Janet L Yellen: Revolution and evolution in central bank communications
Speech by Ms Janet L Yellen, Vice Chair of the Board of Governors of the Federal Reserve
System, at the Haas School of Business, University of California, Berkeley, Berkeley,
California, 13 November 2012.
* * *
Thank you. I'm delighted to be back at Haas, which I've been proud to call home for much of my career. I'd like to
thank Dean Lyons for inviting me to speak to you this afternoon.1
My subject is the recent revolution and continuing evolution in communication by central
banks. All of us, of course, live in an era of revolutionary advances in communication: If I
succeed in saying anything interesting this afternoon, those words may be posted, tweeted,
and blogged about even before I've left this podium. So, it might seem unsurprising that the
Federal Reserve, too, is bolstering its efforts at communication.
But the revolution in central bank communication is not driven by technological advances.
Rather, it is the product of advances in our understanding of how to make monetary policy
most effective. A growing body of research and experience demonstrates that clear
communication is itself a vital tool for increasing the efficacy and reliability of monetary
policy. In fact, the challenges facing our economy in the wake of the financial crisis have
made clear communication more important than ever before. Today I'll discuss the revolution
in thinking about central bank transparency and how, pushed by the unique situation
precipitated by the financial crisis, the Federal Reserve has responded with fundamental
advances in communication. Indeed, I hope that one of the legacies of this difficult period is a
permanent and substantial advance in Federal Reserve transparency, building on the
policies I'll talk about shortly.
As you all know, the Federal Reserve is actively promoting a faster recovery. Our efforts are
hampered by the fact that our standard policy tool, the federal funds rate, is near zero and
cannot be reduced much further. In this extraordinary environment, the Federal Reserve is
employing two unconventional policy tools to spur job creation and growth: large-scale asset
purchases, which some people call quantitative easing, and communications about the future
course of monetary policy, also known as forward guidance.
At the Federal Open Market Committee's (FOMC) meeting in September, the FOMC - the
Federal Reserve's principal monetary policymaking body - employed both of these
unconventional tools. The Committee initiated a new large-scale asset purchase program to
buy mortgage-backed securities (MBS). In addition, with regard to forward guidance, the
Committee said that, first, it intends to continue buying MBS and other assets until it sees a
substantial improvement in the outlook for the labor market.2 Second, the Committee stated
that it expects a highly accommodative stance of monetary policy to remain appropriate for a
considerable time after the economic recovery strengthens. And third, the Committee noted
that it currently expects to hold the federal funds rate at exceptionally low levels at least
through mid-2015, about a half-year longer than previously announced.
The three elements of forward guidance that were adopted by the FOMC in September 2012
would have been unthinkable in 1992 and greatly surprising in 2002, but they have, in my
view, become a centerpiece of appropriate monetary policy. To better explain my views
regarding the FOMC's forward guidance, I will first discuss how it fits into the Committee's
broader thinking and communication about monetary policy. The FOMC took a major step to
explain this thinking last January when it issued for the first time a "Statement of Longer-Run
Goals and Policy Strategy."3 This statement provides a concise description of the FOMC's
objectives in conducting monetary policy and the approach the Committee considers
appropriate to achieve them. I will present my views on the implications of this statement for
monetary policy in current circumstances. I will then discuss several approaches the FOMC
has recently considered to enhance its communications to make its policy more effective in
this challenging situation. Let me emphasize that the views I express here are my own and
do not necessarily represent those of my colleagues in the Federal Reserve System.
The case for central bank transparency
To fully appreciate the recent revolution in central bank communication and its implications
for current policy, it is useful to recall that for decades, the conventional wisdom was that
secrecy about the central bank's goals and actions actually makes monetary policy more
effective. In 1977, when I started my first job at the Federal Reserve Board as a staff
economist in the Division of International Finance, it was an article of faith in central banking
that secrecy about monetary policy decisions was the best policy: Central banks, as a rule,
did not discuss these decisions, let alone their future policy intentions. While the Federal
Reserve is required by the Congress to promote stable prices and maximum employment,
Federal Reserve officials at that time avoided discussing how policy would be used to pursue
both sides of this mandate. Indeed, mere mention of the employment side of the mandate,
even by the mid-1990s, was described in a New York Times article as the equivalent of
"sticking needles in the eyes of central bankers."4
This secretiveness regarding monetary policy decisions clashed with the openness regarding
government decisions expected in a democracy, especially since Federal Reserve decisions
influence the lives of every American. And there were critics within the economics profession.
James Tobin and Milton Friedman, both Nobel laureates, disagreed on almost every aspect
of monetary policy, but they were united in arguing that transparency regarding central bank
decisions is vital in a democracy to lend legitimacy to policy decisions.5 Surely only some
important societal interest requiring opacity could justify the traditional practice. Indeed, in
1975 a citizen demanding greater openness sued the FOMC to obtain immediate release of
3
See Board of Governors of the Federal Reserve System (2012), "Federal Reserve Issues FOMC Statement of
Longer-Run Goals and Policy Strategy," press release, January 25. I should note that this statement grew out
of discussions within the FOMC that date back to the early 1990s. For a proposal from 2003 by the then
Governor Bernanke, see Ben S. Bernanke (2003), "Panel Discussion," speech delivered at the 28th Annual
Policy Conference: Inflation Targeting Prospects and Problems, Federal Reserve Bank of St. Louis, St. Louis,
Missouri, October 17. My own thinking on the issue has evolved over the years; for a snapshot of its state in
early 2006, see Janet L. Yellen (2006), "Enhancing Fed Credibility," speech delivered at the Annual
Washington Policy Conference Sponsored by the National Association for Business Economics, Washington,
March 13.
4
See Keith Bradsher (1994), "Tough-Decision Time for the Federal Reserve; New Vice Chairman Stirs the
Board's Pot," New York Times, September 26, www.nytimes.com/1994/09/26/business/
tough-decision-time-for-federal-reserve-new-vice-chairman-stirs-board-s-pot.html?pagewanted=all&src=pm.
5
See Milton Friedman (1962), "Should There Be an Independent Monetary Authority?" in Leland B. Yeager,
ed., In Search of a Monetary Constitution (Cambridge, Mass.: Harvard University Press), pp.219-43; and
James Tobin (1992), "Prepared Statement," in The Monetary Policy Reform Act of 1991, hearing before the
Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and
Urban Affairs, U.S. Senate, November 13, 1991, S.1611, 102 Cong. (Washington: Government Printing
Office), pp. 25-33.
the policy directive upon its adoption, and in 1981 the case was resolved in favor of deferred
disclosure.6
Ironically, while this transparency lawsuit was wending its way through the courts, Robert
Lucas and others were publishing research that would garner several Nobel prizes and
ultimately overturn the traditional wisdom that secrecy regarding policy actions was the best
policy.7 A key insight of these scholars was that monetary policy affects employment,
incomes, and inflation to a large extent through its effects on the public's expectations about
future policy. Many spending decisions, such as financing the purchase of a home or
businesses' capital expenditures, depend on longer-term interest rates that are connected to
monetary policy through expectations of short-term interest rates over the lifetime of a
mortgage or an investment project. In other words, the effect of monetary policy on the
economy today depends not only, or even primarily, on the FOMC's current target for the
federal funds rate or the quantity of assets on its balance sheet, but rather on how the public
expects the Federal Reserve to set the paths of these variables in the future. These
expectations influence longer-term interest rates and asset prices as well as the public's
views concerning the likely future paths of income and inflation.
The history of oil price shocks is a good example to illustrate this point. In the 1970s, two
large oil price shocks led to sharp increases in general inflation that were not met with
prompt inflation-fighting actions by the Federal Reserve. This delay left the public unsure
whether the Federal Reserve would act to reverse the increase in inflation, and expectations
of longer-term inflation ratcheted up. When the Federal Reserve eventually did act to bring
inflation down from double-digit levels, the consequence was the painful recession of 1981
and 1982.
The effects of that policy shift were severe, but the decision helped change expectations of
the Federal Reserve's commitment to price stability, and thereby ultimately led to longer-run
inflation expectations becoming anchored at their current low levels. As a result, a series of
large increases in oil prices starting in 2005 did not unleash a general rise in inflation or
longer-term inflation expectations. The public seemed to correctly perceive that the Federal
Reserve would not allow an oil price shock to precipitate a general rise in inflation.
Longer-term inflation expectations remained well anchored, and hence no aggressive and
recessionary disinflation action by the Federal Reserve was required. Thus, over the quarter
century up to the mid-2000s, the Federal Reserve established a record of policymaking that
allowed the public to predict monetary policy responses to unforeseen events such as an oil
price shock with reasonable accuracy.
Unfortunately, recent events have made it harder for the public to predict the future course of
monetary policy. Economic weakness since the financial crisis and the Great Recession has
confounded hopes for a speedy recovery and has required unprecedented monetary policy
actions. Shortly after the financial crisis erupted, the Federal Reserve reduced the federal
funds rate to almost zero and launched a number of temporary liquidity and credit programs
to keep the financial system operating. Even these aggressive policy responses, however,
were not enough to halt the contraction, and further action was needed to stop the economy
from falling into a second Great Depression. To this end, the Federal Reserve started to
expand its balance sheet through purchases of longer-term Treasury securities and agency
debt and MBS in an effort to put further downward pressure on long-term interest rates and
so stimulate the economy.
With the federal funds rate near zero, and the Federal Reserve deploying the new tool of
large-scale asset purchases, it became much more difficult for the public to anticipate how
the FOMC would likely conduct policy over time, and how the overall stance of monetary
policy would both affect and respond to economic conditions. In this situation, the FOMC
began to rely heavily on forward guidance about both the likely future path of the federal
funds rate and the Committee's intentions concerning asset purchases and sales.8 But, for
this guidance to have its maximum effect, it must be understood and believed by the public,
and therefore provide the public with a solid basis for forming their borrowing and spending
decisions today.9 In my view, such credibility can be achieved only if the public understands
the FOMC's objectives and intentions.
Communications after the financial crisis
Chairman Bernanke asked me to take up these challenges in 2010 as chair of a new FOMC
communications subcommittee.10 Central bank transparency had long been an issue of great
interest to both of us, and the Chairman had been an exceptionally strong voice for central
bank transparency in his academic work and in his earlier service on the Board of Governors.
Throughout the Chairman's term, the FOMC has made important strides in transparency
through actions such as introducing the Committee's quarterly Summary of Economic
Projections (SEP), which provides information about participants' forecasts for the economy
under their individual views concerning appropriate policy and their longer-run assessments
of potential output growth, the "normal" unemployment rate, and the most appropriate
inflation rate.
A high priority for the Chairman was to further clarify the FOMC's interpretation of the
long-term objectives implied by its dual mandate to promote maximum employment and
stable prices. While we had made progress, as I just noted, during the years preceding the
crisis, the FOMC as a body had never provided an explicit description of its policy goals
beyond quoting its mandate. We saw further clarification of these objectives as important for
the sake of transparency and accountability. But beyond that, an explicit statement of goals
had become essential for the Committee to achieve its monetary policy objectives in the
aftermath of the crisis, including allowing heavier reliance than in the past on forward
guidance on the future path of policy.
A particular concern, given that the crisis had ushered in a prolonged period of elevated
unemployment, was that the weakness in the economy might push inflation well below
8
The FOMC also provided information concerning its "exit strategy" in the minutes of its June 2011 meeting
(see Board of Governors of the Federal Reserve System (2011), Minutes of the Federal Open Market
Committee, June 21-22). The Committee indicated that it intends to normalize the size and composition of its
balance sheet by selling off agency securities at a gradual pace after it begins the process of raising the
federal funds rate.
9
Economic theory suggests that the public's expectations concerning the time path of the Federal Reserve's
asset holdings - which includes both the ultimate size of those holdings and the length of time that these
assets will be retained on the Fed's balance sheet - influence longer-term yields and the term premiums
embedded in those yields today. For empirical estimates of these effects see, for example, Canlin Li and Min
Wei (2012), "Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset
Purchase Programs," Finance and Economics Discussion Series 2012-37 (Washington: Board of Governors
of the Federal Reserve System, May).
10
Similar subcommittees acting in the early 1990s dealt with FOMC policies concerning the disclosure of the
minutes and transcripts of FOMC meetings. An FOMC subcommittee in 1999 laid the groundwork for the
current FOMC postmeeting statements. And a subcommittee appointed in 2006, led by the then Vice
Chairman Kohn, considered the adoption of a numerical inflation objective and recommended enhancements
that were incorporated in the Summary of Economic Projections.
2 percent, a level that many took to be an implicit target of the FOMC. There was even an
ongoing risk that low inflation might turn to deflation and further hamper growth. These
challenges led to legitimate questions among forecasters and the public about just what the
FOMC meant by "maximum employment" and "stable prices."
The FOMC could have chosen to adopt an "inflation-targeting framework," in which it would
have specified an objective solely for inflation, without any explicit reference to employment.
Such an approach has been adopted by a large number of central banks since the 1990s.
While the FOMC had debated adopting an inflation target on a number of occasions since
the mid-1990s, some Committee members believed that stating an explicit target for inflation
alone would undermine the maximum-employment side of the dual mandate. In fact, some
central banks that have been assigned a single mandate of inflation stabilization have
struggled to explain how the goals of growth and financial stability figure into their
inflation-targeting framework.11
A consensus on monetary policy goals
Last January, the FOMC took a major step to clarify its interpretation of its dual mandate,
issuing the "Statement of Longer-Run Goals and Monetary Policy Strategy" that I mentioned
earlier. Unlike the regular postmeeting statements, which are intended to remain current only
until the next FOMC meeting, this statement is meant to be a more enduring expression of
the FOMC's policy objectives and how it plans to pursue them. The intention is that the public
can count on the principles expressed in the statement to remain unchanged for some time
to come, even as the economic outlook changes. For that reason, the Committee sought the
endorsement of all its participants - the Board members and all 12 Reserve Bank presidents
- not only the voting members. My expectation is that this "consensus statement" will be
reaffirmed each January, perhaps with minor modifications but with the core principles intact.
Importantly, the consensus statement provides a numerical value - 2 percent - for the
Committee's longer-run inflation goal. But importantly, it pairs that inflation goal with a
specific goal for maximum employment. In particular, the statement cites a range
summarizing FOMC participants' estimates of the longer-run normal rate of unemployment.
Finally, the statement says that the Committee will follow a "balanced approach" as it "seeks
to mitigate deviations of inflation from its longer-run goal and deviations of employment from
the Committee's assessments of its maximum level."12
The specification of 2 percent as the Committee's longer-run inflation goal, as measured by
the annual change in the price index for personal consumption expenditures (PCE), reflected
careful deliberation. The Committee judged that the PCE price index is the most reliable
measure of prices that are relevant for households and, in choosing the 2 percent goal,
balanced two main considerations. First, any rate of price inflation, whether positive or
negative, imposes some costs on society, making planning more difficult and creating
distortions in the economy. Second, were the FOMC to aim for zero inflation to eliminate
these costs, it would face greater difficulty in providing sufficient monetary accommodation in
response to large negative shocks. With inflation at zero, the zero lower bound on nominal
interest rates implies that real short-term interest rates cannot be reduced below zero. In
contrast, with low but positive inflation, they can be.13 History has shown that sustained
periods of even mild deflation can impose immense costs in terms of slow growth and high
unemployment.14 Thus, balancing the goal of maximum employment against the costs of
modest inflation, the Committee chose 2 percent measured inflation as the value it judged
likely to provide an adequate buffer against costly deflations while keeping the costs of
inflation quite small.
Given that the rate of inflation over the longer run is determined solely by monetary policy,
central banks can, and indeed must, determine the long-run level of inflation. In contrast,
they cannot do much to affect the maximum sustainable level of employment. That level is
determined by factors affecting the structure and dynamics of the labor market that are
almost completely outside the control of the central bank. Nonetheless, the Committee felt
strongly that it should provide some quantitative interpretation of economic conditions
consistent with the maximum employment portion of the Fed's mandate. Failure to do so
might be seen as elevating the inflation side of the dual mandate above the employment
side. The Committee chose to couch the longer-run employment objective in terms of the
rate of unemployment while indicating that other indicators may also be relevant in assessing
the maximum level of employment. Unfortunately, there is a considerable range of
disagreement in the economics profession and on the FOMC itself about what this longer-run
normal rate of unemployment is. Moreover, there is widespread recognition that whatever the
normal rate might be today, it can change over time. So the consensus statement notes that,
as of January 2012, FOMC participants' estimates of this rate had a central tendency of
5.2 percent to 6.0 percent. I expect the FOMC to review its estimates of the longer-run
normal rate of unemployment in its annual reaffirmation of the consensus statement on goals
and strategy.
Setting longer-run objectives and minimizing shorter-run fluctuations
As I mentioned before, stating longer-run goals is only one part of clarifying the dual
mandate. The other part involves explaining how the FOMC will conduct policy to attain its
longer-run objectives over time. Because shocks to the economy regularly push inflation and
unemployment away from the Committee's objectives, the FOMC must adjust policy to
mitigate such deviations from its goals. We can therefore think of two tasks for monetary
policymakers: first, setting policy to pursue the longer-run objectives; and second, adjusting
policy in response to shocks to minimize shorter-run fluctuations around those objectives.
Clarity on longer-run goals, due to the important role of expectations, can itself help reduce
short-run fluctuations. In the words of the January consensus statement, "communicating this
inflation goal clearly to the public helps keep longer-term inflation expectations firmly
anchored, thereby fostering price stability and moderate long-term interest rates and
enhancing the Committee's ability to promote maximum employment in the face of significant
economic disturbances."15
Put differently, the purpose of providing greater clarity about the FOMC's longer-run inflation
goal is to anchor inflation expectations more firmly. These more firmly anchored expectations
in turn free the Committee's hand to more actively and effectively stabilize short-run
fluctuations in economic activity. The Committee can act in this way because the FOMC can
tolerate transitory deviations of inflation from its objective in order to more forcefully stabilize
employment without needing to worry that the public will mistake these actions as the pursuit
of a higher or lower long-run inflation objective. The instability of inflation, inflation
expectations, and employment in response to the oil price increases of the 1970s vividly
illustrates the threat posed by price shocks when longer-term inflation expectations are not
well anchored.
To minimize short-run fluctuations, the FOMC also needs to decide how to respond to
shocks that push the economy away from price stability and maximum employment. The
goals of stable prices and maximum employment are often complementary: Policymakers
need not sacrifice performance on one goal to pursue the other. However, the pursuit of the
two sides of the dual mandate can temporarily conflict. For example, returning inflation to its
longer-run goal might require, say, a tighter stance of monetary policy, whereas returning the
economy to maximum employment might require just the opposite. The consensus statement
explains that in such circumstances the FOMC will pursue a balanced approach, taking into
account the magnitude of the deviation of each variable from its objective and allowing for
the possibility that the deviations may not be eliminated over the same time horizon. The
balanced-approach strategy endorsed by the FOMC is consistent with the view that
maximum employment and price stability stand on an equal footing as objectives of monetary
policy.
As I see it, such a balanced approach has two important implications that deserve emphasis.
The first is that, if the FOMC is doing its best to minimize deviations from its objectives, then,
over long periods, both unemployment and inflation will be about equally likely to fall on
either side of those objectives. To put it simply, if 2 percent inflation is the Committee's goal,
2 percent cannot be viewed as a ceiling for inflation because that would result in deviations
that are more frequently below 2 percent than above and thus not properly balanced with the
goal of maximum employment. Instead, to balance the chances that inflation will sometimes
deviate a bit above and a bit below the goal, 2 percent must be treated as a central tendency
around which inflation fluctuates. The same holds true for fluctuations of unemployment
around its longer-run normal rate.
The second property, which to me is the essence of the balanced approach, is that reducing
the deviation of one variable from its objective must at times involve allowing the other
variable to move away from its objective. In particular, reducing inflation may sometimes
require a monetary tightening that will lead to a temporary rise in unemployment. And a
policy that reduces unemployment may, at times, result in inflation that could temporarily rise
above its target.
Communicating the economic outlook and its policy implications
How can we translate the principles embodied in the Committee's consensus statement of
longer-run goals and strategy into a concrete plan of action for the current situation? And,
having done so, how can we make such a plan understandable to the public? I'll next
illustrate a method I use to help me judge the best plan of action at a particular time. I will
then describe the communications tools the Committee is now using to explain its strategy
and discuss others it is considering to better explain its policy decisions to the public.
In addition to clearly specified goals, concrete recommendations about appropriate monetary
policy require the specification of a baseline outlook for the economy and also a realistic,
quantitative model of the economy to assess how monetary policy choices affect the likely
paths of the FOMC's goal variables - namely, inflation and the unemployment rate. Figure 1
presents such an outlook, one based on a survey of the Federal Reserve's primary dealers
conducted during the week prior to the September FOMC meeting. The baseline paths
through 2015 of the unemployment rate and inflation shown by the solid black lines in the
upper two panels track the median of the dealers' forecasts of these variables. Beyond 2015,
the path assumes that the unemployment rate converges over time to 6 percent - the
median forecast of the long-run unemployment rate, which is the upper end of the range of
estimates of the longer-run normal unemployment rate cited in the FOMC consensus
statement - while the inflation rate settles down at 2 percent, the FOMC's inflation objective
and the median long-run forecast in the dealer survey.
The solid black line in the bottom panel of the figure shows the median of dealers'
expectations for the path of the federal funds rate through the end of 2015. The dealers
assumed it would remain near zero through the first half of 2015, consistent with the
guidance the Committee subsequently provided. Beyond 2015, the federal funds rate is
assumed to gradually rise to 4 percent, the long-run value expected by most dealers as well
as most FOMC participants. I have assumed in the baseline that this process is largely
completed within four years.16
The question I now want to address is whether this illustrative baseline path for the federal
funds rate is one that reflects a balanced approach to attaining our longer-run objectives,
consistent with our consensus statement. As I noted, this balanced approach means inflation
and unemployment will sometimes temporarily deviate from longer-run objectives, but that
these deviations would be minimized. To answer this question I need to rely, as I noted, on a
specific macroeconomic model, and, for this purpose, I will employ the FRB/US model, one
of the economic models commonly used at the Board. The model lets us analyze every
possible policy path to see which one yields the best feasible outcome for the paths of
unemployment and inflation. Although the exact numerical results of the exercises I am about
to report depend on the specific model, the qualitative points that I'll highlight are fairly
general.
To derive a path for the federal funds rate consistent with the Committee's enunciated
longer-run goals and balanced approach, I assume that monetary policy aims to minimize the
deviations of inflation from 2 percent and the deviations of the unemployment rate from
6 percent, with equal weight on both objectives.17 In computing the best, or "optimal policy,"
path for the federal funds rate to achieve these objectives, I will assume that the public fully
anticipates that the FOMC will follow this optimal plan and is able to assess its effect on the
economy.18
The blue lines with triangles labeled "Optimal policy" show the resulting paths. The optimal
policy to implement this "balanced approach" to minimizing deviations from the inflation and
unemployment goals involves keeping the federal funds rate close to zero until early 2016,
about two quarters longer than in the illustrative baseline, and keeping the federal funds rate
below the baseline path through 2018. This highly accommodative policy path generates a
faster reduction in unemployment than in the baseline, while inflation slightly overshoots the
Committee's 2 percent objective for several years.
This path illustrates one of the key features of optimal policy under a balanced approach to
the dual mandate. Provided that long-term inflation expectations are firmly anchored, the
16
It is worth noting that the dealer forecasts probably incorporate some effect from asset purchases that were
only later announced by the FOMC. At the time of this survey, more than one-half of the primary dealers
anticipated that the FOMC would announce a new program of asset purchases in September and around
70 percent anticipated further asset purchases within one year. The median value of asset purchases
anticipated by the dealers under such a program was about $500 billion. In the simulations that follow, I treat
the balance sheet as unchanged relative to its baseline path, and focus on the federal funds rate as the tool
for conducting monetary policy even though the Committee is currently using both forward guidance
concerning the funds rate path and the balance sheet to provide monetary accommodation.
17
More precisely, the loss function that the central bank is assumed to minimize is the discounted sum of current
and future squared deviations of inflation from 2 percent, current and future squared deviations of the
unemployment rate from 6 percent, and current and future quarterly changes in the federal funds rate. The last
term is included to avoid unrealistically large quarterly movements in the "optimal" federal funds rate path.
18
This illustration takes the anticipated scale of asset purchases as fixed. The effect of these purchases, given
that the modal expectation in the primary dealer survey was for $500 billion of purchases, is implicitly already
incorporated into the baseline forecast. In principle, we could use the FRB/US model to perform a joint
optimization exercise in which the optimal paths of asset purchases and the federal funds rate are
simultaneously determined, but the results from such an exercise would be highly sensitive to assumptions
about possible costs of asset purchases that are not well defined, such as the potential for market disruption.
federal funds rate is set to balance the benefits from a faster reduction of the unemployment
rate against the losses from a temporary and modest increase of inflation above 2 percent.
The more rapid reduction in unemployment along the optimal control path than in the
baseline reflects the stimulus to demand provided by lower nominal and real interest rates,
higher asset prices, and the expectation of more rapid growth in employment and income.19
The computation