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Between the end of July and the FOMC's September meeting, we will get two employment and CPI reports with data for July and August.

Both total and core inflation were projected to move up slightly next year, as the low readings early this year were expected to be transitory, but nevertheless to continue to run below 2 percent.

But, certainly, we’ve had a lot of years in which interest rates have been low.

While participants viewed the downside risks to their forecasts of economic activity over the projection period as having diminished, their assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed.

Major stock price indexes were up a bit over the intermeeting period, as positive first-quarter earnings reports more than offset the negative effects of higher energy prices and rising interest rates.

However, other participants noted that the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from the current level of resource utilization.

Implications of Economic Theory I am going to assert some conclusions based on economic theory that help to understand the potential for monetary policy to achieve these objectives and the consistency among them.

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 in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate.

Prominent among these risks were a possible intensification of strains in the euro zone, with potential spillovers to U. S. financial markets and institutions and thus to the broader U. S. economy; a larger-than-expected U. S. fiscal tightening; and the possibility of a further slowdown in global economic growth.

But speculators rarely succeed in dislodging an exchange rate that is firmly rooted in compatible policies and cost structures.

In their discussion of considerations related to asset purchases, various participants noted that these purchases were an important part of the monetary policy toolkit and a critical aspect of the Federal Reserve's response to the economic effects of the pandemic, supporting smooth financial market functioning and accommodative financial conditions, which aided the flow of credit to households and businesses and supported the recovery.

From the end of 2000 to the end of 2003, productivity rose at a 3-1/2 percent annual rate and, even after recent downward revisions to the data, it is estimated to have increased at an average annual rate of 2-1/4 percent since the end of 2003.

Several participants noted the increase in agricultural crop prices over 2020 and the associated improvement in farm revenues.

While a preemptive tightening move might be warranted in the not-too-distant future to help contain inflationary pressures in the economy, these members believed that a symmetrical directive would best convey the message that no tightening action was contemplated for the weeks immediately ahead.

Recent increases in house prices and equity prices were positives,

May 26, 2021 The Economic Outlook and Monetary Policy Vice Chair for Supervision Randal K. Quarles At the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C. (via webcast) Share Watch Live Thank you, David, and thank you to Brookings and the Hutchins Center for the opportunity to lead things off and be part of this very distinguished panel.

Beyond 2017, the forecast for real GDP growth was little revised.

Their key finding, illustrated in figure 3, is that Federal Reserve policy rate surprises attributed to stronger U.S. growth generally have only moderate spillovers to EM financial conditions, whereas U.S. policy rate changes attributed to U.S. inflationary pressures trigger more substantial spillovers to EM financial conditions.

Members agreed that the Federal Reserve was committed to using its full range of tools to support the U. S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Potentially, waiting could require more disruptive policy tightening actions later and could risk the credibility of the System's anti-inflation policy.

In particular, the unemployment rates in the metropolitan areas of South Dakota have consistently been lower than in rural areas, and this relative abundance of job opportunities has tended to encourage migration to areas such as Sioux Falls.

Therefore, even in the case of personal computers, where we have made such great strides in measuring quality changes, I suspect that important phenomena still may not be adequately captured by our published price indexes.

What implications do these results have for our broader understanding and for the practice of monetary policy?

In contrast, in cases in which variations in the demand for reserves or in external factors affecting reserve supply appear likely to be temporary, the Desk typically prefers to conduct open-market operations through short-term or long-term repurchase agreements, known as repos.

A few participants expressed less confidence in this outlook for inflation and commented that inflation had averaged less than 2 percent over the past several years even as resource utilization had increased, or pointed to downward pressures from global or technology-related factors that could continue to suppress inflation.

Financial markets are the channel through which our policy affects the economy, and asset prices contain valuable information about investors' expectations for the course of policy, economic activity, and inflation, as well as about the risks around those expectations.

Market-based measures of inflation compensation remained low

In general, participants viewed recent consumer price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee's symmetric 2 percent objective on a sustained basis.

Many potential inflation targeters ask, "Why not zero?"

So, you know, I can’t—all I can tell you is, we’ll be looking at weak global growth.

An environment involving such interest rates could have adverse repercussions on the functioning of some sectors of the money market, but the members agreed that the potential extent of such disruptions would not be sufficient to prevent the Committee from taking advantage of the full scope of conventional easing of the federal funds rate, should that become necessary.

The result could be cross-border spillovers from the increase in U.S. domestic demand, reducing the effect on U.S. real activity and inflation and potentially contributing to external imbalances.

The central tendency of the unemployment rate projections is slightly lower than in the March projections and now stands at 6.0 to 6.1 percent at the end of this year.

While more moderate growth in consumer spending for durable goods seemed likely after an extended period of robust expansion, these favorable factors suggested that the risks of a different outcome were tilted in the direction of faster-than-projected expansion.

And in so far as that will affect monetary policy, of course we will have to factor those policies along with many other things, including the global environment and oil prices and other matters.

However, the deficit was up appreciably from its average for the first quarter, with the value of imports increasing substantially more than the value of exports.

This is the scenario from which we draw the lesson that timely, typically preemptive, policy restraint to avoid the excesses of a boom results in longer expansions and avoids unnecessary fluctuations in both output and inflation.

Advances in productivity had boosted profit margins, and high margins were helpful in that they could absorb some portion of any cost increases for a time.

Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy.

That's why I said that flexibility is also an important characteristic of monetary policy during a time of financial turmoil.

Three Asset-Price-Bust Episodes Let us first examine the U.K. recession of 1974.

Our goal of price stability was achieved by most analysts' definition by mid-2003.

So I, you know, I’m—I feel quite comfortable that we can—in particular, that we can raise interest rates at the appropriate time, even if the balance sheet remains large for an extended period.

The changes to the policy statement that we made over the past few FOMC meetings bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC's estimates of "shortfalls [emphasis added] of employment from its maximum level"—not "deviations."

These participants stated that, in such circumstances, a major challenge facing policymakers—especially in the presence of the effective lower bound on the federal funds rate—was to maintain a policy stance sufficiently accommodative to keep average inflation at 2 percent and thereby bolster the credibility of the Committee's new policy framework, facilitating the achievement of both maximum employment and price stability.

It will include all data relevant to our dual mandate of stable prices and maximum employment.

M2 growth picked up appreciably during December and January, evidently reflecting extra demands for liquidity and safety during the century-date-change period.

The unwinding in the early months of 1997 of special factors that had boosted net exports in the fourth quarter of 1996 was offsetting some of the effects on production of the persisting strength in domestic demand.

More recently, with inflation under control, overheating has shown up in the form of financial excess.

At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.

Japan enjoyed effective price stability through most of the 1980s.

That is a positive for growth.

The vote encompassed approval of the statement below to be released at 2:00 p. m. : "Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.

The guidance indicates an expectation that it will be appropriate to maintain the current target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

still outpace that of potential over this period, leading to a decline in the unemployment rate to historically low levels, as monetary policy was assumed to remain highly accommodative.

In the Committee's discussion of current and prospective economic developments, members referred to the widespread statistical and anecdotal evidence that the surprising strength in economic activity over the closing months of 1996 was persisting in 1997.

In addition, the median estimate of the longer-run normal unemployment rate moved down a tenth to 4.6 percent.

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

In their discussion of prices, participants indicated that data over the intermeeting period, including measures of inflation expectations, suggested that underlying inflation was not in the process of moving higher.

The strong support from monetary policy, together with fiscal stimulus, should turn the K-shaped recovery into a broad-based and inclusive recovery that delivers full employment, as Mike McCracken would have wished.

And we’d like to see that in the form of a series of declining monthly inflation readings—that’s what we’re looking for.

In the circumstances, most members endorsed a proposal to delete as no longer necessary the previous summary statement relating to the risks to growth and inflation taken together.

What I’m telling you is that the stance of monetary policy we have today, we believe, is appropriate.

Much of the current spending for equipment and software reportedly represented replacement demand largely associated with the short useful lives of various types of equipment, and there appeared to be little spending that would entail capital deepening.

In their review of the outlook for prices, members noted that incoming data over the intermeeting period had shown a slowing in core inflation from the high levels posted earlier in the year, consistent with the Committee's view that a portion of the earlier increase had reflected transitory factors.

Recent data pointed to little change in underlying inflation trends.

Financing conditions in capital markets remained broadly accommodative, supported by low interest rates and high equity valuations.

In the productivity boom that followed World War I, a chief technological innovation was the spread of electrification to the factory floor.

But I have seen little direct evidence on the extent to which globalization may have boosted aggregate productivity growth in the United States in recent years.

Moreover, when some measures of inflation were close to 1 percent in 2003, the Federal Open Market Committee's official statements specifically noted that any further substantial decline in inflation would be unwelcome, mainly because of the risk that a falling price level (which has not occurred since the Great Depression) could cause a significant disruption to economic activity and employment.

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

This effort culminated in 1943 with the publication of Banking and Monetary Statistics, which included annual figures on demand and time deposits from 1892 and on currency from 1860.

Accordingly, in the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, the Committee decided that a slightly higher federal funds rate might be acceptable or a somewhat lower federal funds rate would be acceptable during the intermeeting period.

This equation relates inflation to, among other factors, lagged inflation, resource utilization, and movements in the relative price of imports excluding energy, semiconductors, and computers.

The steepening of the yield curve was due mostly to sharply lower short- and intermediate-term forward rates, consistent with investors' apparently more pessimistic outlook for economic growth.

they differed to some extent regarding the prospects for further increases in inflation.

To see this, suppose that a speculative bubble has emerged and that a central bank, operating under a conventional strategy, has raised interest rates to keep the projected output gap closed and expected inflation at its desired level before the bubble bursts.

For inflation, we can use the 12-month change in core PCE prices, a measure of the current underlying rate of inflation.

The housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates.

But because the United States has run persistent and sizable primary trade deficits since 1990, the net external debt is now 25 percent of GDP and rising sharply.

Indeed, an oft-quoted quip by economist Robert Solow held that, as of the late 1980s, "computers are everywhere except in the productivity statistics."

Indeed, scattered evidence dating back to ancient Rome and before reflects the same order of interest rate magnitude, not a one percent interest rate nor 200 percent.

Recent data on core consumer prices led the staff to mark down slightly its forecast for core PCE inflation.

However, reports from business contacts in several Districts indicated that employers in labor markets in which demand was high or in which workers in some occupations were in short supply were raising wages noticeably to compete for workers and limit turnover.

Other economies, such as Argentina and Hong Kong, have fixed their exchange rates essentially through currency boards.

More subtly, my conclusion that the effects on inflation of transitory changes in commodity prices or in the value of the dollar tend to dissipate in the longer run depends on the assumption that the public's inflation expectations are well anchored.

another indicated that the Committee could provide guidance stating that it would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level at a specific horizon.

Consider our estimates of real economic activity.

Now, we’ve long expected, as most analysts have, to see some slowing in Chinese growth over time as they rebalance their economy.

In their discussion of forward guidance about the target federal funds rate, a few members suggested that lowering the unemployment threshold to 6 percent could effectively convey the Committee's intention to keep the target federal funds rate low for an extended period.

First, insofar as recent productivity growth is concerned, I have a serious question about the quality of the data that we employ to measure output in today's economy.

However, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.

As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from "flexible inflation targeting" to a "flexible form of average inflation targeting.

In July, the range for M3 had been raised by two percentage points to reflect developments that seemed to be fostering a return to the historical pattern of somewhat faster growth in M3 than in M2.

Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate was intended to foster trading in the federal funds market at rates well within the FOMC's target range.

Consumer credit continued to increase at a steady pace, with similar growth rates across credit card, automobile, and student loans.

While prices in equity markets had turned up from their recent lows, the cumulative losses in financial wealth incurred since early 2000 clearly were having an adverse impact on expenditures by households and the higher cost of equity capital was inhibiting business investment.

The American economy is very strong and well positioned to handle tighter monetary policy.

In contrast, the rise in oil prices during the 1970s was probably seen at the time as largely reflecting a permanent shift in global demand/supply balances.