Opening remarks for ‘Monetary policy and imbalances’ panel

It's an honor to participate in this important conference alongside my distinguished fellow panelists. These are my views and not necessarily those of my Federal Reserve colleagues.

Before I address more traditional imbalances, I’d like to share an update on global oil balances from my vantage point in Texas. The closure of the Strait of Hormuz has reduced global oil supply on net by nearly 13 million barrels per day, or more than 10 percent. Inventory drawdowns have filled much of that shortfall so far, including through increased exports from the United States. However, inventories are finite.

Industry leaders see little scope to increase oil production outside the Persian Gulf in the near term. The Dallas Fed’s latest survey of energy executives asked how U.S. oil production will respond to the war. Most respondents anticipate output will rise by no more than 250,000 barrels per day by the end of 2026 and 500,000 barrels per day in 2027.

My contacts give three reasons for the constrained response. First, producers exercise strict capital discipline. Second, they face tight supplies of labor and other inputs. Third, many wells produce both oil and natural gas, but there is little pipeline capacity to move more gas out of the fields in West Texas. Gas prices at the wellhead in the Permian Basin are already deeply negative. Fixed export capacity also means that in the near term, U.S. natural gas cannot fill much of the gap in global gas supplies from the closure of the strait.

With supplies highly constrained, if shipping through the strait does not soon return to prewar levels, world oil and natural gas consumption could need to fall more meaningfully than it has so far. The economic consequences would depend on the degree to which end users can switch to other energy sources or use energy more efficiently, versus curtailing economic activity.

One way or another, I expect energy markets to come into rough balance before too long. If the molecules aren’t available, the world can’t consume them.

The same physics don’t apply to trade, fiscal and financial imbalances. In these matters, extreme positions can build up and persist for years. And when they do, economies become more vulnerable to shocks.

The market for U.S. Treasury securities experienced such a shock at the start of the pandemic. Since the Global Financial Crisis nearly two decades ago, Treasury issuance has outpaced dealers’ balance sheet capacity. A flood of customers sold Treasuries in the so-called dash for cash in March 2020. Dealers, scaled for the smaller market of the past, struggled to intermediate the surge. Market liquidity deteriorated, and the stresses could have disrupted the flow of credit throughout the economy had the Federal Reserve not responded forcefully.

Drawing on lessons learned in that experience, the U.S. authorities have taken substantial steps to strengthen Treasury market resilience. These actions include a central clearing mandate for many private sector transactions, increased data collection and transparency, and enhancements to Federal Reserve liquidity tools. I believe the Federal Open Market Committee (FOMC) could further promote market resilience and effective monetary policy implementation by centrally clearing our open market operations, even though they are not subject to the mandate. The FOMC should also deepen its strategies and tools for distinguishing support for smooth Treasury market functioning from monetary accommodation. Liquidity tools such as the standing repo operation can achieve that separation, but providing funding is not always sufficient. Developing a richer toolkit in calm times would support a more nimble and targeted response to any future stresses.

Public policies and industry practices must also adapt to maintain the Treasury market’s strength when new imbalances emerge. Levered investors such as hedge funds have acquired a growing share of Treasuries in recent years. Levered positions can unwind rapidly in the event of price or funding shocks. The Treasury market underpins government finance, the flow of investment, and the implementation and transmission of monetary policy. Its resilience deserves, and requires, ongoing effort and vigilance.

The classic trade, fiscal and financial imbalances often capture attention because they leave economies vulnerable to rapid, dramatic adjustments. But slower-moving forces can also push the global economy out of balance and create strains.

The marked global decrease in fertility is one such force. The world’s total fertility rate fell from 5 lifetime live births per woman in the 1950s to 2.25 in 2024. In part, women are choosing to have fewer children because infant mortality has decreased and more children survive to adulthood. And, in part, growing economic and societal opportunities for women play a role. Those are good things. At this point, though, fertility globally is just above the rate of 2.1 needed to maintain a stable population. And total fertility is below replacement in Asia, the Americas and Europe.

We have been living in a world of growing population. But at some point in the second half of this century, demographers predict it will be a shrinking one.

The resulting imbalances could range widely. A shrinking population will have fewer young workers to care for the elderly and produce the goods and services on which retirees depend. Fewer people will share the burden of government spending. Some governments will face unpalatable choices between rising debt and fiscal consolidation. Accumulated capital—houses, schools, offices, factories—will remain in place even as population falls. Some of this capital overhang may make workers more productive or reduce housing costs, but some may go to waste.

Research also suggests aging populations innovate less. So lower fertility might reduce not just the growth rate of aggregate output, but also the growth rate of output per capita. At the same time, longer and healthier lifespans, increases in average education levels and technological progress could let smaller populations produce more than they can today. And there are less measurable but still meaningful cultural consequences: What will a community feel like when it has few young children?

Many of these are familiar considerations here in Japan, where fertility fell sooner than elsewhere. But policymakers in many other countries are only beginning to grapple with them. And the potential responses change when population growth is low worldwide. For example, while individual countries may seek immigrants to offset declines in births, that solution will not work planet-wide.

While forecasts are uncertain, reduced population growth appears very likely to shape the global economic trajectory in coming decades. Monetary policymakers will need a new understanding of what the data look like when the economy is in balance. Near-zero job growth and lower aggregate GDP growth will not be the bad signs they once were. Shifts in growth rates and fiscal positions could also affect the neutral interest rate.

For policy analysts and scholars more generally, the questions are deeper: Why has fertility fallen below replacement in so many places? What policies might reverse that decline? If populations fall, what are the best ways for countries to keep their labor markets, capital markets and fiscal positions well balanced? And how might population decline interact with new technologies that appear poised to reshape human workers’ economic role?

These questions call for focused consideration in the years ahead. Thank you.