who are going to the securities market. I need to follow my
customers, but I can't because of Glass-Steagall." And they found that there was a loophole,
Section 20 of the Glass-Steagall Act basically said that you can't be principally-engaged in
securities activities. So, it meant that you could be engaged but just as long as it wasn't
principally-engaged. And so this is a little loophole that a number of firms managed to exploit. And
so they actually found a way to get into some securities activities, and then Glass-Steagall Act a
number of years later was actually formally repealed because the firms were already, essentially,
in the business.
Now my own personal view is that I don't think the Glass-Steagall Act had much to do with the
great financial crisis. If you look at the firms that got into great difficulty, at the earliest stages -
Bear Stearns and Lehman Brothers, AIG - they really had nothing to do with Glass-Steagall
because they really weren't banks and securities firms. They were securities firms and
insurance companies. My own view is that the Glass-Steagall Act was not a major - the repeal of
the Glass-Steagall Act was not a major factor behind the Great Recession and the financial
crisis.
Now this is something that people probably would debate. Other people might have somewhat
different views. You could repeal the Glass-Steagall Act again. I think it would obviously require a
lot of financial corporate restructuring because there are a lot of firms in the U.S. that are in both
the securities business and the commercial banking business today. I think that there are links
between those two businesses. It probably helps those firms, satisfy the demands of their large
corporate clients more easily than if you had to separate them into separate entities. But you
could do it.
One thing I would say if you do do it, you better have a mechanism in place to make sure that
those large securities firms that are left actually are well-regulated, well-capitalized, have enough
liquidity, and have access to a lender of last-resort.
One of the problems that we had in the financial crisis is there wasn't a good method to lend to
securities firms. By law, the Federal Reserve discount window - this is the facility that we have
open to commercial banks - were not allowed to have that discount window open to securities
firms.
So, in the crisis, we had to do extraordinary lending activities to securities firms. We need a
better lender of last resort backstop for securities firms.
If you decide to repeal Glass-Steagall and separate commercial banks from securities firms,
that's not something that I would recommend, but if you were to do that, make sure you have a
way of backstopping the securities industry, too, so if a big securities firm gets in trouble it
doesn't threaten the entire financial system.
Dr. Olajide Oladipo:
Thank you. I'll be expecting questions from students, too.
Audience Member:
Not a student.
President Dudley:
But you're a student of something, right?
Audience Member:
My concern is MWBEs. I feel that the racist element within our capitalization has not allowed us
to participate in the economy on an equal level by having access to capital. The government's
asking for 30% on major projects. For example, at LaGuardia, we have a $5 billion project.
Contracts to facilitate that will probably be too high for many minority and women-owned
businesses. Therefore, if we don't have access to capital, we won't even be allowed to bid on
that work. And that's when fraud comes in, when a major contractor proposes to a small
contractor, "I'll help you out if you bid, give you give me a number on this contract."
If we had access to capital, we then bid. I'd like you to take a look at what the New York State
Department of School Construction Authorities are doing. They worked out a system that allows
us to bid on major contracts. If you took a look at that, because we need some ingenious new
ways of financing. We don't have a black bank per se. There were 94 black banks across this
country, now there's only 23. Some of the banks that's going out of business, I don't think is
kosher, but something has to be done to allow us to participate in the marketplace.
On your material, you have listed some organizations within the minority community that you deal
with. I'd like to recommend some additional organizations. For example, the ones that are
primarily interested in the flow of contracts and development. I'm not in a prime area of what's
going on today. In addition, for example, we have here at York College one of the best small
business development sectors. They're number one in the state a couple of times.
President Dudley:
I agree with your concern. Is there a