john c williams : shifting gears - rebalance and realignment in the economy remarks by mr john c williams, president and chief executive officer of the federal reserve bank of new york, at the fixed income analysts society, new york city, 19 january 2023. * * * as prepared for delivery albert einstein famously said, " life is like riding a bicycle. to keep your balance, you must keep moving. " while charming advice to live by, it is also particularly salient when it comes to the rebalancing and movement taking place in the u. s. economy today. in my remarks this evening, i'm going to discuss inflation, the continued imbalances between supply and demand, and the effects that monetary policy is having on different sectors of the economy. i'll share what this means for the economic outlook in the united states, and how the federal reserve's policy actions support our bedrock commitment to price stability. before i do that, i want to thank the fixed income analysts society for putting together this wonderful program. it's great to stay local, even if it means dodging rush hour traffic in midtown. although times like these make me wonder if i should take einstein's bike riding advice more literally! i should also give the standard fed disclaimer that the views i express today are mine alone and do not necessarily reflect those of the federal open market committee ( fomc ) or others in the federal reserve system. inflation indications and implications i'll start by saying that although we are seeing some signs that inflation is moderating, it remains far too high, and it is my no. 1 concern going into 2023. rapidly rising prices continue to have an immense impact on families and businesses, especially when it comes to essentials like food, utilities, and housing. high inflation is a new reality for many people. for the three decades preceding the pandemic, the inflation rate averaged almost exactly 2 percent, as measured by the personal consumption expenditures ( pce ) price index. but that changed dramatically in the spring of 2021, when inflation suddenly soared, ultimately reaching a 40 - year high of 7 percent last june. while the inflation rate has since come down to 5 - 1 / 2 percent, it's still higher than any pre - pandemic reading since 1982 and far above the fomc's 2 percent longer - run goal. persistently high inflation undermines the ability of our economy to perform at its full

increasingly regarded banking as a transactional relationship and are willing to jump from one bank to another just for the sake of a slight improvement in the interest rate received on deposits. what has changed : short termism of shareholders 16. and if banks ’ customers and creditors have changed – what about their shareholders? well, returning for a moment to our earlier discussion. the owners, now in the form of hundreds of thousands of shareholders, have only limited “ skin in the game ”. their personal or family wealth, outside of their bank shares, is not at stake if the bank fails and they can now in most cases exit from their shareholdings swiftly through trading on a stock exchange. so their perspectives can now be much shorter - term and, as they alone benefit from increases in a firm ’ s “ value ”, they may actually favour greater risk - taking to maximise share price valuation in that shorter - term. this “ short - termism ” mindset is more pronounced amongst some asset managers and hedge funds, which in recent years would appear to have accumulated increasing amounts of bank shares and become more proactive in capitalist fools. joseph e stiglitz january 2009 ( the great hangover : 21 tales of the new recession from the pages of vanity fair ). bis central bankers ’ speeches exerting pressure on bank management. as these asset managers are themselves rewarded on the basis of the annual valuation of their funds ’ holdings, including the bank shares, they have every incentive to push the banks to achieve higher profitability. so board directors and senior management were, and still are, under constant pressure to pursue higher roes. it is not difficult to see why capital raising, which improves the resilience of banks, is often rejected or delayed as it is negative for share prices in the short term. the result? banks have no choice but to leverage up and take bigger risk in order to meet the targets that the shareholders demand. modern banking at crossroads 17. so where do we go from here? as i mentioned earlier, while bank regulators clearly play an important role in influencing banking operations, it is really up to the industry to decide what it can and should do to regain the trust and respect that banks once enjoyed. we should bear in mind bank regulators are a consequence of the emergence of modern banking. however, as discussed earlier, the modality and incentive system for banking were very different in the old model of banking : there was a high degree of alignment of interest between bank owners,