Price stability in challenging times

**Paul Gordon** (0:02)
War, tariffs, energy prices, the global economy is going through yet another period of elevated uncertainty.
In such an environment, the goal of central banks is pretty clear. Keep prices and the financial system stable. The decisions of policymakers will shape borrowing costs, investment and ultimately economic growth in the months ahead. You're listening to Euro Matters, the podcast by the European Central Bank, where we unpack the stories, ideas and decisions shaping Europe's economy. My name is Paul Gordon.
And this year's ECB Forum on Central Banking in Sintra, Portugal, the president of the European Central Bank, Christine Lagarde, sat down with central bank heads from the US, the UK and Canada to discuss the steps they're taking to fight inflation and the challenges and opportunities that lie ahead. The conversation was moderated by CNBC's Sarah Eisen. Let's listen to what they had to say.

**Sarah Eisen** (0:59)
And thank you to President Lagarde and to the ECB for having me back here. It's an amazing tradition and one of the highlights of my year and my career. And way more fun than watching you guys on your respective press conferences. So this is going to be fun.
And I'm excited because I'm hoping we can have a good debate about divergence in policy and approaches. And maybe with that, President Lagarde, I'll kick it off with you because you're the only one up here to have raised interest rates in response to the Middle East oil shock. Are you going to do it again? This year? Now, why did you do that?

**Christine Lagarde** (1:46)
Well, we did it because we had the perfect monetary policy circumstances to do so.
And, you know, when you have your inflation outlook up, your core inflation up, when you have the underlying inflation indicating that it's also trending up as well and that you're only going back to your 2% target at the end of 28, with the number of things happening in our inflation outlook, which includes, you know, the market expectations in particular, you have the obvious decision. And it was so obvious that we had a unanimity decision within the Board of the Governing Council.

**Sarah Eisen** (2:26)
But seriously, how will you decide whether you keep going? Because you're still above target.

**Christine Lagarde** (2:32)
You know, what we decided to do is way back to give up on forward guidance. Okay. And personally, and I've said that publicly, if I have one regret, it's to have felt bound and compelled by forward guidance.
So, I think what we do is now also informing market participants, informing financial experts from all walks of life about how we come to our monetary policy stance. And I have called it not forward guidance, but framework guidance. So that those interested in how we come up to a particular decision appreciate what we take into account, what intellectual process we go through, what indicators we are particularly attentive to, so that of course they have to do a little bit more work themselves. It's not forward guidance blindly and you just assume that it's going to be what had been calibrated as forward guidance.
They will have to do a bit of homework. They will have to look at the indicators that we are attentive to. They will have to appreciate our intellectual process and what we are especially attentive to. And that includes, you know, if I go through what we did on the 11th of June, we looked at the inflation outlook, taking into account all the latest economic and financial data with risks part of our assessment as well. And that's, you know, recent development as you know. We looked at underlying inflation, various set of indicators, and we looked at the transmission of monetary policy. So it's taking all that into account in the context of a supply shock that led us to the decision that we made.

**Sarah Eisen** (4:15)
Speaking of not liking forward guidance, which is going to make this job so much harder for me, this panel. Chairman Warsh, we have inflation in the US that is higher than Europe's and farther away from our target. So why are we not raising interest rates?

**Kevin Warsh** (4:30)
I was hoping you'd ask me about forward guidance.

**Sarah Eisen** (4:32)
We'll get there. Because you have so much to say there too, right?

**Kevin Warsh** (4:36)
So we have found common cause. It's what President Lagarde said. I liked her when we met 20 years ago when she was finance minister. After that answer, I love her.
Reform does not stop at the water's edge. What I found most exhilarating about the last two days here is the kind of discussions that we've begun at the Federal Reserve has a lot of people at this conference open-minded, keen to think anew about the conduct of monetary policy.