for release on delivery 12 : 35 p. m. est november 30, 2022 the economic outlook and u. s. productivity remarks by lisa d. cook member board of governors of the federal reserve system at the detroit economic club detroit, michigan november 30, 2022 good morning. it is a pleasure to be back in michigan, although i wish i had been here to participate in the turkey trot last week, which is an annual tradition for my family and me. it is especially a treat to be back in detroit, with its rich history of music, art, architecture, and industrial innovation — which i will address today. i am also delighted to see some familiar faces. today, i would like to discuss the economic outlook and focus on one particularly important aspect of the economy : productivity. i have spent much of my career researching the ways in which american ingenuity and invention can be wellsprings of economic growth. i am here, therefore, to address the impressive innovation happening in the auto industry and what it tells us about future prospects for productivity in the u. s. manufacturing sector and in the economy more generally. i can think of no better place to do that than in the motor city. outlook to set the stage, i will first turn to the u. s. economy as a whole, where inflation remains much too high. as a result, the federal reserve must continue to focus on bringing inflation back down to our 2 percent target. we have begun to see some improvement in the inflation data. the october report on consumer prices was encouraging, particularly the slowing in core inflation — the measure that excludes more volatile categories, such as food and energy. producer price inflation also moderated in october, suggesting that inflation pressures on businesses may be easing. nonetheless, i would be cautious about reading too much into one month of relatively favorable data. - 2core goods inflation has finally begun to slow significantly, helped by some longanticipated improvement in global supply chains. declines in wholesale prices for used cars and in prices for key manufacturing components, like plastic resin and steel, also suggest continued moderation in goods price inflation. services, however, make up about two - thirds of consumer spending, and inflation in that sector has not yet slowed. notably, inflation in housing costs shot up this year and will likely contribute substantially to overall inflation for some time. nonetheless, some good news is emerging on this front. rent increases on new leases have slowed in recent months. and

cut this process and build up ad hoc measures for purely prudential purposes will not succeed. it runs the risk of adding significant distortions and having unwanted consequences. in particular, if not carefully drafted, the leverage ratio could create incentives for banks to pile up riskier assets in their balance sheets, in order to maintain the same returns on equity with lower leverage. this would only aggravate the problems that regulation is trying to solve and precipitate the next crisis. this is why some scepticism is warranted as to the possibility of using the leverage ratio as a universally binding, or in the language of regulators, a " pillar one " component of the capital framework. consistency with macroeconomic policy regulatory reform has today to be implemented in a very uncertain macroeconomic environment. it is therefore important that we strike the right balance : efforts towards long term reform must not create, in the short run, additional downside risks to economic activity. since pittsburgh, we have a roadmap and we have deadlines. we must find the optimal sequencing to reconcile our ultimate objectives with the need not to impede the recovery. this is especially relevant for the capital regime. banks must have a much stronger capital base in the long run. but, in the short run, we expect credit to continue flowing to the economy and we want, therefore, to avoid any abrupt and disorderly deleveraging. we don't want, in short, the introduction of a new capital regime to have a procyclical effect on our economies. in the euro area, the economy depends on the banking system for more than two - thirds of its financing. any lasting disruption to credit flows would cause considerable harm. regulators could jointly decide on the following sequence. in the immediate future, priority should be given to capital conservation. as i mentioned, most of the current banking profits are, in fact, by - products of public policies and there is a good case for requesting that they should be kept inside the banking system and used to strengthen balance sheets and finance credit to the economy. this would require some restraint in dividend distribution and, of course, in the overall amount of variable compensation. in parallel, all possibilities to issue new equity should be exploited. this would be a first step. as a second step, a progressive schedule of capital strengthening could be precisely defined and published for the future. it would be crucial that this schedule be made explicitly contingent on the state of the world economy. again