For release on delivery
9:55 a.m. EDT (8:55 a.m. CDT)
June 4, 2019
Opening Remarks
by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
"Conference on Monetary Policy Strategy, Tools, and Communications Practices"
sponsored by the Federal Reserve
Federal Reserve Bank of Chicago
Chicago, Illinois
June 4, 2019
Good morning. I am very pleased to welcome you here today. This conference is
part of a first-ever public review by the Federal Open Market Committee of our monetary
policy strategy, tools, and communications. We have a distinguished group of experts
from academics and other walks of life here to share perspectives on how monetary
policy can best serve the public.
I'd like first to say a word about recent developments involving trade negotiations
and other matters. We do not know how or when these issues will be resolved. We are
closely monitoring the implications of these developments for the U.S. economic outlook
and, as always, we will act as appropriate to sustain the expansion, with a strong labor
market and inflation near our symmetric 2 percent objective. My comments today, like
this conference, will focus on longer-run issues that will remain even as the issues of the
moment evolve.
While central banks face a challenging environment today, those challenges are
not entirely new. In fact, in 1999 the Federal Reserve System hosted a conference titled
"Monetary Policy in a Low Inflation Environment." Conference participants discussed
new challenges that were emerging after the then-recent victory over the Great Inflation.1
They focused on many questions posed by low inflation and, in particular, on what
unconventional tools a central bank might use to support the economy if interest rates fell
to what we now call the effective lower bound (ELB). Even though the Bank of Japan
was grappling with the ELB as the conference met, the issue seemed remote for the
United States. The conference received little coverage in the financial press, but a
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Reuters wire service story titled "Fed Conference Timing on Inflation Odd, but Useful"
emphasized the remoteness of the risk.2 Participants at the conference could not have
anticipated that only 10 years later, the world would be engulfed in a deep financial
crisis, with unemployment soaring and central banks around the world making extensive
use of new strategies, tools, and ways to communicate.
The next time policy rates hit the ELB-and there will be a next time-it will not
be a surprise. We are now well aware of the challenges the ELB presents, and we have
the painful experience of the Global Financial Crisis and its aftermath to guide us. Our
obligation to the public we serve is to take those measures now that will put us in the best
position deal with our next encounter with the ELB. And with the economy growing,
unemployment low, and inflation low and stable, this is the right time to engage the
public broadly on these topics.
The review has several parts, all of which are intended to open our monetary
policy to critical examination. We are holding a series of Fed Listens events around the
country to help us understand the perspectives of people from diverse backgrounds and
with varied interests. This conference and many other engagements will help us bring to
bear the best thinking from policymakers and experts. Beginning later this year, the
FOMC will devote time at a series of our regular meetings to assess lessons from these
events, supported by staff analysis performed throughout the Federal Reserve System.
We will publicly report the outcome of our discussions. In the meantime, anyone who is
2
Herbst-Bayliss (1999).
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interested in participating or learning more can find information on the Federal Reserve
Board's website.3
Before turning to the specifics of the review, I want to focus a little more closely
on the challenges we face today. For a reference point, at the time of the 1999
conference, the United States was eight years into an expansion; core inflation was
1.4 percent, and the unemployment rate was 4.1 percent-not so different from today.4
Macroeconomists were puzzling over the flatness of the Phillips curve, the level of the
natural rate of unemployment, and a possible acceleration in productivity growth-
questions that are also with us today.5
The big difference between then and now is that the federal funds rate was
5.2 percent-which, to underscore the point, put the rate 20 quarter-point rate cuts away
from the ELB. Since then, standard estimates of the longer-run normal or neutral rate of
interest have declined between 2 and 3 percentage points, and some argue that the
effective decline is even larger.6 The combination of lower real interest rates and low
inflation translates into lower nominal rates and a much higher likelihood that rates will
fall to the ELB in a downturn.
As the experience of the past decade showed, extended ELB episodes can be
associated with painfully high unemployment and slow growth or recession. Economic
3
More on Fed Listens events and related information is available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-andcommunications-fed-listens-events.htm.
4
The inflation rate referenced is the October 12-month percent change in the price index for personal
consumption expenditures excluding food and energy.
5
The discussion of all these issues was centered on Fed Chair Alan Greenspan's (1998) "New Economy"
hypothesis that the United States had undergone fundamental changes for the better, leading to the
otherwise puzzling outcomes.
6
See, for example, the estimates of the neutral rate reported on the New York Fed's website at
https://www.newyorkfed.org/research/policy/rstar. Rachel and Summers (2019) give reasons why the
effective change may be larger.
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weakness puts downward pressure on inflation, which can raise real interest rates and
reinforce the challenge of supporting needed job growth. In addition, over time, inflation
has become much less sensitive to tightness in resource utilization. This insensitivity can
be a blessing in avoiding deflation when unemployment is high, but it means that much
greater labor market tightness may ultimately be required to bring inflation back to target
in a recovery. Using monetary policy to push sufficiently hard on labor markets to lift
inflation could pose risks of destabilizing excesses in financial markets or elsewhere.
In short, the proximity of interest rates to the ELB has become the preeminent
monetary policy challenge of our time, tainting all manner of issues with ELB risk and
imbuing many old challenges with greater significance. For example, the behavior of
inflation7 now draws much sharper focus. When nominal interest rates were around 4 or
5 percent, a low-side surprise of a few tenths on inflation did not raise the specter of the
ELB. But the world has changed. Core inflation is currently running a bit below
2 percent on a trailing 12-month basis. In this setting, a similar low-side surprise, if it
were to persist, would bring us uncomfortably closer to the ELB. My FOMC colleagues
and I must-and do-take seriously the risk that inflation shortfalls that persist even in a
robust economy could precipitate a difficult-to-arrest downward drift in inflation
expectations. At the heart of the review is the evaluation of potential changes to our
strategy designed to strengthen the credibility of our symmetric 2 percent inflation
objective.
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The ELB problem also complicates the FOMC's efforts to achieve transparency
and accountability. The Fed, like most major central banks, is insulated from short-term
political pressures. In our democracy, that insulation carries with it an obligation for us
to be transparent and publicly accountable. When policy rates reached the ELB during
the crisis, central banks resorted to what were then new, untested tools to pursue their
mandated goals. These tools are no longer new, but their efficacy, costs, and risks remain
less well understood than the traditional approaches to central banking. My FOMC
colleagues and I are committed to explaining why the use of these tools in the wake of
the crisis was a prudent and effective approach to pursuing our congressional mandate
and why tools like these are likely to be needed again. Our review is but one part of our
efforts to engage with the public on these matters.
Let me turn to the specifics of the review, which is focused on three questions:
1. Can the Federal Reserve best meet its statutory objectives with its
existing monetary policy strategy, or should it consider strategies that
aim to reverse past misses of the inflation objective?
2. Are the existing monetary policy tools adequate to achieve and
maintain maximum employment and price stability, or should the
toolkit be expanded?
3. How can the FOMC's communication of its policy framework and
implementation be improved?
These questions are quite broad, and my colleagues and I come to them with open
minds. We believe our current policy framework is working well, and we have made no
decisions about particular changes. In fact, the review is still in its early stages.
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The first question raises the issue of whether the FOMC should use makeup
strategies in response to ELB risks. By the time of the 1999 conference, research was
beginning to show that-in models, at least-such strategies could substantially reduce
the unemployment and other costs of ELB spells.8 The simplest version goes like this:
Suppose that a spell with interest rates near the ELB leads to a persistent shortfall of
inflation relative to the central bank's goal. But what if the central bank promised
credibly that it would deliberately make up for any lost inflation by stimulating the
economy and temporarily pushing inflation modestly above the target? In the models, the
prospect of future stimulus promotes anticipatory consumption and investment that could
greatly reduce the pain of being at the ELB.9 Policymakers discussed this reasoning in
the wake of the crisis, but neither the Fed nor any other major central bank chose to
pursue such a policy.10 Why? For makeup strategies to work, households and businesses
must go out on a limb, so to speak, raising spending in the midst of a downturn. In
theory, they would do this based on their confidence that the central bank will deliver the
makeup stimulus at some point-perhaps years in the future. In models, great confidence
in central bankers is achieved by assumption. Despite the flattering nature of this
8
See Reifschneider and Williams (2000) and references therein. For a more recent review of this subject,
see Bernanke, Kiley, and Roberts (2019) and Mertens and Williams (2019).
9
Eggertsson and Woodford (2003), for example, show that optimal policy at the ELB entails a commitment
to reflate the price level during subsequent economic expansions. See also Wolman (2005) for a discussion
of the effectiveness of price-level targeting at the ELB. For a discussion of the relationship between
pricelevel targeting and average-inflation targeting, see Nessén and Vestin (2005). The strategy in
Reifschneider and Williams (2000), for instance, involves a central bank following a Taylor rule modified
to make up for shortfalls in policy accommodation during ELB episodes. Kiley and Roberts (2017) study a
strategy in which policymakers aim for inflation higher than 2 percent during normal times to compensate
for below-target inflation during ELB episodes. Also see Bernanke (2017) for a strategy in which low
inflation is made up if it occurs when the federal funds rate is at or near the ELB. See also Bernanke,
Kiley, and Roberts (2019) and Mertens and Williams (2019).
10
The Bank of Japan (2016) came closest, announcing in September 2016 an "inflation-overshooting
commitment" (p. 1). The commitment did not, however, come with any explicit goal for a degree or
duration of overshoot.
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assumption, crisis-era policymakers had major questions about whether their promise of
good times to come would really have moved the hearts, minds, and pocketbooks of the
public. Part of the problem was that the groundwork had not been laid in advance of the
downturn-a problem we could hope to fix well before next time. Policymakers also had
deeper concerns about the legitimacy and effectiveness of attempting to bind some future
FOMC to take actions that could be objectionable from a short-term perspective when the
time came to deliver.11
Research on makeup strategies has begun to grapple more seriously with the
credibility questions.12 But important questions remain. To achieve buy-in by
households and businesses, a comprehensible, credible, and actionable makeup strategy
will need to be followed by years of central bank policy consistent with that strategy.
The second question asks about the adequacy of the Fed's toolkit for providing
stimulus when facing the ELB. In the United States, we used several different
formulations of both forward guidance and large-scale purchases of longer-term
securities.13 While views differ on the effectiveness of these policies, with their use, the
unemployment rate fell steadily and inflation expectations remained well anchored,
outcomes that were favorable overall when viewed against the recoveries of many other
advanced economies. My own view is that these policies provided meaningful support
for demand, but that they should not be thought of as a perfect substitute for our
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traditional interest rate tool. In any case, we have a responsibility to thoroughly evaluate
what mix of these tools is likely to work best when the next ELB episode arrives.
Perhaps it is time to retire the term "unconventional" when referring to tools that
were used in the crisis. We know that tools like these are likely to be needed in some
form in future ELB spells, which we hope will be rare. We now have a significant body
of evidence regarding the effectiveness, costs, and risks of these tools, including those
used by the FOMC and others tried elsewhere. Our plans must take advantage of this
growing understanding as assessments are refined.
The third question concerns improving communication, which I discussed earlier
from the standpoint of governance and accountability. But transparency also plays a
central role in policy effectiveness through its effects on the expectations of households
and businesses. Of course, this was the major insight behind the transparency revolution
in central banking over the past few decades. Today, central banks publicly share a large
and ever-increasing amount of information about policy. But policymakers and
commentators inside and outside central banks sometimes question whether all of the
transparency adds up to effective communication.14
The FOMC's famous dot plot is one example. A focus on the median forecast
amounts to emphasizing what the typical FOMC participant would do if things go as
expected. But we have been living in times characterized by large, frequent, unexpected
changes in the underlying structure of the economy.15 In this environment, the most
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important policy message may be about how the central bank will respond to the
unexpected rather than what it will do if there are no surprises. Unfortunately, at times
the dot plot has distracted attention from the more important topic of how the FOMC will
react to unexpected economic developments. In times of high uncertainty, the median
dot might best be thought of as the least unlikely outcome.
Let me conclude by saying that I look forward to our discussions here and to the
ongoing work of the review that lies ahead. We need the best tools and strategies
possible for dealing with the challenges we now face, and we must communicate them in
a clear and credible way. My colleagues and I welcome your best thinking on these
issues.
References
Bank of Japan (2016). "New Framework for Strengthening Monetary Easing:
'Quantitative and Qualitative Monetary Easing with Yield Curve Control,' "
announcement, September 21,
https://www.boj.or.jp/en/announcements/release_2016/k160921a.pdf.
Bernanke, Ben S. (2017). "Monetary Policy in a New Era," paper presented at
"Rethinking Macroeconomic Policy," a conference held at the Peterson Institute
of International Economics, Washington, October 12-13,
https://www.brookings.edu/wpcontent/uploads/2017/10/bernanke_rethinking_macro_final.pdf.
Bernanke, Ben S., Michael T. Kiley, and John M. Roberts (2019). "Monetary Policy
Strategies for a Low-Rate Environment," Finance and Economics Discussion
Series 2019-009. Washington: Board of Governors of the Federal Reserve
System, February, https://doi.org/10.17016/FEDS.2019.009.
Eggertsson, Gauti B., and Michael Woodford (2003). "The Zero Bound on Interest Rates
and Optimal Monetary Policy," Brookings Papers on Economic Activity, no. 1,
pp. 139-211,
https://www.brookings.edu/wpcontent/uploads/2003/01/2003a_bpea_eggertsson.pdf.
English, William B., J. David López-Salido, and Robert J. Tetlow (2015). "The Federal
Reserve's Framework for Monetary Policy: Recent Changes and New
Questions," IMF Economic Review, vol. 63 (April), pp. 22-70.
Greenspan, Alan (1998). "Question: Is There a New Economy?" speech delivered at the
Haas Annual Business Faculty Research Dialogue, University of California,
Berkeley, September 4,
https://www.federalreserve.gov/boarddocs/speeches/1998/19980904.htm.
Hebden, James, and J. David López-Salido (2018). "From Taylor's Rule to Bernanke's
Temporary Price Level Targeting," Finance and Economics Discussion Series
2018-051. Washington: Board of Governors of the Federal Reserve System,
July, https://doi.org/10.17016/FEDS.2018.051.
Herbst-Bayliss, Svea (1999). "Fed Conference Timing on Inflation Odd, but Useful,"
Reuters News, October 20.
Kiley, Michael T., and John M. Roberts (2017), "Monetary Policy in a Low Interest Rate
World," Brookings Papers on Economic Activity, Spring, pp. 317-72,
https://www.brookings.edu/wp-content/uploads/2017/08/kileytextsp17bpea.pdf.
Mertens, Thomas M., and John C. Williams (2019). Monetary Policy Frameworks and
the Effective Lower Bound on Interest Rates, Staff Report 877. New York:
Federal Reserve Bank of New York, January,
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr877.pdf.
Nessén, Marianne, and David Vestin (2005). "Average Inflation Targeting," Journal of
Money, Credit and Banking, vol. 37 (October), pp. 837-63.
Olson, Peter, and David Wessel (2016a). "Federal Reserve Communications: Survey
Results." Washington: Hutchins Center on Fiscal and Monetary Policy at
Brookings, November,
https://www.brookings.edu/wpcontent/uploads/2016/11/fed-communications-survey-results.pdf.
--- (2016b). "Survey Finds Mixed Feelings on Fed Communication," Wall Street
Journal, November 21. (Also reprinted and available on the Brookings Institution
site at
https://www.brookings.edu/opinions/survey-finds-mixed-feelings-on-fedcommunication.)
Powell, Jerome H. (2018). "Monetary Policy in a Changing Economy," speech delivered
at "Changing Market Structure and Implications for Monetary Policy," a
symposium sponsored by the Federal Reserve Bank of Kansas City, held in
Jackson Hole, Wyo., August 23-25,
https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm.
Rachel, Lukasz, and Lawrence H. Summers (2019). "On Falling Neutral Real Rates,
Fiscal Policy, and the Risk of Secular Stagnation," paper presented at the
Brookings Papers on Economic Activity Conference, Spring, held at the
Brookings Institution, Washington, March 7-8,
https://www.brookings.edu/wpcontent/uploads/2019/03/On-Falling-Neutral-Real-Rates-Fiscal-Policy-and-theRisk-of-Secular-Stagnation.pdf.
Reifschneider, David, and John C. Williams (2000), "Three Lessons for Monetary Policy
in a Low Inflation Era," Journal of Money, Credit and Banking, vol. 32
(November), pp. 936-66.
Wiley-Blackwell (2000). Journal of Money, Credit and Banking, vol. 32 (November),
pp. 707-1109.
Wolman, Alexander L. (2005). "Real Implications of the Zero Bound on Nominal
Interest Rates," Journal of Money, Credit and Banking, vol. 37 (March),
pp. 273-96.