For release on delivery
9:10 a.m. EDT
May 13, 2019
The Federal Reserve's Review of Its Monetary Policy Strategy, Tools, and
Communication Practices
Remarks by
Richard H. Clarida
Vice Chair
Board of Governors of the Federal Reserve System
at
"New England Perspectives on Fed Policymaking: A 'Fed Listens' Conference"
hosted by the Federal Reserve Bank of Boston
Boston, Massachusetts
May 13, 2019
I am pleased to attend this Fed Listens event providing a New England
perspective for the Federal Reserve's review of our monetary policy strategy, tools, and
communication practices.1 We are bringing open minds to our review and are seeking a
broad range of perspectives. To us, it simply seems like good institutional practice to
engage with a wide range of interested individuals and groups as part of a comprehensive
approach to enhanced transparency and accountability.2
Motivation for the Review
The Congress charged the Federal Reserve with achieving a dual mandate-
maximum employment and price stability-and this review will take this mandate as
given. We will also take as given that a 2 percent rate of inflation in the price index for
personal consumption expenditures is the operational goal most consistent with our price-
stability mandate. While we believe that our existing strategy, tools, and
communications practices have generally served the public well, we are eager to evaluate
ways they might be improved. That said, based on the experience of other central banks
that have undertaken similar reviews, our review is more likely to produce evolution, not
a revolution, in the way we conduct monetary policy.
With the U.S. economy operating at or close to our maximum-employment and
price-stability goals, now is an especially opportune time for this review. The
unemployment rate is at a 50-year low, and inflation is running close to our 2 percent
objective. We want to ensure that we continue to meet our statutory goals in coming
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years. In addition, we will evaluate the new policy tools and enhanced communication
practices the Federal Reserve deployed in response to the Global Financial Crisis and the
Great Recession. Furthermore, the U.S. and foreign economies have evolved
significantly since before the crisis.
Perhaps most importantly, neutral interest rates appear to have fallen in the United
States and abroad.3 This global decline in neutral rates is widely expected to persist for
years and likely reflects several factors, including aging populations, changes in risk-
taking behavior, and a slowdown in technology growth. These factors' contributions are
highly uncertain, but, irrespective of their precise role, the policy implications of the
decline in neutral rates are important. All else being equal, a fall in neutral rates
increases the likelihood that a central bank's policy rate will reach its effective lower
bound in future economic downturns. That development, in turn, could make it more
difficult during downturns for monetary policy to support household spending, business
investment, and employment and keep inflation from falling too low.4
Another key development in recent decades is that inflation appears less
responsive to resource slack, implying a change in the dynamic relationship between
inflation and employment.5 This change is, in a sense, a proverbial double-edged sword.
It permits the Federal Reserve to support employment more aggressively during
3
For evidence of a fall in neutral rates of interest in the United States and abroad, see, among several
contributions, King and Low (2014); Holston, Laubach, and Williams (2017); Rachel and Smith (2017);
and Brand, Bielecki, and Penalver (2018).
4
For assessments of the risks that U.S. monetary policy will be constrained by the effective lower bound
and its implications for economic activity and inflation, see Kiley and Roberts (2017), Erceg and others
(2018), Swanson (2018), and Chung and others (2019).
5
The apparent diminished responsiveness of inflation to resource slack is known in economic research as a
flattening of the short-run Phillips curve. For evidence of this flattening in the slope of the Phillips curve in
the United States and abroad, see, among others, Simon, Matheson, and Sandri (2013); Blanchard, Cerutti,
and Summers (2015); and Bank for International Settlements (2017).
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downturns-as was the case during and after the Great Recession-because a sustained
inflation breakout is less likely when inflation is less responsive to employment
conditions.6 However, that dynamic also increases the cost, in terms of economic output,
of reversing unwelcome increases in longer-run inflation expectations. Thus, it is all the
more important that longer-run inflation expectations remain anchored at levels
consistent with our 2 percent inflation objective.7
Activities and Timeline for the Review
Our monetary policy review will have several components.8 The Board and the
Reserve Banks are hosting Fed Listens events-such as this one in Boston-in which we
are hearing from, among others, business and labor leaders, community development
advocates, and academics. Next month, we are holding a System research conference at
the Federal Reserve Bank of Chicago, with speakers and panelists from outside the Fed.
6
One potential contributor to the flattening of the Phillips curve is a change in the conduct of monetary
policy since the 1980s toward greater stabilization of inflation and economic activity; for evidence of such
a change, see Clarida, Galí, and Gertler (2000); Boivin and Giannoni (2006); and Boivin, Kiley, and
Mishkin (2010). As discussed in Roberts (2006) and Bullard (2018), greater stabilization on the part of a
central bank can lead to the estimation of flatter Phillips curves in reduced-form regressions. Similarly, the
adoption of an explicit inflation objective, along with greater certainty regarding the conduct of monetary
policy, can help anchor longer-term inflation expectations and stabilize actual inflation in response to
shocks.
7
See Yellen (2015) for a discussion of inflation dynamics and monetary policy; see Erceg and others
(2018) for a quantitative exploration of the monetary policy implications of a flat Phillips curve in an
uncertain economic environment. Since the mid-1980s, movements in both realized inflation and measures
of longer-term inflation expectations have been somewhat muted, complicating the task of extracting the
precise role of inflation expectations as a determinant of realized inflation. Faust and Wright (2013) review
the literature on inflation forecasting and present evidence in support of the conclusion that measures of
inflation expectations help predict the trend in inflation. Cecchetti and others (2017) showed that while the
level of realized inflation and four-quarter-ahead inflation expectations are positively correlated, changes in
these variables have been largely uncorrelated since the mid-1980s. These authors suggest that, in a low
and stable inflation environment, policymakers should pay attention to a wide array of other indicators in
determining the implications of movements in realized inflation and measures of inflation expectations.
8
Information about the review and the events associated with it are available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-andcommunications.htm.
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The program includes overviews by academic experts of themes that are central to the
review.
Building on the perspectives we hear and on staff analysis, the Federal Open
Market Committee will perform its own assessment of how it conducts monetary policy,
beginning around the middle of the year. We expect to make our conclusions public in
the first half of 2020.
Concluding Thoughts
The economy is constantly evolving, bringing with it new policy challenges. So it
makes sense for us to remain open minded as we assess current practices and consider
ideas that could potentially enhance our ability to deliver on the goals the Congress has
assigned us. For this reason, my colleagues and I do not want to preempt or to predict
our ultimate finding. What I can say is that any changes to our conduct of monetary
policy that we might make will be aimed solely at improving our ability to achieve and
sustain our dual-mandate objectives in the world we live in today.
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References
Bank for International Settlements (2017). 87th Annual Report. Basel, Switzerland:
BIS, June, https://www.bis.org/publ/arpdf/ar2017e.pdf.
Blanchard, Olivier, Eugenio Cerutti, and Lawrence Summers (2015). "Inflation and
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Boivin, Jean, and Marc P. Giannoni (2006). "Has Monetary Policy Become More
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Boivin, Jean, Michael T. Kiley, and Frederic S. Mishkin (2010). "How Has the Monetary
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