For release on delivery
9:00 a.m. EDT
August 31, 2020
The Federal Reserve's New Monetary Policy Framework: A Robust Evolution
Remarks by
Richard H. Clarida
Vice Chair
Board of Governors of the Federal Reserve System
at the
Peterson Institute for International Economics
Washington, D.C.
(via webcast)
August 31, 2020
Last week, the Federal Reserve reached an important milestone in its ongoing
review of its monetary policy strategy, tools, and communication practices with the
unanimous approval and release of a new Statement on Longer-Run Goals and Monetary
Policy Strategy.1 In my remarks today, I will discuss our new framework and highlight
some important policy implications that flow from the revised statement and our new
strategy.2 I believe that this new statement and strategy represent a critical and robust
evolution of our framework that will best equip the Federal Reserve to achieve our dual-
mandate objectives on a sustained basis in the world in which we conduct policy today
and for the foreseeable future.
I will divide my remarks into four parts. First, I will discuss the factors that
motivated the Federal Reserve in November 2018 to announce it would undertake in
2019 the first-ever public review of its monetary policy strategy, tools, and
communication practices. Second, I will discuss the review process itself, with particular
focus on the economic analysis and public input the Federal Open Market Committee
(FOMC) drew on as it contemplated, over the past 18 months, potential changes to its
policy framework. Third, I will briefly summarize the flexible inflation-targeting
strategy that has been guiding U.S. monetary policy since 2012 in the context of some
important changes in the economic landscape that have become evident since 2012.
1
The revised statement is available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf. Last week, Chair
Powell made the review and the revised statement the focus of his speech at "Navigating the Decade
Ahead: Implications for Monetary Policy," a symposium sponsored by the Federal Reserve Bank of
Kansas City and held in Jackson Hole, Wyoming; see Powell (2020).
2
The views expressed are my own and not necessarily those of other Federal Reserve Board members or
Federal Open Market Committee participants. I would like to thank Etienne Gagnon, Ellen Meade, Jon
Faust, and Trevor Reeve for their assistance in preparing these remarks, and Thomas Laubach for sharing
with me throughout the review process his many keen insights on monetary policy strategy and
communication.
- 2 -
Fourth, I will discuss the major findings of the review as codified in our new Statement
on Longer-Run Goals and Monetary Policy Strategy and highlight some important policy
implications that flow from them. Finally, I will offer some brief concluding remarks
before joining in conversation with my good friend Adam Posen, which, as always, I very
much look forward to.
Motivation for the Review
As my FOMC colleagues and I indicated from the outset, the fact that the Federal
Reserve System chose to conduct this review does not indicate that we believed we have
been poorly served by the framework in place since 2012. Indeed, I would argue that
over the past eight years, the framework served us well and supported the Federal
Reserve's efforts after the Global Financial Crisis (GFC) first to achieve and then, for
several years, to sustain-until cut short this spring by the COVID-19 pandemic-the
operation of the economy at or close to both our statutorily assigned goals of maximum
employment and price stability in what became the longest economic expansion in U.S.
history. Nonetheless, both the U.S. economy-and, equally importantly, our
understanding of the economy-have clearly evolved along several crucial dimensions
since 2012, and we believed that in 2019 it made sense to step back and assess whether,
and in what possible ways, we might refine and rethink our strategy, tools, and
communication practices to achieve and sustain our goals as consistently and robustly as
possible in the global economy in which we operate today and for the foreseeable future.3
Perhaps the most significant change since 2012 in our understanding of the
economy is our reassessment of the neutral real interest rate, r*, that, over the longer run,
- 3 -
is consistent with our maximum-employment and price-stability mandates. In January
2012, the median FOMC participant projected a long-run r* of 2.25 percent, which, in
tandem with the inflation goal of 2 percent, indicated a neutral setting for the federal
funds rate of 4.25 percent. However, in the eight years since 2012, members of the
Committee-as well as outside forecasters and financial market participants-have
repeatedly marked down their estimates of longer-run r* and, thus, the neutral nominal
policy rate.4 Indeed, as of the most recent Summary of Economic Projections (SEP)
released in June, the median FOMC participant currently projects a longer-run r* equal to
just 0.5 percent, which implies a neutral setting for the federal funds rate of 2.5 percent.
Moreover, as is well appreciated, the decline in neutral policy rates since the GFC is a
global phenomenon that is widely expected by forecasters and financial markets to persist
for years to come.5
The substantial decline in the neutral policy rate since 2012 has critical
implications for the design, implementation, and communication of Federal Reserve
monetary policy because it leaves the FOMC with less conventional policy space to cut
rates to offset adverse shocks to aggregate demand. With a diminished reservoir of
conventional policy space, it is much more likely than was appreciated in 2012 that, in
4
See Chair Powell's address in Jackson Hole, Wyoming, last week (Powell, 2020) for an illustration of the
revisions to the macroeconomic projections-including for the longer-run neutral federal funds rate-of
FOMC participants as well as private and public forecasters. The downward revisions to r* over time have
been informed, in part, by the general fall in interest rates and by econometric evidence that suggests that
this fall is of a permanent rather than a cyclical nature. See, among many contributors, Hamilton and others
(2016), Johannsen and Mertens (2018), Laubach and Williams (2016), Del Negro and others (2017), and
López-Salido and others (2020). For discussions of the various factors that might have contributed to this
fall, see Fischer (2016) and Rachel and Smith (2017).
5
For evidence on the global nature of the decline in r*, see King and Low (2014); Holston, Laubach, and
Williams (2017); Wynne and Zhang (2018); and Del Negro and others (2019). For a discussion of global
considerations for U.S. monetary policy, see Obstfeld (2020).
- 4 -
economic downturns, the effective lower bound (ELB) will constrain the ability of the
FOMC to rely solely on the federal funds rate instrument to offset adverse shocks.6 This
development, in turn, makes it more likely that recessions will impart elevated risks of
more persistent downward pressure on inflation and upward pressure on unemployment
that the Federal Reserve's monetary policy should, in design and implementation, seek to
offset throughout the business cycle and not just in downturns themselves.7
Two other, related developments that have also become more evident than they
appeared in 2012 are that price inflation seems less responsive to resource slack, and also,
that estimates of resource slack based on historically estimated price Phillips curve
relationships are less reliable and subject to more material revision than was once
commonly believed.8 For example, in the face of declining unemployment rates that did
not result in excessive cost-push pressure to price inflation, the median of the
Committee's projections of u*-the rate of unemployment consistent in the longer run
with the 2 percent inflation objective-has been repeatedly revised lower, from
6
For assessments of the risk that the federal funds rate will be constrained by the ELB in the future, along
with policy strategies that might mitigate that risk, see Kiley and Roberts (2017); Chung and others (2019);
Hebden and López-Salido (2018); and Bernanke, Kiley, and Roberts (2019).
7
For pre-GFC discussions of the macroeconomic consequences of policy rates being constrained by the
ELB, see Krugman (1998), Eggertsson and Woodford (2003), and Adam and Billi (2007). For the GFC
and its aftermath, using a time-series approach, Eberly, Stock, and Wright (2020) estimate that, in the
absence of the ELB constraint, the labor market recovery would have proceeded at a significantly more
rapid pace than was observed, whereas core inflation would have been only modestly higher because of
inflation's limited sensitivity to resource slack. Using a DSGE (dynamic stochastic general equilibrium)
approach, the mean estimates of Gust and others (2017) suggest that a binding ELB accounted for about
30 percent (roughly 2 percentage points) of the 6 percent contraction in gross domestic product in 2009
relative to the peak in 2007 and was responsible for an even larger fraction of the ensuing slow recovery.
8
For evidence of a flattening of 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 Pfajfar and
Roberts (2018). The difficulties in assessing shortfalls from maximum employment using measures of the
unemployment rate has motivated researchers to explore alternative approaches. See Abraham,
Haltiwanger, and Rendell (2020) for an approach based on the job search and matching framework. See
also the staff discussion of various concepts of unemployment rate benchmarks by Crump, Nekarda, and
Petrosky-Nadeau (2020), which was prepared as background materials for this review.
- 5 -
5.5 percent in January 2012 to 4.1 percent as of the June 2020 SEP.9 Projections of u* by
the Congressional Budget Office and professional forecasters show a similar decline
during this same period and for the same reason.10 In the past several years of the
previous expansion, declines in the unemployment rate occurred in tandem with a notable
and, to me, welcome increase in real wages that was accompanied by an increase in
labor's share of national income, but not a surge in price inflation to a pace inconsistent
with our price-stability mandate and well-anchored inflation expectations. Indeed, this
pattern of mid-cycle declines in unemployment coincident with noninflationary increases
in real wages has been evident in the U.S. data since the 1990s.11
With regard to inflation expectations, there is broad agreement among academics
and policymakers that achieving price stability on a sustainable basis requires that
inflation expectations be well anchored at the rate of inflation consistent with the price-
stability goal. This is especially true in the world that prevails today, with flat Phillips
curves in which the primary determinant of actual inflation is expected inflation.12 The
9
The large degree of uncertainty attached to estimates of r*, u*, the slope of the (short-run) Phillips curve,
and other key economic objects adds additional risk-management considerations in the conduct of
monetary policy, especially in a low r* environment in which the federal funds rate is likely to be
constrained by the ELB. See Powell (2019b) for a discussion of the implications for monetary policy and
my recent remarks in Clarida (2020). See also the model-based analyses of Erceg and others (2018), Ajello
and others (2020), and Hebden and others (2020).
10
See Powell (2020) for an illustration. See also Caldara and others (2020) for a discussion of how
repeated surprises in macroeconomic forecasts affect inference about the appropriate stance of policy.
11
See Clarida (2016, 2019c) and Heise, Karahan, and Şahin (2020) for discussions.
12
See Yellen (2015) for a discussion of inflation dynamics and monetary policy and 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
longer-run inflation expectations help predict inflation. Mavroeidis, Plagborg-Møller, and Stock (2014)
discuss the challenges of identifying the precise role of expectations in determining actual inflation.
Cecchetti and others (2017) suggest that, in a low and stable inflation environment, policymakers should
pay attention to a wide array of indicators in determining the implications for monetary policy of
movements in realized inflation and measures of inflation expectations.
- 6 -
pre-GFC academic literature derived the important result that a credible inflation-
targeting monetary policy strategy that is not constrained by the ELB can deliver, under
rational expectations, inflation expectations that themselves are well anchored at the
inflation target.13 In other words, absent a binding ELB constraint, a policy that targets
actual inflation in these models delivers long-run inflation expectations well anchored at
the target "for free." But this "copacetic coincidence" no longer holds in a world of low
r* in which adverse aggregate demand shocks are expected to drive the economy in at
least some downturns to the ELB. In this case, which is obviously relevant today,
economic analysis indicates that flexible inflation-targeting monetary policy cannot be
relied on to deliver inflation expectations that are anchored at the target, but instead will
tend to deliver inflation expectations that, in each business cycle, become anchored at a
level below the target.14 This is the crucial insight in my colleague John Williams'
research with Thomas Mertens. Indeed John's research over the past 20 years on r*
estimation and monetary policy design at the ELB have been enormously influential, not
only in the profession but also at Fed and certainly in my own thinking about how our
framework should evolve. This downward bias in inflation expectations under inflation
targeting in an ELB world can in turn reduce already scarce policy space-because
nominal interest rates reflect both real rates and expected inflation-and it can open up
the risk of the downward spiral in both actual and expected inflation that has been
observed in some other major economies.
- 7 -
Inflation expectations are, of course, not directly observed and must be
imperfectly inferred from surveys, financial market data, and econometric models. Each
of these sources contains noise as well as signal, and they can and sometimes do give
contradictory readings. But, at minimum, the failure of actual PCE (personal
consumption expenditures) inflation-core or headline-over the past eight years to
reach the 2 percent goal on a sustained basis cannot have contributed favorably to
keeping inflation expectations anchored at 2 percent. Indeed, my reading of the evidence
is that the various measures of inflation expectations I follow reside at the low end of a
range I consider consistent with our 2 percent inflation goal.15
The Review Process
With this brief overview of important changes in the economic landscape since
2012, I would now like to discuss the review process itself. In November 2018, the
Federal Reserve announced that in 2019 the System would undertake a wide-ranging,
public review of its monetary policy strategy, tools, and communication practices. This
initiative would be the first-ever public review of monetary policy strategy ever
undertaken by the Fed. From the outset, it was conceived that the review would build on
three pillars: a series of livestreamed Fed Listens events hosted by each of the
12 Reserve Banks and the Board, a flagship research conference hosted by the Federal
Reserve Bank of Chicago, and a series of 13 rigorous briefings for the Committee by
System staff at a succession of five consecutive FOMC meetings commencing in July
2019 and running through January 2020.
15
See Clarida (2020).
- 8 -
The Fed Listens series built on a long-standing practice at the Reserve Banks and
the Board of hosting outreach events that included a wide range of community groups,
but, by focusing on a common format in which representatives of these groups were
encouraged to tell their stories about our policies' effect on their communities and daily
lives, it became a potent vehicle for us to better connect with the people our policies are
meant to benefit. Although many people across the System were involved in making Fed
Listens the success it was, I would be more than remiss if I did not single out Ellen
Meade for her indefatigable contributions and attention to detail and organization that
were essential to pulling the whole thing off. A report on the Fed Listens series is
available on the Board's web site.16
The second pillar of our review, a research conference hosted by the Federal
Reserve Bank of Chicago, brought together some of the world's leading academic experts
in monetary economics to present bespoke papers on a range of topics central to the
review. These papers and the robust discussion at the conference that they stimulated
were an important input to the review process. The proceedings of the Chicago
conference are available as a special January 2020 issue of the International Journal of
Central Banking.17
The third important pillar of the review is a collection of 13 memos prepared by
System staff and discussed by the Committee at a number of FOMC meetings over the
past 18 months. These memos were commissioned by a System steering committee that
- 9 -
included Jeff Fuhrer, Marc Giannoni, and David Altig, with extensive input from Trevor
Reeve. Thomas Laubach chaired the steering committee, and I must note that we simply
would not be here today discussing this significant evolution of our framework without
Thomas and the insights, inspiration, and good judgement that he brought to the project
and the review process. A collection of the staff memos prepared for the review is now
available on the Board's website.18
A New Economic Landscape Compels a Framework ReThink
As I mentioned earlier, the Committee devoted five consecutive FOMC meetings
between July 2019 and January 2020 to presentations by the staff and Committee
discussions of memos touching on various aspects of the framework review, and it held a
lengthy discussion at the July 2020 FOMC meeting about the new Statement on Longer-
Run Goals and Monetary Policy Strategy.19 While it is fair to say that these Committee
discussions revealed among the 17 participants a healthy range of views about and
priorities for refining our framework and strategy, some common themes did emerge, and
these provided the foundation for the revised Statement on Longer-Run Goals and
Monetary Policy Strategy that the Committee discussed in July, approved last week, and
released on Thursday, August 27.
Broadly, we agreed that the economic landscape has changed in important ways
since 2012 and that, as a result, the existing statement and the monetary policy strategy
that flows from it need as well to evolve along several dimensions.20 For example, under
our previous flexible inflation-targeting framework, the Federal Reserve declared that the
2 percent inflation objective is "symmetric." This term has been interpreted by many
observers to mean that the Committee's reaction function aimed to be symmetric on
either side of the 2 percent inflation goal, and that the FOMC set policy with the (ex ante)
aim that the 2 percent goal should represent an inflation ceiling in economic expansions
following economic downturns in which inflation falls below target. Regarding the ELB,
the previous statement was silent on the global decline in neutral policy rates, the
likelihood that the ELB will constrain monetary policy space in economic downturns, and
the implications of this constraint for our ability to achieve our dual-mandate goals. As
for inflation expectations, the previous statement did discuss expected inflation, but only
in the context of mentioning that the announcement of a 2 percent goal helps anchor
inflation expectations. While this is certainly true, it does beg the deeper question of how
well anchored inflation expectations can be if the 2 percent goal is seen by the public
as-and turns out ex post to be-a ceiling. Regarding the maximum-employment leg of
the dual mandate, the previous statement's discussion of minimizing "deviations" of
employment from its maximum level does not adequately reflect how the FOMC has
actually conducted monetary policy in recent years-before the pandemic-as the actual
unemployment rate was declining and, for several years, remained below SEP median
projections of u* (although, to be sure, the earlier statement did acknowledge that it can
be difficult to estimate the maximum level of employment with precision).21
The New Statement and Strategy
Before discussing how our Statement on Longer-Run Goals and Monetary Policy
Strategy has evolved, let me highlight some important elements that remain unchanged.
First and foremost, our policy framework and strategy remain focused exclusively on
meeting the dual mandate assigned to us by the Congress. Second, our statement
continues to note that the maximum level of employment that we are mandated to achieve
is not directly measurable and changes over time for reasons unrelated to monetary
policy. Hence, we continue not to specify a numerical goal for our employment objective
as we do for inflation. Third, we continue to state that an inflation rate of 2 percent over
the longer run is most consistent with our mandate to promote both maximum
employment and price stability. Finally, because the effect of monetary policy on the
economy operates with a lag, our strategy remains forward looking. As a result, our
policy actions depend on the economic outlook as well as the risks to the outlook, and we
continue in the new statement to highlight potential risks to the financial system that
could impede the attainment of our dual-mandate goals on a sustained basis.
With respect to the new framework itself, the statement now notes that the neutral
level of the federal funds rate has declined relative to its historical average and therefore
that the policy rate is more likely than in the past to be constrained by its ELB, and,
moreover, that this binding ELB constraint is likely to impart downside risks to inflation
and employment that the Committee needs to consider in implementing its monetary
policy strategy. In this regard, the statement now highlights that the Committee is
prepared to use its full range of tools to achieve its dual-mandate objectives.22
Regarding the maximum-employment mandate, the new statement now
acknowledges that maximum employment is a "broad-based and inclusive goal" and
continues to state that the FOMC considers a wide range of indicators to assess the level
of maximum employment consistent with this broad-based goal. However, under our
new framework, policy decisions going forward will be based on the FOMC's estimates
of "shortfalls of employment from its maximum level"-not "deviations."23 This change
conveys our judgment that a low unemployment rate by itself, in the absence of evidence
that price inflation is running or is likely to run persistently above mandate-consistent
levels or pressing financial stability concerns, will not, under our new framework, be a
sufficient trigger for policy action.24 This is a robust evolution in the Federal Reserve's
policy framework and, to me, reflects the reality that econometric models of maximum
employment, while essential inputs to monetary policy, can be and have been wrong, and,
moreover, that a decision to tighten monetary policy based solely on a model without any
other evidence of excessive cost-push pressure that puts the price-stability mandate at risk
is difficult to justify, given the significant cost to the economy if the model turns out to be
22
FOMC participants discussed the benefits, limitations, and risks associated with policy tools other than
the setting of the federal funds rate target at various points during the review. See, notably, the summaries
of FOMC participants' discussions at the July 2019 and October 2019 meetings-available on the Board's
website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm-which covered,
respectively, the performance of these tools during the GFC and its aftermath and issues pertaining to the
use of these tools in the future. See also the analyses of Sims and Wu (2020), Caldara and others (2020),
Campbell and others (2020), and Carlson and others (2020), prepared for this review.
23
Italics added for emphasis.
24
For a discussion of financial stability considerations in the conduct of monetary policy, see Kashyap and
Siegert (2020) and Goldberg and others (2020), prepared as part of this review.
wrong and given the ability of monetary policy to respond if the model were eventually
to turn out to be right.25
With regard to the price-stability mandate, while the new statement maintains our
definition that the longer-run goal for inflation is 2 percent, it elevates the importance-
and the challenge-of keeping inflation expectations "well anchored at 2 percent" (and
not just "well anchored") in a world of low r* and an ELB constraint that is binding in
downturns.26 To this end, the new statement conveys the Committee's judgment that, in
order to anchor expectations at 2 percent, it "seeks to achieve inflation that averages 2
percent over time," and-in the same sentence-that therefore "following periods when
inflation has been running persistently below 2 percent, appropriate monetary policy will
likely aim to achieve inflation moderately above 2 percent for some time." This is the
second robust evolution of our framework, and it reflects the inherent asymmetry of
conducting monetary policy in a low r* world with an ELB constraint that binds in
economic downturns. As discussed earlier, if policy seeks only to return inflation to 2
percent following a downturn in which the ELB has constrained policy, an inflation-
targeting monetary policy will tend to generate inflation that averages less than 2 percent,
which, in turn, will tend to put persistent downward pressure on inflation expectations
25
As I stated in Clarida (2019a, paragraph 17), "For example, were models to predict a surge in inflation, a
decision for preemptive hikes before the surge is evident in actual data would need to be balanced against
the cost of the model being wrong." One major cost of withdrawing policy accommodation prematurely
during an economic expansion is that it prevents job opportunities from reaching all communities. A clear
takeaway from our Fed Listens events is that the strong job market that preceded the pandemic was
especially beneficial to members of low- and moderate-income communities. The prolonged economic
expansion not only helped create job opportunities for marginalized groups and cement their attachment to
the labor force, but, as we heard at these events, it also more generally strengthened families, businesses,
and communities. See Aaronson and others (2019) for a discussion of how a strong labor market helped
address labor market disparities in the previous economic expansion. See also Feiveson and others (2020)
for a discussion of distributional considerations and monetary policy.
26
Italics added for emphasis.
and, potentially, on available policy space. In order to offset this downward bias, our
new framework recognizes that monetary policy during economic expansions needs to
"aim to achieve inflation moderately above 2 percent for some time." In other words, the
aim to achieve symmetric outcomes for inflation (as would be the case under flexible
inflation targeting in the absence of the ELB constraint) requires an asymmetric monetary
policy reaction function in a low r* world with binding ELB constraints in economic
downturns.
It is for this reason that while our new statement no longer refers to the 2 percent
inflation goal as symmetric, it does now say that the Committee "seeks to achieve
inflation that averages 2 percent over time." To be clear, "inflation that averages
2 percent over time" represents an ex ante aspiration, not a description of a mechanical
reaction function-nor is it a commitment to conduct monetary policy tethered to any
particular formula or rule.27 Indeed, as summarized in the minutes of the September
2019 FOMC meeting, the Committee (and, certainly, I) was skeptical about the benefit,
credibility, or practicality of adopting a formal numerical price level or average inflation
target rule, just as it has been unwilling to implement its existing flexible inflation-
targeting strategy via any sort of mechanical rule.28 So in practice, what, then, is the
27
The absence of a commitment to a specific formula or rule should not be interpreted as the absence of a
commitment to achieving our mandated goals. To the contrary, the revised statement has strengthened our
commitment to achieving these goals in several important ways. Notably, it has clarified that we seek to
achieve 2 percent inflation, on average, over time and that, when inflation has been running persistently too
low, it is appropriate to aim for inflation outcomes moderately above 2 percent for some time to solidly
anchor longer-run inflation expectations at 2 percent. The revised statement also emphasizes our resolve to
use our full range of tools to achieve our goals. Clarity about our goals, strategy, and tools fosters greater
democratic accountability in the pursuit of our dual mandate. For a discussion of time-consistency issues in
monetary policy, see the staff analysis of Duarte and others (2020), prepared for this review.
28
A summary of the September 2019 FOMC discussion is available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. For the staff analysis presented as
background to that discussion, see Arias and others (2020), Duarte and others (2020), and Hebden and
others (2020). See also the related staff analysis by Chung and others (2020) on the use of operational
inflation ranges.
policy implication of this stated desire "to achieve inflation that averages 2 percent over
time"? Again, the implication of our new strategy for monetary policy is stated explicitly
in the new statement, and, at the risk of repeating myself, let me restate it verbatim: "...
following periods when inflation has been running persistently below 2 percent,
appropriate monetary policy will likely aim to achieve inflation moderately above
2 percent for some time." Full stop. As Chair Powell indicated in his remarks last week,
we think of this new strategy as an evolution from flexible inflation targeting to flexible
average inflation targeting.29
Concluding Thoughts
My remarks today have been focused on our new framework and flexible average
inflation targeting strategy. Of course, our review has also explored ways in which we
might add to our toolkit and refine our communication practices. With regard to our
toolkit, we believe that forward guidance and large-scale asset purchases have been and
continue to be effective sources of support to the economy when the federal funds rate is
at the ELB, and, of course, both were deployed promptly in our March 2020 policy
response to the pandemic. With regard to other monetary policy tools, and as we have
made clear previously in the minutes to our October 2019 FOMC meeting, we do not see
negative policy rates as an attractive policy option in the U.S. context.30 As for targeting
the yield curve, our general view is that with credible forward guidance and asset
purchases, the potential benefits from such an approach may be modest. At the same
time, the approach brings complications in terms of implementation and communications.
Hence, as noted in the minutes from our previous meeting (July 2020), most of my
colleagues judged that yield caps and targets were not warranted in the current
environment but should remain an option that the Committee could reassess in the future
if circumstances changed markedly.31 Regarding communication practices, our new
consensus statement does bring greater clarity and transparency to the way we will
co