Ben S Bernanke: Monetary policy since the onset of the crisis
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve
System, at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole,
Wyoming, 31 August 2012.
* * *
When we convened in Jackson Hole in August 2007, the Federal Open Market Committee's
(FOMC) target for the federal funds rate was 5-1/4 percent. Sixteen months later, with the
financial crisis in full swing, the FOMC had lowered the target for the federal funds rate to
nearly zero, thereby entering the unfamiliar territory of having to conduct monetary policy
with the policy interest rate at its effective lower bound. The unusual severity of the recession
and ongoing strains in financial markets made the challenges facing monetary policymakers
all the greater.
Today I will review the evolution of U.S. monetary policy since late 2007. My focus will be the
Federal Reserve's experience with nontraditional policy tools, notably those based on the
management of the Federal Reserve's balance sheet and on its public communications. I'll
discuss what we have learned about the efficacy and drawbacks of these less familiar forms
of monetary policy, and I'll talk about the implications for the Federal Reserve's ongoing
efforts to promote a return to maximum employment in a context of price stability.
Monetary policy in 2007 and 2008
When significant financial stresses first emerged, in August 2007, the FOMC responded
quickly, first through liquidity actions - cutting the discount rate and extending term loans to
banks - and then, in September, by lowering the target for the federal funds rate by 50 basis
points.1 As further indications of economic weakness appeared over subsequent months, the
Committee reduced its target for the federal funds rate by a cumulative 325 basis points,
leaving the target at 2 percent by the spring of 2008.
The Committee held rates constant over the summer as it monitored economic and financial
conditions. When the crisis intensified markedly in the fall, the Committee responded by
cutting the target for the federal funds rate by 100 basis points in October, with half of this
easing coming as part of an unprecedented coordinated interest rate cut by six major central
banks. Then, in December 2008, as evidence of a dramatic slowdown mounted, the
Committee reduced its target to a range of 0 to 25 basis points, effectively its lower bound.
That target range remains in place today.
Despite the easing of monetary policy, dysfunction in credit markets continued to worsen. As
you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary
steps to provide liquidity and support credit market functioning, including the establishment of
a number of emergency lending facilities and the creation or extension of currency swap
agreements with 14 central banks around the world.2 In its role as banking regulator, the
Federal Reserve also led stress tests of the largest U.S. bank holding companies, setting the
stage for the companies to raise capital. These actions - along with a host of interventions by
other policymakers in the United States and throughout the world - helped stabilize global
financial markets, which in turn served to check the deterioration in the real economy and the
emergence of deflationary pressures.
Unfortunately, although it is likely that even worse outcomes had been averted, the damage
to the economy was severe. The unemployment rate in the United States rose from about
6 percent in September 2008 to nearly 9 percent by April 2009 - it would peak at 10 percent
in October - while inflation declined sharply. As the crisis crested, and with the federal funds
rate at its effective lower bound, the FOMC turned to nontraditional policy approaches to
support the recovery.
As the Committee embarked on this path, we were guided by some general principles and
some insightful academic work but - with the important exception of the Japanese
case - limited historical experience. As a result, central bankers in the United States, and
those in other advanced economies facing similar problems, have been in the process of
learning by doing. I will discuss some of what we have learned, beginning with our
experience conducting policy using the Federal Reserve's balance sheet, then turn to our
use of communications tools.
Balance sheet tools
In using the Federal Reserve's balance sheet as a tool for achieving its mandated objectives
of maximum employment and price stability, the FOMC has focused on the acquisition of
longer-term securities - specifically, Treasury and agency securities, which are the principal
types of securities that the Federal Reserve is permitted to buy under the Federal Reserve
Act.3 One mechanism through which such purchases are believed to affect the economy is
the so-called portfolio balance channel, which is based on the ideas of a number of
well-known monetary economists, including James Tobin, Milton Friedman, Franco
Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that,
for a variety of reasons, different classes of financial assets are not perfect substitutes in
investors' portfolios.4 For example, some institutional investors face regulatory restrictions on
the types of securities they can hold, retail investors may be reluctant to hold certain types of
assets because of high transactions or information costs, and some assets have risk
characteristics that are difficult or costly to hedge.
Imperfect substitutability of assets implies that changes in the supplies of various assets
available to private investors may affect the prices and yields of those assets. Thus, Federal
Reserve purchases of mortgage-backed securities (MBS), for example, should raise the
prices and lower the yields of those securities; moreover, as investors rebalance their
portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of
the assets they buy should rise and their yields decline as well. Declining yields and rising
asset prices ease overall financial conditions and stimulate economic activity through
channels similar to those for conventional monetary policy. Following this logic, Tobin
suggested that purchases of longer-term securities by the Federal Reserve during the Great
Depression could have helped the U.S. economy recover despite the fact that short-term
3
Agency securities are securities issued by the government-sponsored enterprises (GSEs) and include both
mortgage-backed securities guaranteed by GSEs and GSE debt. Since August 2008, Fannie Mae and Freddie
Mac have been in government conservatorship with capital support provided by the U.S. Treasury. The
Federal Reserve's net acquisitions of securities are financed by the creation of commercial bank reserves,
which in turn are held in accounts at the Federal Reserve. (*The text of this footnote has been revised since its
original release.)
4
See Tobin (1965, 1969), Modigliani and Sutch (1966), Brunner and Meltzer (1973), and Friedman and
Schwartz (1982). Nelson (2011) discusses the relevance of Friedman's views for recent Federal
Reserve policy. For modern treatments of the portfolio balance channel in a macroeconomic context,
see Andrés, López-Salido, and Nelson (2004). The portfolio balance channel would be inoperative under
various strong assumptions that I view as empirically implausible, such as complete and frictionless
financial markets and full internalization by private investors of the government's balance sheet
(Ricardian equivalence).
rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds
by the Bank of Japan to help overcome Japan's deflationary trap.5
Large-scale asset purchases can influence financial conditions and the broader economy
through other channels as well. For instance, they can signal that the central bank intends to
pursue a persistently more accommodative policy stance than previously thought, thereby
lowering investors' expectations for the future path of the federal funds rate and putting
additional downward pressure on long-term interest rates, particularly in real terms. Such
signaling can also increase household and business confidence by helping to diminish
concerns about "tail" risks such as deflation. During stressful periods, asset purchases may
also improve the functioning of financial markets, thereby easing credit conditions in some
sectors.
With the space for further cuts in the target for the federal funds rate increasingly limited, in
late 2008 the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). In
November, the FOMC announced a program to purchase a total of $600 billion in agency
MBS and agency debt.6 In March 2009, the FOMC expanded this purchase program
substantially, announcing that it would purchase up to $1.25 trillion of agency MBS, up to
$200 billion of agency debt, and up to $300 billion of longer-term Treasury debt.7 These
purchases were completed, with minor adjustments, in early 2010.8 In November 2010, the
FOMC announced that it would further expand the Federal Reserve's security holdings by
purchasing an additional $600 billion of longer-term Treasury securities over a period ending
in mid-2011.9
About a year ago, the FOMC introduced a variation on its earlier purchase programs, known
as the maturity extension program (MEP), under which the Federal Reserve would purchase
$400 billion of long-term Treasury securities and sell an equivalent amount of shorter-term
Treasury securities over the period ending in June 2012.10 The FOMC subsequently
extended the MEP through the end of this year.11 By reducing the average maturity of the
securities held by the public, the MEP puts additional downward pressure on longer-term
interest rates and further eases overall financial conditions.
How effective are balance sheet policies? After nearly four years of experience with
large-scale asset purchases, a substantial body of empirical work on their effects has
emerged. Generally, this research finds that the Federal Reserve's large-scale purchases
have significantly lowered long-term Treasury yields. For example, studies have found that
the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program
reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The
$600 billion in Treasury purchases under the second LSAP program has been credited with
lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering
5
See Tobin (1965) and Friedman (2000).
6
See Board of Governors (2008).
7
See Board of Governors (2009).
8
Several months later, to avoid an implicit tightening in policy associated with the runoff of maturing securities, the
Federal Reserve also began reinvesting the principal payments received on agency MBS and debt into Treasury
securities and continued to roll over maturing longer-term Treasury debt. See Board of Governors (2010a).
9
See Board of Governors (2010b).
10
At the same time, the Committee announced that it would reinvest principal payments from agency debt and
agency MBS into agency MBS. See Board of Governors (2011a).
11
See Board of Governors (2012a).
12
Studies of the effects of securities purchases include, among others, D'Amico and King (forthcoming), Gagnon
and others (2011), Hamilton and Wu (2012), Krishnamurthy and Vissing-Jørgensen (2011), Meaning and Zhu
(2011), Swanson (2011), D'Amico and others (forthcoming), and Wright (2012).
the cumulative influence of all the Federal Reserve's asset purchases, including those made
under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury
yield.13 These effects are economically meaningful.
Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury
yields. Notably, LSAPs have been found to be associated with significant declines in the
yields on both corporate bonds and MBS.14 The first purchase program, in particular, has
been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also
appear to have boosted stock prices, presumably both by lowering discount rates and by
improving the economic outlook; it is probably not a coincidence that the sustained recovery
in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly
expand securities purchases. This effect is potentially important because stock values affect
both consumption and investment decisions.
While there is substantial evidence that the Federal Reserve's asset purchases have lowered
longer-term yields and eased broader financial conditions, obtaining precise estimates of the
effects of these operations on the broader economy is inherently difficult, as the
counterfactual - how the economy would have performed in the absence of the Federal
Reserve's actions - cannot be directly observed. If we are willing to take as a working
assumption that the effects of easier financial conditions on the economy are similar to those
observed historically, then econometric models can be used to estimate the effects of LSAPs
on the economy. Model simulations conducted at the Federal Reserve generally find that the
securities purchase programs have provided significant help for the economy. For example,
a study using the Board's FRB/US model of the economy found that, as of 2012, the first two
rounds of LSAPs may have raised the level of output by almost 3 percent and increased
private payroll employment by more than 2 million jobs, relative to what otherwise would
have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the
Federal Reserve, so it is of interest that researchers have found the financial and
macroeconomic effects of the British programs to be qualitatively similar to those in the
United States.16
13
See Pandl (2012), Meyer and Bomfim (2012), and Li and Wei (2012). One important feature of these analyses
is that they are not just based on event studies. For example, the Li and Wei study employs a no-arbitrage
model of the term structure of interest rates and time-series data from 1994 to 2007 to estimate the effects on
term premiums of changes in the amount of longer-term Treasury debt and agency MBS held by the public.
Using this model, Li and Wei are able to infer the effects of the two LSAP programs and the MEP, controlling
for changes in the expected path of the federal funds rate and its implications for long-term interest rates.
Their analysis suggests that the Federal Reserve's asset purchases are an important factor underlying the
current very low level of the term premium in longer-term rates.
14
On corporate bonds, see Krishnamurthy and Vissing-Jørgensen (2011) and Wright (2012); Fuster and Willen
(2010), Hancock and Passmore (2011), and Wright (2012) report results on mortgage yields. Early skeptics of
balance sheet policies worried that any effects on Treasury yields would not be transmitted to other interest
rates and asset prices. The evidence reported in these papers refutes this concern, as does the fact that
spreads of investment-grade corporate bond yields and mortgage rates over comparable-maturity Treasury
yields were not elevated from late 2009 through mid-2011; those spreads have since risen somewhat,
reflecting in part concerns about the European situation and the pace of the U.S. economic recovery.
15
See Chung and others (2012) for details of assumptions and simulation results. Focusing only on the second
LSAP program, Fuhrer and Olivei (2011) find comparable effects, attributing to that program a bit less than a
1 percent increase in output and 700,000 new jobs. Using different methodologies, Kiley (2012) finds
significantly smaller effects and Baumeister and Benati (2010) find larger effects.
16
Joyce, Tong, and Woods (2011) summarize a range of estimates of the macroeconomic effects of the Bank of
England's quantitative easing program, which, relative to size of the U.K. economy, is roughly equivalent in
scale to the Federal Reserve's two LSAP programs. Those estimates suggest a peak effect of 1-1/2 to
2 percent for real output and between 3/4 and 1-1/2 percent for inflation in the United Kingdom. See also
Baumeister and Benati (2010) and Christensen and Rudebusch (2012).
To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with
caution. It is likely that the crisis and the recession have attenuated some of the normal
transmission channels of monetary policy relative to what is assumed in the models; for
example, restrictive mortgage underwriting standards have reduced the effects of lower
mortgage rates. Further, the estimated macroeconomic effects depend on uncertain
estimates of the persistence of the effects of LSAPs on financial conditions.17 Overall,
however, a balanced reading of the evidence supports the conclusion that central bank
securities purchases have provided meaningful support to the economic recovery while
mitigating deflationary risks.
Now I will turn to our use of communications tools.
Communication tools
Clear communication is always important in central banking, but it can be especially
important when economic conditions call for further policy stimulus but the policy rate is
already at its effective lower bound. In particular, forward guidance that lowers private-sector
expectations regarding future short-term rates should cause longer-term interest rates to
decline, leading to more accommodative financial conditions.18
The Federal Reserve has made considerable use of forward guidance as a policy tool.19
From March 2009 through June 2011, the FOMC's postmeeting statement noted that
economic conditions "are likely to warrant exceptionally low levels of the federal funds rate
for an extended period."20 At the August 2011 meeting, the Committee made its guidance
more precise by stating that economic conditions would likely warrant that the federal funds
rate remain exceptionally low "at least through mid-2013."21 At the beginning of this year, the
FOMC extended the anticipated period of exceptionally low rates further, to "at least through
late 2014," guidance that has been reaffirmed at subsequent meetings.22 As the language
indicates, this guidance is not an unconditional promise; rather, it is a statement about the
FOMC's collective judgment regarding the path of policy that is likely to prove appropriate,
given the Committee's objectives and its outlook for the economy.
The views of Committee members regarding the likely timing of policy firming represent a
balance of many factors, but the current forward guidance is broadly consistent with
prescriptions coming from a range of standard benchmarks, including simple policy rules and
optimal control methods.23 Some of the policy rules informing the forward guidance relate
17
For example, while the macroeconomic effects reported by Chung and others (2012) are consistent with the
persistence of financial effects as estimated by Li and Wei (2012), Wright (2012) finds much less persistence
using a different methodology. Kiley (2012) also provides arguments and evidence for why LSAPs may have
been less stimulative than found in Chung and others (2012) and Fuhrer and Olivei (2011).
18
See Eggertsson and Woodford (2003) and Levin and others (2010) for discussions of the role of
communication at the zero lower bound.
19
As with asset purchases, the Federal Reserve has not been alone in using forward policy guidance. The Bank
of Canada, for example, announced in April 2009 its intention to hold the overnight policy at 25 basis points
through the second quarter of 2010; this conditional guidance was subject to the bank's assessment of future
inflation trends. The Bank of Japan has long provided forward guidance linking policy to economic
developments. In March 2001, for example, the Bank of Japan committed to maintain its policy rate at zero
until Japanese consumer prices stabilized or exhibited a year-on-year increase. The Riksbank and the
Reserve Bank of New Zealand in recent years have made statements about the future course of the policy
rate similar to those provided by the Federal Reserve and the Bank of Canada.
20
See Board of Governors (2009).
21
See Board of Governors (2011b).
22
See Board of Governors (2012b).
23
Yellen (2012a, 2012b) provides details on the current forward guidance.
policy interest rates to familiar determinants, such as inflation and the output gap. But a
number of considerations also argue for planning to keep rates low for a longer time than
implied by policy rules developed during more normal periods. These considerations include
the need to take out insurance against the realization of downside risks, which are
particularly difficult to manage when rates are close to their effective lower bound; the
possibility that, because of various unusual headwinds slowing the recovery, the economy
needs more policy support than usual at this stage of the cycle; and the need to compensate
for limits to policy accommodation resulting from the lower bound on rates.24
Has the forward guidance been effective? It is certainly true that, over time, both investors
and private forecasters have pushed out considerably the date at which they expect the
federal funds rate to begin to rise; moreover, current policy expectations appear to align well
with the FOMC's forward guidance. To be sure, the changes over time in when the private
sector expects the federal funds rate to begin firming resulted in part from the same
deterioration of the economic outlook that led the FOMC to introduce and then extend its
forward guidance. But the private sector's revised outlook for the policy rate also appears to
reflect a growing appreciation of how forceful the FOMC intends to be in supporting a
sustainable recovery. For example, since 2009, forecasters participating in the Blue Chip
survey have repeatedly marked down their projections of the unemployment rate they expect
to prevail at the time that the FOMC begins to lift the target for the federal funds rate away
from zero. Thus, the Committee's forward guidance may have conveyed a greater
willingness to maintain accommodation than private forecasters had previously believed.25
The behavior of financial market prices in periods around changes in the forward guidance is
also consistent with the view that the guidance has affected policy expectations.26
Making policy with nontraditional tools: a cost-benefit framework
Making monetary policy with nontraditional tools is challenging. In particular, our experience
with these tools remains limited. In this context, the FOMC carefully compares the expected
benefits and costs of proposed policy actions.
The potential benefit of policy action, of course, is the possibility of better economic
outcomes - outcomes more consistent with the FOMC's dual mandate. In light of the
evidence I discussed, it appears reasonable to conclude that nontraditional policy tools have
been and can continue to be effective in providing financial accommodation, though we are
less certain about the magnitude and persistence of these effects than we are about those of
more-traditional policies.
24
On responding to unusual headwinds (technically, a situation in which a lower real interest rate is required to
achieve full employment), see Williams (2009). On risk management near the zero lower bound, see Orphanides
and Wieland (2000). On compensating for limits to policy accommodation attributable to the lower bound on
rates, see Reifschneider and Williams (2000). Another argument for sustaining low rates follows because optimal
policies may involve a slow, or "inertial," adjustment of rates; see, for example, Woodford (2003).
25
In October 2009, private forecasters in the Blue Chip survey projected that the unemployment rate would be
near 10 percent and overall inflation as measured by the consumer price index (CPI) would be 2 percent at
the time that short-term interest rates (three-month Treasury bill rates) rose above 50 basis points. By March
2011, forecasters had lowered the projected unemployment rate at the policy liftoff date to about
8-1/2 percent, again accompanied by inflation near 2 percent. And by March 2012, forecasters projected that
the unemployment rate would have fallen below 7-1/2 percent, and that CPI inflation would be moving up to
close to 2-1/2 percent, before short-term interest rates would rise appreciably above the current target range.
26
For example, Board staff members have performed event studies of the movement in Eurodollar futures prices
and other financial variables immediately following the release of the August 2011 and January 2012 FOMC
statements. In both cases, the provision of specific guidance about the likely date of liftoff was associated with
a noticeable flattening of the expected path of the federal funds rate. For a formal analysis of the effectiveness
of the FOMC's forward guidance, see Swanson and Williams (2012).
The possible benefits of an action, however, must be considered alongside its potential
costs. I will focus now on the potential costs of LSAPs.
One possible cost of conducting additional LSAPs is that these operations could impair the
functioning of securities markets. As I noted, the Federal Reserve is limited by law mainly to
the purchase of Treasury and agency securities; the supply of those securities is large but
finite, and not all of the supply is actively traded. Conceivably, if the Federal Reserve became
too dominant a buyer in certain segments of these markets, trading among private agents
could dry up, degrading liquidity and price discovery. As the global financial system depends
on deep and liquid markets for U.S. Treasury securities, significant impairment of those
markets would be costly, and, in particular, could impede the transmission of monetary
policy. For example, market disruptions could lead to higher liquidity premiums on Treasury
securities, which would run counter to the policy goal of reducing Treasury yields. However,
although market capacity could ultimately become an issue, to this point we have seen few if
any problems in the markets for Treasury or agency securities, private-sector holdings of
securities remain large, and trading among private market participants remains robust.
A second potential cost of additional securities purchases is that substantial further
expansions of the balance sheet could reduce public confidence in the Fed's ability to exit
smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a
reduction in confidence might increase the risk of a costly unanchoring of inflation
expectations, leading in turn to financial and economic instability. It is noteworthy, however,
that the expansion of the balance sheet to date has not materially affected inflation
expectations, likely in part because of the great emphasis the Federal Reserve has placed
on developing tools to ensure that we can normalize monetary policy when appropriate, even
if our securities holdings remain large. In particular, the FOMC will be able to put upward
pressure on short-term interest rates by raising the interest rate it pays banks for reserves
they hold at the Fed. Upward pressure on rates can also be achieved by using
reserve-draining tools or by selling securities from the Federal Reserve's portfolio, thus
reversing the effects achieved by LSAPs. The FOMC has spent considerable effort planning
and testing our exit strategy and will act decisively to execute it at the appropriate time.
A third cost to be weighed is that of risks to financial stability. For example, some observers
have raised concerns that, by driving longer-term yields lower, nontraditional policies could
induce an imprudent reach for yield by some investors and thereby threaten financial
stability. Of course, one objective of both traditional and nontraditional policy during
recoveries is to promote a return to productive risk-taking; as always, the goal is to strike the
appropriate balance. Moreover, a stronger recovery is itself clearly helpful for financial
stability. In assessing this risk, it is important to note that the Federal Reserve, both on its
own and in collaboration with other members of the Financial Stability Oversight Council, has
substantially expanded its monitoring of the financial system and modified its supervisory
approach to take a more systemic perspective. We have seen little evidence thus far of
unsafe buildups of risk or leverage, but we will continue both our careful oversight and the
implementation of financial regulatory reforms aimed at reducing systemic risk.
A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve
could incur financial losses should interest rates rise to an unexpected extent. Extensive
analyses suggest that, from a purely fiscal perspective, the odds are strong that the Fed's
asset purchases will make money for the taxpayers, reducing the federal deficit and debt.27
And, of course, to the extent that monetary policy helps strengthen the economy and raise
incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely
fiscal perspective is too narrow: Because Americans are workers and consumers as well as
taxpayers, monetary policy can achieve the most for the country by focusing generally on
improving economic performance rather than narrowly on possible gains or losses on the
Federal Reserve's balance sheet.
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all
likelihood, they will also vary over time, depending on factors such as the state of the
economy and financial markets and the extent of prior Federal Reserve asset purchases.
Moreover, nontraditional policies have potential costs that may be less relevant for traditional
policies. For these reasons, the hurdle for using nontraditional policies should be higher than
for traditional policies. At the same time, the costs of nontraditional policies, when considered
carefully, appear manageable, implying that we should not rule out the further use of such
policies if economic conditions warrant.
Economic prospects
The accommodative monetary policies I have reviewed today, both traditional and
nontraditional, have provided important support to the economic recovery while helping to
maintain price stability. As of July, the unemployment rate had fallen to 8.3 percent from its
cyclical peak of 10 percent and payrolls had risen by 4 million jobs from their low point. And
despite periodic concerns about deflation risks, on the one hand, and repeated warnings that
excessive policy accommodation would ignite inflation, on the other hand, inflation (except
for temporary deviations caused primarily by swings in commodity prices) has remained near
the Committee's 2 percent objective and inflation expectations have remained stable. Key
sectors such as manufacturing, housing, and international trade have strengthened, firms'
investment in equipment and software has rebounded, and conditions in financial and credit
markets have improved.
Notwithstanding these positive signs, the economic situation is obviously far from
satisfactory. The unemployment rate remains more than 2 percentage points above what
most FOMC participants see as its longer-run normal value, and other indicators - such as
the labor force participation rate and the number of people working part time for economic
reasons - confirm that labor force utilization remains at very low levels. Further, the rate of
improvement in the labor market has been painfully slow. I have noted on other occasions
that the declines in unemployment we have seen would likely continue only if economic
growth picked up to a rate above its longer-term trend.28 In fact, growth in recent quarters
has been tepid, and so, not surprisingly, we have seen no net improvement in the
unemployment rate since January. Unless the economy begins to grow more quickly than it
has recently, the unemployment rate is likely to remain far above levels consistent with
maximum employment for some time.
In light of the policy actions the FOMC has taken to date, as well as the economy's natural
recovery mechanisms, we might have hoped for greater progress by now in returning to
maximum employment. Some have taken the lack of progress as evidence that the financial
crisis caused structural damage to the economy, rendering the current levels of
unemployment impervious to additional monetary accommodation. The literature on this
issue is extensive, and I ca