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Financial Services Innovation Lab, Georgia Tech 19

But first, please allow me to offer a few remarks on the economic outlook and Federal Reserve monetary policy.

In the course of the Committee's discussion of the outlook for inflation, members commented that there was no persuasive evidence in recent statistical measures that price inflation was currently picking up or that inflation expectations were rising, though the declines in both inflation and expectations experienced over the course of recent years no longer seemed to be occurring.

Notably, if people feel sure that inflation will remain well controlled, they will be more restrained in their wage-setting and pricing behavior, which (in something of a virtuous circle) makes it easier for the Federal Reserve to confirm their expectations by keeping inflation low.

Core inflation was then expected to edge down in 2009 as the impetus from prior increases in the prices of imports, energy, and other commodities abated and the margin of slack in resource use widened.

If, in their quest to reduce macroeconomic risk, policymakers overshoot and ease policy too much, they need to be willing to expeditiously remove at least part of that ease before inflationary pressures become a threat.

A potential negative cited by some members was the possibility that a weak job market, should it persist, would at some point adversely affect overall consumer sentiment and willingness to spend.

In addition, at every policy meeting, each member of the MPC is operating with the same information from the staff, and before the quarterly meetings that precede an Inflation Report, the members have sat through a number of discussions covering all aspects of the forecast.

What we really mean is that we would look at—we know that inflation will move around on both sides of the target, and what we say is that we would be equally concerned with inflation persistently above as persistently below the target.

Later in the week, however, market interest rates moved up in response to the release of the minutes of the February meeting and the mention therein of some sentiment for a larger policy tightening than had been undertaken.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

Again, the FOMC has done just that through its commitment to adjust policy as required to keep inflation at bay.

the outlook for housing activity remained favorable, given an overall economic performance in line with current forecasts of a robust expansion, related growth in incomes, and still relatively attractive mortgage interest rates.

Participants' Views on Current Economic Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of the federal funds rate.

As a monetary policy maker, I am interested in these links because the prices of financial assets affect the spending decisions of firms and households and because these prices may reveal forward-looking information relevant for setting policy.

Geopolitical uncertainties, notably those relating to developments in Iraq, frequently were cited by business contacts as a major reason for caution, but other factors inhibiting capital expenditures evidently included excess capacity and limited prospects for profits because of increased energy, insurance, pension, and other costs and a concomitant inability to raise selling prices.

Weaker demand and significantly lower oil prices were holding down consumer price inflation.

The staff forecast prepared for this meeting suggested that the expansion in economic activity would slow in coming quarters to a pace somewhat above that of the economy's estimated potential and would moderate a bit further in 1998.

Committee Policy Action Members viewed the information on U. S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook was broadly similar to that at the time of their March meeting.

Now, we have—you know, we haven’t anticipated that slowdown in productivity, and that’s one of the main reasons why we haven’t anticipated the relatively slow growth.

Recent data suggested that growth of household spending had moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly.

These are, you know, this is—this is the economy at nearly full employment or in the range—in the neighborhood of full employment.

As long as the Federal Reserve is required to set and report ranges for money and debt growth, it should update them as appropriate.

This information helps Committee members deduce how their own actions and statements are likely to affect asset prices and yields.

And one reason for that is that long-term interest rates generally embody two factors.

Generally speaking, the growth of profits and the related buildup of cash have been broadly distributed across industries.

Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant.

Even so, in the absence of major overhangs in inventories of business equipment and consumer durables, and given favorable conditions in financial markets, members believed that a resumption of moderate, sustainable growth after a relatively brief period of weakness was the most likely outlook for the economy.

The rationale for monetary policy tightening is, in my judgment, quite straightforward and flows from two assessments about the current state of the economy.

In this case headline inflation will rise well above its underlying trend as the price of energy rises

Finally, while my assessment of maximum employment incorporates a wide range of indicators to assess the state of the labor market—including indicators of labor compensation, productivity, and price-cost markups—the employment data I look at, such as the Kansas City Fed's Labor Market Conditions Indicators, are historically highly correlated with the unemployment rate.9 My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP median of modal projections of 3.8 percent.

Major equity indexes appeared to be supported by lower interest rates and posted modest gains despite the increases in energy prices.

The staff's near-term forecast for inflation was revised up a little, as recent data showed somewhat faster-than-anticipated increases that were judged to be only partly transitory.

In this less comfortable world, restoring price stability can involve a painful process of slow growth and elevated unemployment.

The associated range for growth of total domestic nonfinancial sector debt was provisionally set at 3 to 7 percent for 1999.

Nonetheless, those restraining influences were expected to abate over time and economic activity strengthen gradually.

They noted that the realization of such a development could make it harder for the Committee to achieve 2 percent inflation over the longer run.

The first area is the characterization of good monetary policy in increasingly realistic and complex model environments.

Of course, if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act.

Conclusion To sum up, none of us, obviously, can see the future, and instead we shall have to monitor incoming data closely for evidence of any shifts in recent productivity trends.

Equity prices in most foreign countries were up moderately since the January FOMC meeting.

The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

To abstract from the potential effects of cyclical factors on the yield curve, consider the pattern of forward rates many years into the future, at which point the effects of current cyclical shocks would be expected to no longer be important.2 Such forward rates reflect not only market expectations of future short-term interest rates

Accordingly, while the weight of current economic output is probably only modestly higher than it was a half century ago, value added, adjusted for price change, has risen well over threefold.

While these developments were positive, participants noted several factors that likely would continue to restrain the expansion in economic activity.

China has eased some of its most stringent COVID containment measures but recently revived travel restrictions in some areas, and its approach to the pandemic remains an upside risk for inflation.

If labor demand cools, will separations increase and shift the curve outward, increasing unemployment further?

Many would ask what challenges could monetary policymakers possibly face in the U.S., given the remarkable combination of consistent above-trend growth and declining inflation?

The Committee's accompanying statement noted that economic growth had slowed over the course of the year, partly reflecting a substantial cooling of the housing market.

While accommodative financial conditions and reduced income tax rates should continue to undergird consumer spending and the data on retail sales for July displayed relatively impressive gains, negative wealth effects from falling stock market prices, declining payrolls, and sluggish income gains--should they persist--might well depress consumer expenditures over coming months.

Real yields increased more than their nominal counterparts, while inflation compensation implied by Treasury Inflation-Protected Securities declined.

Many participants noted that they expected household spending to be a primary contributor to economic growth going forward.

But some would argue that monetary policy is actually further away from neutral, based on the fact that current inflation is so much higher than the federal funds rate.

Nevertheless, the role of this consideration in inflation dynamics should not be overlooked or underestimated.

Looking to the future, however, the members generally agreed that the risks were in the direction of a heightening in inflation pressures despite their belief that growth in overall demand now seemed to have declined to a more sustainable pace and probably would continue to expand for a time at a rate below that of the economy's output potential.

The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash.

At the time, we could only observe outcomes that did not fit with preconceptions; try to find rationales that explained what we were seeing; and in the process, derive implications about the future that could be used to guide a forward-looking monetary policy.

But, really, it isn’t monetary policy.

The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

Household spending stepped up in mid-April, coinciding with the first disbursement of stimulus payments to households and a ramp-up in the payout of unemployment benefits, and showed the most pronounced increases in the states that received more benefits.9 With some of the fiscal support measures either provided as one-off payments or slated to come to an end in July, the strength of the recovery will depend importantly on the timing, magnitude, and distribution of additional fiscal support.

Apart from notably adverse business sentiment and disappointing growth in sales and profits, factors that were curbing capital expenditures cited by members included persisting capital overhangs stemming from what were now seen as excessive earlier buildups in equipment and software and substantial idle capacity in many industrial and commercial structures.

Although we are hearing some reports of large retailers planning markdowns due to excess inventories, we do not have hard data at an aggregate level suggesting that businesses are reducing margins in response to more price sensitivity among customers.

If you look at core PCE inflation, which is a good measure of where inflation is running now, if you look at it on a 3-, 6-, and 12-month trailing annualized basis, you’ll see that inflation is at 4.8 percent, 4.5 percent, and 4.8 percent.

The latter could well be augmented by sharply rising medical costs and by attempts to protect the purchasing power of wages from the erosion caused by the rise in energy prices.

It is important to note, however, that although sound policy undoubtedly helped create the conditions for growth, macroeconomic policy cannot create growth itself.

These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its longer-run potential.

This modal projection for the path of the unemployment rate is, according to the Atlanta Fed jobs calculator, consistent with a rebound in labor force participation to its estimated demographic trend and is also consistent with cumulative employment gains this year and next that, by the end of 2022, eliminate the 7 million "employment gap" relative to the previous cycle peak I mentioned earlier.5 As is the case for GDP growth and the unemployment rate, my projections for headline and core PCE (personal consumption expenditures) inflation are also similar to the paths of the SEP median of modal projections for these variables.

Mr. Broaddus dissented because he continued to believe that a modest tightening of policy would be prudent in light of the apparent persisting strength in aggregate demand for goods and services.

As is evident in the right-hand chart, the relationship between the growth differential and capital inflows to EMEs seems to be quite strong.

Last year was the fifth consecutive year that inflation, measured by the chain GDP price index, was 2.6% or lower and the 5-year compound annual inflation rate is now 2.5%, the lowest since 1967.

The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years.

The challenge is to set a strategy that respects this uncertainty, takes advantages of opportunities for better performance, while mitigating the risks of overtaxing the limits of sustainable production and growth.

Some saw a risk that inflationary pressures might develop more rapidly than currently anticipated as resource utilization tightened,

The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity.

The weakness in commodity prices and the appreciation of the dollar also continued to weigh on activity in the energy and agricultural sectors.

The threat to global economic growth and financial stability posed by the fiscal situation in some European nations sparked widespread flight-to-quality flows over most of the intermeeting period.

September 01, 2020 Bringing the Statement on Longer-Run Goals and Monetary Policy Strategy into Alignment with Longer-Run Changes in the Economy Governor Lael Brainard At "How the Fed Will Respond to the COVID-19 Recession in an Era of Low Rates and Low Inflation," an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington, D.C. (via webcast) Share Watch Live I want to thank David Wessel for hosting this event.

Some members expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward.

Looking ahead, the anticipated pickup in employment and related gains in incomes, undergirded by continued robust growth in structural productivity, was seen as supporting further expansion in consumer spending.

Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011 and over a longer horizon.

Because an interest rate, by definition, is the exchange rate for money against non-monies, money obviously is central to monetary policy.

And so you’re seeing prices are moving back up off their lows there.

European equity prices were also lower over the period.

If this policy succeeds ex post, inflation expectations become anchored at the new lower level of inflation, and policy can, then, respond to demand shocks by adjusting real rates pro-cyclically, the opposite of what is required when initial inflation is too high and inflation expectations are not anchored.13 Inflation will also be pro-cyclical with well-anchored inflation expectations if demand shocks dominate and inflation expectations remain anchored.

However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.

I will focus my remarks today on the use of explicit forward guidance as a tool for monetary policy.1 Before I start, let me briefly discuss near-term monetary policy.

Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously.

That said, our model accords the greatest roles to increased productivity growth, which has made the United States a magnet for foreign saving, and to the slump in foreign domestic demand, which has led to an excess of saving in those economies.

But, again underscoring an earlier point, this tightness of the labor market has not manifested itself in ongoing escalation of wage inflation.

In keeping with its usual procedures under the Humphrey-Hawkins Act, the Committee would review its ranges at midyear, or sooner if interim conditions warranted, in light of the growth and velocity behavior of the aggregates and ongoing economic and financial developments.

You might ask: Does successful monetary policymaking really require all this additional knowledge?

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

Inflation in 1996, measured by the chain price index for GDP or the core CPI, was the lowest in 30 years.

Reports from several Districts suggested that firms had greater scope than in the recent past to raise prices in response to strong demand or increases in input costs, including those associated with tariff increases and recent rises in fuel and freight expenses.

The median expectation for inflation over the next 5 to 10 years from the Michigan survey edged down in October to a new historical low,

It is generally thought that monetary policy takes many months to have most of its effect on the growth of output and employment, while, of course, it has an immediate impact on financial markets.

The members concluded that retaining a risk statement weighted toward more inflation pressures would best represent their current thinking, but they believed it was desirable to provide some recognition of the emergence of increased downside risks to the economic expansion in the statement to be released after this meeting.

They also generally expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

Pressures on resources would rise as the anticipated upturn and possible above-trend growth brought the economy closer to full capacity utilization.

The Federal Reserve Bank of New York was authorized and directed, until instructed otherwise by the Committee, to execute transactions in the System Account in accordance with the following domestic policy directive: The information reviewed at this meeting suggests that the expansion in economic activity has slowed considerably after a very rapid advance in the first quarter.

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.