John C Williams: A new chapter for the FOMC monetary policy
framework
Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of
the Federal Reserve Bank of New York, at the "In Conversation: New York Fed Presidents on
COVID-19" Bretton Woods Committee Webinar, 2 September 2020.
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Thank you, Bill. It's great to be with you today, at least virtually, and I am looking forward to our
discussion. But before we dive in, I thought I would offer some thoughts on the announcement
made last week about the completion of the Federal Open Market Committee's review of its
monetary policy framework and the issuance of a new Statement on Longer-Run Goals and
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Monetary Policy Strategy.
Before I continue-and you know what comes next, Bill-let me give the usual disclaimer that the
views I express are mine alone and do not necessarily reflect those of the Federal Open Market
Committee or anyone else in the Federal Reserve System.
Allow me to add one last "before" caveat. Before I explain the new statement, it is important to
reflect on the context in which the original statement was issued. Then I'll share how the
monetary policy framework of today positions us best to achieve our goals and manage the very
challenging environment that lies ahead.
The original consensus statement was issued back in January 2012 and represented an
important step in the Committee's progress toward greater transparency around its goals and
strategy. It incorporated key aspects of flexible inflation targeting, a monetary policy framework
that had gained wide acceptance around the world.
This framework served us well, but the need for change was clear. In the past eight years, basic
facts that shaped the original framework have fundamentally changed.
First and foremost is the dramatic decline in the neutral interest rate, that is, the short-term
interest expected to prevail when the economy is operating at its full potential and inflation is at its
longer-run target. Since January 2012, FOMC participants' median estimate of the neutral
nominal rate has fallen by 1-3/4 percentage points, from 4.25 percent to 2.5 percent. A similar
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decline is seen in private sector forecasts and bond yields. This secular decline in interest rates
is not limited to the United States-we're seeing it across the globe-and it reflects longer-run
trends in demographics, productivity, and other factors that are unlikely to reverse anytime
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soon.
Lower neutral interest rates constrain the ability of monetary policy to offset negative shocks to
the economy. This effect has been seen most clearly in the behavior of inflation. Over the past
decade, inflation in the United States has been below our 2 percent longer-run target most of the
time, and measures of inflation expectations have drifted down.
These declines in trend inflation and inflation expectations can create a pernicious feedback loop
of reduced policy space and even lower inflation expectations. Again, this experience is not
unique to the United States, indicating that it stems from factors common across countries,
rather than issues unique to our economy. Indeed, most inflation-targeting advanced economies
have struggled to achieve their inflation goals on a sustained basis over the past decade.
This brings us to last week's announcement and the issuance of a new consensus statement of
our policy framework. It is a culmination of extensive outreach and conversations with
communities and stakeholders across the country, careful and thorough analysis, and active
discussion and debate among Committee participants. , We took important lessons from the
experience of the past decade, reassessed the evidence, and looked at the challenges ahead of
us. All this effort was worth it: this new statement means we are better positioned to achieve our
goals. In fact, the process worked so well, we've committed to repeating it roughly every five
years!
The new framework statement directly and effectively addresses the problems caused by a low
neutral rate and persistently low inflation.
First, it stipulates that, following periods when inflation has been running persistently below 2
percent, a temporary overshooting of the longer-run inflation target will likely be desirable to keep
inflation and inflation expectations centered on 2 percent. Second, it makes clear that we seek
inflation that averages 2 percent over time, consistent with our longer-run target. Finally, the
statement makes unequivocally clear that we seek maximum employment and will aim to
eliminate shortfalls from this broad and inclusive goal. These changes are mutually reinforcing
and will meaningfully improve our ability to achieve both of our dual mandate goals in an
environment of a very low neutral rate.
I'll conclude with this: The new framework represents both an important evolution in our thinking
about how to achieve our goals and another step toward greater transparency. It reaffirms key
aspects of the original statement that have stood the test of time and refines others in line with
experience and evolving practices. It also makes some more significant changes in light of
developments and lessons learned in recent years. And most importantly, it positions us for
success in achieving our maximum employment and price stability goals in the future.
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See Board of Governors of the Federal Reserve System, Statement on Longer-Run Goals and Monetary Policy
Strategy, as amended effective August 27, 2020.
2
Longer-run forecasts of interest rates can be found in Blue Chip Financial Forecasts (Wolters Kluwer). For the
decline these forecasts over this period, see the June 2012 and June 2020 issues.
3
See John C. Williams, Three Questions on R-Star, FRBSF Economic Letter, 2017-05 (February 21, 2017), for a
discussion of the decline in the natural rate of interest. Estimates of the natural rate for the United States,
Canada, the United Kingdom, and the euro area are available at Federal Reserve Bank of New York, Measuring
the Natural Rate of Interest.
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Jerome H. Powell, New Economic Challenges and the Fed's Monetary Policy Review, Speech at "Navigating the
Decade Ahead: Implications for Monetary Policy," an economic policy symposium sponsored by the Federal
Reserve Bank of Kansas City, Jackson Hole, Wyoming (via webcast) (August 27, 2020).
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Richard H. Clarida, The Federal Reserve's New Monetary Policy Framework: A Robust Evolution, Speech at the
Peterson Institute for International Economics, Washington, D.C. (via webcast) (August 31, 2020).