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Financial Services Innovation Lab, Georgia Tech 19

For example, in his monetary policy testimony of July 1992, Chairman Greenspan said, "As I have often noted to this committee, the most important contribution the Federal Reserve can make to encouraging the highest sustainable growth the U.S. economy can deliver over time is to provide a backdrop of reasonably stable prices on average for business and household decisionmaking" (Greenspan, 1992, pp.

Job growth last month was fairly widespread, although heavy hiring in the construction sector was due partly to efforts to repair damage from the four hurricanes that hit the southeastern states.

In particular, participants judged that communicating the Committee's expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful because it could lead to pricing of longer-term interest rates consistent with the path of monetary policy that policymakers saw as most likely.

Our Congressional mandate is to achieve full employment and price stability in the United States.

This policy preference was based on expectations of growth in business activity at a pace averaging in the vicinity of the economy's potential, a perception among the members that the risks to such an outlook were more balanced than earlier, and anticipations that under these circumstances inflation would remain constrained.

Since the previous FOMC meeting, spreads on municipal bonds narrowed substantially, on net, moving near levels observed for several years before the pandemic, as investor demand exhibited some recovery over much of the period from earlier weak levels.

These headwinds—which include developments abroad, subdued household formation, and meager productivity growth—could persist for some time.

(4') U** = U* - (1/b) [q - q*] U** = short-run or effective NAIRU However, once productivity growth stabilizes at a higher level, q* will eventually catch up to q, and the disinflationary effect will gradually diminish and then completely disappear.

most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.

The Federal Reserve and ECB Framework Reviews The monetary policy framework reviews conducted by the Federal Reserve and the ECB provide another example of monetary policy correlation.

And downward revisions to the longer-run normal unemployment rate in a way suggests that participants are seeing more slack in the economy now than they previously did.

Even so, the growth rate of the ECI did not return to the levels experienced before 2008.

In 2019, sluggish growth abroad and global developments weighed on investment, exports, and manufacturing in the United States,

I believe the current move can be justified in a forward-looking variant of the Taylor Rule, where today's policy depends on the forecast of future output gaps and inflation.

One participant suggested that the economic projections would be more understandable if they were based on a common interest rate path.

Monetary Policy But it is monetary policy--and the Fed's principal monetary lever, the federal funds rate, which is the interest rate on overnight loans of reserves between depository institutions--that earns the Federal Reserve all that ink and airtime.

Although members generally saw little risk that maintaining very low short-term interest rates could raise inflation expectations or create instability in asset markets, they noted that it was important to remain alert to these risks.

So there’s been a number of emerging markets—as you know, we’re suffering under the weight of declines in oil prices that are affecting their economic activity.

The current range readily encompassed the growth rate seen likely to be associated with the members' forecasts for economic activity and prices.

The vote also encompassed approval of the sentence below for inclusion in the press statement to be released shortly after the meeting: Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

They noted that economic activity and employment had continued to recover

Prices, interest rates, stock prices, and other signals produced by market economies to encourage the distribution of productive resources have no inherent moral content.

Auctions of GSE debt following the conservatorship announcement reportedly attracted heavy demand, but market participants indicated that liquidity in the secondary market for GSE debt remained somewhat lower than normal.

A number of global factors were seen as contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets.

Members agreed that their policy decisions would remain data dependent, and they continued to include wording in the statement noting that 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 would likely occur sooner than currently anticipated, and, similarly, that if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated.

Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions.

Rents have grown dramatically, and while home sales have slowed, the continued increasing price of single-family homes indicates to me that rents won't decline anytime in the near future.

However, we have also found that excluding volatile food and energy prices generally gives a better sense of underlying inflation pressures that are likely to persist and dominate total inflation over time.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.

Participants' Views on Current Conditions and the Economic Outlook In 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 of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run.

The severity of the 1981-82 recession, the worst of the postwar period, clearly illustrates the danger of letting inflation get out of control.

The course of underlying inflation pressures was more difficult to gauge, however.

And we’ve seen significant outflows of capital from those countries, pressures on their exchange rates, and concerns about their performance going forward.

We said that we would "aim to achieve inflation moderately above 2 percent for some time" to ensure that it averages 2 percent over time and that inflation expectations stay anchored.

And what it is is, it’s an expression of the thinking about individual Committee members about appropriate monetary policy and the path of the economy.

They also agreed that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity.

In addition to the headwinds facing demand, there could be persistent effects on the supply side of the economy.

In the residential real estate sector, home sales, prices, and construction had shown signs of stabilization in many areas and were increasing modestly in others, but a still-sizable inventory of unsold existing homes continued to restrain homebuilding.

Nonfarm payroll employment increased sharply further in January and February, and the civilian unemployment rate, at 4.

As a result, as in the January forecast, real GDP was expected to rise at a moderate pace over 2011 and 2012, supported by accommodative monetary policy, increasing credit availability, and greater household and business confidence.

Major reasons for optimism about the outlook were the substantial easing in monetary policy, whose lagged effects would be felt increasingly in the year ahead, and the fiscal stimulus measures that already had been enacted and might well be supplemented over coming months.

Strong fundamentals, including low interest rates, wide profit margins, and a high level of liquid assets, were seen as supporting expenditures on software and equipment going forward.

Market-based measures of inflation compensation remained low

Although single-family housing starts had come down substantially from their peak, the drop had lagged the decline in demand, and as a result, inventories of new homes had risen considerably.

So tonight, I would like to take a few minutes to put this action in the broad context of the Fed’s mandate to promote the stable financial environment that will encourage economic growth.

However, with tightening resource constraints indicating unsustainable growth, only tentative signs that growth might be slowing, and various factors that had been damping prices now turning around, all the members agreed on the need for a slight tightening at this meeting to raise the odds on containing inflation and forestalling the inflationary imbalances that would undercut the very favorable performance of the economy.

Now, members of the Committee have different views about why this is likely to be true, that the funds rate—when the labor market is normalized and inflation is back to our objective—they maybe have slightly different views on exactly why it’s likely to be the case that interest rates will be a little lower than they would in the longer run.

The early days of stabilization policy in the 1950s taught monetary policymakers not to attempt to offset what are likely to be temporary fluctuations in inflation.15 Indeed, responding may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times.

Trends in wages and prices have remained stable in recent months.

And, and those are—that’s again—that goes to keeping this episode as short as it can be and avoiding unnecessary business bankruptcies, unnecessary household bankruptcies, and unnecessary long-term stays of unemployment or supporting people through them so that they can maintain their financial footing and their lives and be able to go back to work in a productive way.

The benefits achieved through more-stable prices are substantial.

Several saw that outlook as depending importantly on continued strengthening of the labor market or on an above-trend pace of economic activity.

The asset purchases are about creating some near-term momentum in the economy, trying to strengthen growth and job creation in the near term, and the increases in the federal funds rate target, when they ultimately occur, are about reducing accommodation.

Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while.

Some participants stated that low interest rates appeared to be contributing to strong sales of autos or, more generally, of consumer durables.

They noted that the economy had entered the new year with considerable momentum and very few indications that growth was moderating from what appeared to be an unsustainable rate.

To the extent the global economy is weak and the United States is strong, it’ll—we’ll wind up, you know, we’ll wind up exporting some of our demand through, through imports rather than having, having a lot of exports.

Price shocks.

The vote encompassed approval of the paragraph below for inclusion in the statement to be released shortly after the meeting: "The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

The behavior of inflation had been unexpectedly benign for an extended period of time for reasons that were not fully understood.

I should note that growth itself does not cause inflation.

But an intriguing alternative is to set a target for the price level.

Job gains had remained solid, and the unemployment rate had stayed near its recent low.

Indicators of longer-term inflation expectations were little changed, on balance.

But I think that that’s a prudent move, to move in a gradual way to remove Chair Yellen’s Press Conference FINAL accommodation, with unemployment now—and not only, I should say, the unemployment rate, but I think any indicator of labor market performance and tightness that you could look at, whether it’s household perceptions of the availability of jobs, difficulty that firms report in hiring workers, the rate at which workers are quitting their jobs, the rate of job openings, all of these indicators do signal a tight labor market.

Going forward, consumer outlays were expected to be supported by further advances in employment and income.

However, with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields.

The expansion of M3 picked up over September and October, reflecting a strong acceleration in its non-M2 component that was associated with strong inflows to institutional money market funds and stepped-up issuance of large time deposits to meet credit demands.

The major reason for these significant differences in spending out of household wealth is doubtless that, while home prices do on occasion decline, large declines are rare; the general experience of homeowners is a modest, but persistent, rise in home values that is perceived to be largely permanent.

I think that keeping interest rates low is still appropriate for our economy.

We need to remember that in decades past it was believed that monetary policy was most effective when it was least transparent.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.

The increase over the last few months in five-year measures of inflation compensation derived from Treasury nominal and inflation-indexed securities might be a warning sign that expectations were not as well anchored as they had been over the summer.

Given the pressure of a considerable amount of unused resources, any adverse developments that held down economic expansion would increase the probability of further disinflation.

In 1951, the Treasury-Federal Reserve Accord freed the Fed from the obligation to support Treasury bond prices.

It’s where we always want inflation to be heading.

Nevertheless, a number of participants cited notable declines in survey measures of consumer confidence since the onset of financial turbulence in mid-summer, along with sharply higher oil prices, declines in house prices, and tighter underwriting standards for home equity loans and some types of consumer loans, as factors likely to restrain consumer spending going forward.

As always, each participant’s projections are conditioned on his or her own view of appropriate monetary policy.

Recent data on consumer prices and unit labor costs led the staff to revise down slightly its projection for core PCE price inflation for 2010 and 2011

One branch of economists holds the view that monetary policy should not be influenced by any perceived financial market bubbles.

We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

We think that the economy will need highly accommodative monetary policy and the use of our tools for an extended period.

In both of the examples I have just discussed, the medium-frequency evolution of market-based, survey-based, and model-based estimates of r* and expected inflation have, over time, tended to move broadly together.

Mishkin and Jonas (forthcoming) describe the experiences of the three transition economies with inflation targets.

Remarkably, 30-year Treasury yields were only slightly lower than 10-year yields throughout the episode, implying that the markets had no confidence that inflation would ever return to 1950s or 1960s levels.

There was also a sharp acceleration in productivity over 1997, which held down unit labor costs.

Money growth was damped by a rise in the opportunity cost of holding M2 assets (as typically occurs in periods of policy tightening).

A number of participants indicated that the Committee should resume asset purchases only if substantially adverse economic circumstances warranted greater monetary policy accommodation than could be provided by lowering the federal funds rate to the effective lower bound.

The strength in corporate profits in the first quarter not only impressed economists, but it also impressed investors, who drove stock prices up earlier this year.

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.

Although a spike in energy prices eroded real income growth in the second quarter, there were solid gains in wages and salaries.

Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. "

"2 One useful insight into how actual inflation may affect expectations about its future path is based in the concept of "rational inattention.

After a short coffee break, we have a staff presentation on the alternatives we face in setting monetary policy.

November 08, 2021 Flexible Average Inflation Targeting and Prospects for U.S. Monetary Policy Vice Chair Richard H. Clarida At the Symposium on Monetary Policy Frameworks, The Brookings Institution, Washington, D.C. (via webcast) Share Watch Live Outlooks and Outcomes for the U.S. Economy The U.S. economy in the second quarter of this year made the transition from economic recovery to economic expansion.1 Given the catastrophic collapse in U.S. economic activity in the first half of 2020 as a result of the global pandemic and the mitigation efforts put in place to contain it, few forecasters could have expected—or even dared to hope—in the spring of last year that the recovery in gross domestic product (GDP), from the sharpest decline in activity since the Great Depression, would be either so robust or as rapid.

These geopolitical events also pose downside risks to growth.

In our most recent monetary policy statement—which was released following our January meeting—we indicated that "with inflation well above 2 percent and a strong labor market," we expected that it would "soon be appropriate to raise the target range for the federal funds rate.

The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting.

and it seems to produce results not too different in practice from those associated with central banks that are flexible inflation targeters.

First, the significant appreciation of the dollar over the last two years has clearly had an important restraining effect on U.S. inflation, both via the direct effect on the prices of imported goods and on the pricing power of domestic firms producing import-competing goods.