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Financial Services Innovation Lab, Georgia Tech 19

To cite a recent study, Faust and Wright (2007) show that real-time staff forecasts of inflation reliably outperform statistical benchmarks at all horizons and that this advantage is not solely the result of the staff's expertise at estimating near-term inflation rates.

Economic Outlook and Monetary Policy Now I would like to turn to the current economic scene and this week's FOMC decision.

The simplest answer is that interest rates should vary to imitate qualitatively the way they would behave if the Fed were implementing a money supply target.

A key difference between the two groups of countries is that the countries whose current accounts have moved toward deficit have generally experienced substantial housing appreciation and increases in household wealth,

I did indicate that I do have concerns about the scope for monetary policy.

Surveys indicated that households’ expectations of inflation over the next year were little changed in February

In that vein, several participants noted that inflation expectations had been sensitive to incoming data and to communications regarding monetary policy over the intermeeting period.

Members again mentioned concerns on the part of business contacts regarding the adverse economic implications of very large deficits for the economy over the longer term.

According to the Taylor Rule, the federal funds rate should adjust over time to changes in utilization rates (the gap between actual and potential output or between the unemployment rate and NAIRU) and to changes in inflation.

The changes to the policy statement that we made over the fall 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."

In its accompanying statement, the Committee indicated that, despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appeared solid.

The unmooring of inflation expectations greatly complicated the process of making monetary policy

” The vote encompassed approval of the paragraph below for inclusion in the statement to be released shortly after the meeting: “The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.

In the household sector, the ongoing deceleration in house prices further restrained the growth of home mortgage debt.

Over this period, inflation remained above most definitions of price stability, and the Federal Reserve was not actively seeking to reduce it.

And I can only say qualitatively that the Committee will continue to look at the evolution of the outlook, try to assess whether unemployment is making sufficient progress towards our objectives, and, in particular, whether the recovery is still continuing.

This is an example of offsetting the attenuation in the response to the output gap with a more aggressive response to inflation realizations.

In the household sector, the rise in home mortgage debt likely slowed a bit further in the first quarter, as home-price appreciation appeared to have remained sluggish.

Two members preferred to leave the target range at 1 to 1-1/4 percent, suggesting that the Committee should wait to raise the target range until inflation moves up closer to 2 percent on a sustained basis or inflation expectations increase.

And I need not remind you that the low inflation we now have was dearly purchased in the late 1970s and early 1980s with the highest interest rates since the Civil War and the highest unemployment rate since the Depression.

Some also argue that resistance to nominal wage cuts will impart an upward bias to real wages as price stability approaches or outright deflation occurs, leaving the economy with a potentially higher level of unemployment in equilibrium.

The invasion and related events were creating additional upward pressure on inflation and were likely to weigh on economic activity.

By definition, multifactor productivity includes technical change, organizational improvements, cyclical factors, and myriad other influences on output per hour, apart from capital investment.

We have a much more resilient, stronger banking system, and we’re not seeing some worrisome buildup in leverage or credit growth at successive levels.1 So, you know, this is something that the FOMC pays attention to,

In keeping with the practice at meetings when the Committee establishes its long-run ranges for growth of the money and debt aggregates, the members of the Committee and the Federal Reserve Bank presidents not currently serving as members had prepared individual projections of economic activity, the rate of unemployment, and inflation for the year 1996.

About two years after the onset of the financial crisis, the ECI moved up slightly in 2010 and then remained essentially flat at an annual growth rate of 2 percent over a five-year period between 2010 and 2015.

Market-based measures of inflation compensation have also picked up.

This was a key reason why currency crises of the past few decades were so costly: Sharp depreciations of the exchange rate boosted the domestic-currency value of foreign debt and wreaked havoc with government finances and corporate balance sheets.

Incoming data suggested that, after a weak start to the year, foreign economic activity accelerated in the second quarter.

Growth in household spending moderated toward the end of last year,

That projection, along with the path to year-three inflation, should help the public differentiate short-term shocks to price stability from the longer-term price trends it should use for planning purposes.

In the staff forecast prepared for this meeting, the economy was seen as likely to expand at a moderate pace, supported by accommodative monetary policy and financial conditions.

While numerous contacts reported generally disappointing holiday sales in an environment of atypically large and widespread discounting, a surge in motor vehicle sales in December fostered by aggressive sales incentives and some pickup in retail sales late in the holiday season helped to sustain moderate overall growth in consumer spending through the year-end.

some market-based measures of inflation expectations and inflation risk suggested continuing concern among market participants about the risk of higher medium-term inflation, perhaps reflecting large fiscal deficits and the size of the Federal Reserve's balance sheet.

On the positive side, weakness in world demand for oil was fostering a significant downtrend in energy prices, albeit with adverse effects on energy producers in this country and abroad.

Given stable prices, savers and investors have more confidence about the ultimate value of their investments.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

The members expected price pressures to remain relatively contained over the next several quarters in the context of what they anticipated would be only a gradual reduction of the excess capacity in labor and product markets as the recovery progressed.

Among other questions that could be addressed would be how policy actions (as opposed to inflation outcomes) influence expectations and how sensitive Federal Reserve credibility is to short-run departures from low inflation.

Mortgage rates, corporate bond rates, and other yields and asset prices moved in sympathy, with important effects on the cost of borrowing and hence, presumably, on aggregate demand.

The jobs picture continues to be strong, with the unemployment rate near historic lows and with stronger wage gains.

Improved prospects for a trade deal between the United States and China and accommodative monetary policy were cited as driving factors that outweighed weaker-than-expected announcements of corporate earnings for the fourth quarter of 2018 and earnings projections for 2019.

This is modeled by assuming that wage change depends on q*, while the inflation equation (based on the markup equation) depends on q.

Although productivity growth had slowed from the extraordinarily rapid pace that prevailed earlier in the expansion, data for the fourth quarter of 2004, as well as preliminary indications for the first quarter of this year, suggested that gains from efficiency remained substantial.

Those developments included a recent uptick in core measures of consumer prices, a drop in the dollar on foreign exchange markets, and still elevated energy prices--all against the backdrop of longer-term inflation expectations that were firmly anchored.

Labor productivity growth slowed to an average pace of 1.4 percent per year over this period,

Flexible inflation averaging could bring some of the benefits of a formal average inflation targeting rule, but it would be simpler to communicate.

With respect to this particular part of the District, Jack may discuss Florida's citrus crop, the relative health of the tourism industry, and trends in Florida real estate prices.

Nonetheless, participants noted a risk that the drop-back in inflation could be slower or more limited than the Committee would find desirable since resource utilization was currently tight and the pickup in price increases had been broadly based rather than being limited to a few specific sectors that could be linked to energy costs.

Subsequently, the expected future path of monetary policy dropped amid increasing concerns about the health of financial institutions.

Given recent developments, the medium-term outlook for inflation will receive particular scrutiny.

households’ and professional forecasters’ longer-term inflation expectations edged lower.

If independence is also defined in terms of assuring the ability and commitment of the central bank to achieve price stability, this commitment can be protected by an explicit price stability mandate from the government.

At the end of the day, we all benefit from plentiful jobs and stable prices, whether we are savers or borrowers--and many of us, of course, are both.

And the way I would explain it is, is that inflation that’s too low will mean that interest rates are lower.

A few participants pointed to continued strong growth in multifamily construction, although the limited pipeline of new projects in one District suggested that activity could slow in 2015.

We must keep in mind that, difficult as the problem seems, consistently measured prices do exist in principle.

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

The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer—are not exhausted, there are still other things that the central bank can do to create additional accommodation.

Faster productivity growth was among the factors that boosted equity valuations

In general, financial markets were viewed as well positioned to support more vigorous expansion in economic activity.

Inflation has declined further below our longer-run objective, largely reflecting the lower energy prices I just mentioned.

Still, core consumer price indices remained relatively damped and had risen only a little over the last year, especially when measured by the PCE chain-price index, and that suggested underlying price pressures remained largely contained.

Palmer was a professor at Wharton, a fellow of the American Statistical Association, a worldwide expert on manpower and labor mobility, and a consultant with the Office of Statistical Standards.5 She argued that "a single figure of unemployment, regardless of how it is defined or derived, is inadequate as a basis for selection among [policy] programs.

not enough to lower the unemployment rate, and labor productivity seemed to be trending sharply upward.

In addition, the Survey of Terms of Business Lending conducted in the first week of November showed that interest rates on C&I loans were generally little changed while spreads remained extremely wide.

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.8 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.

While the underlying demand for residential housing continued to be robust and government outlays evidently were rising, the expansion of consumer spending seemed to have slowed, and outlays for capital spending were still very sluggish in an environment of business uncertainty and pessimism.

Domestic respondents to the April SLOOS generally reported tightening their lending standards and experiencing weaker loan demand across all major CRE loan categories during the first quarter.

Inflation is a significant challenge for everyone, but it hits lower- and moderate-income people the hardest, since they spend a larger share of their incomes on necessities and often have less savings to fall back on.

Referring to monetary policy developments in the 1980s, Greenspan writes: In recognition of the lag in monetary policy's impact on economic activity, a preemptive response to the potential for building inflationary pressures was made an even more important feature of policy.

Members noted that most broad measures of inflation moved together over extended periods of time, but they did not always do so over short intervals.

The staff assessed that households were in a better position than in the mid-2000s to weather a downturn in house prices, noting that mortgage debt growth has significantly lagged growth in house prices, leaving households with substantial equity cushions.

On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility.

My goal is not to draw conclusions on recent movements in risk premiums but rather to give you a sense of how estimates of risk premiums may influence our policy decisionmaking, to note some of the difficulties that we face in interpreting their movements, and, I hope, to stimulate further research in this already fertile field.1 At the Federal Reserve, we pay a lot of attention to financial market prices in the formulation of monetary policy.

Market sentiment toward the syndicated leveraged loan market also improved, with the average bid price increasing noticeably and bid-asked spreads narrowing a bit further.

This increase was slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) moved down to 1.

The fundamental price of an asset typically is defined in terms of the discounted present value of the income stream or equivalent services that the asset is expected to provide over time.

Moreover, current data suggested little or no growth in overall expenditures on nonresidential structures.

In particular, I will focus on liquidity regulation and supervision as well as interactions with monetary policy tools.

The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability. "

We found that a surprise increase of 25 basis points in the funds rate target typically results in a decline in broad equity indexes of about 1 percent, whereas a change in the funds rate that is expected by the market has essentially no effect on stock prices.17 Our work is just one example of a number of event-study analyses that may well shed light on the effects of monetary policy and the channels of monetary policy transmission.

That’s probably related to gas prices and also just stock prices to some extent for other people.

In their discussion of monetary policy for the intermeeting period, Committee members agreed that the Federal Reserve's large-scale securities purchases were providing financial stimulus that would contribute to the gradual resumption of sustainable economic growth in a context of price stability.

Risks to the inflation projection also were seen as balanced.

For example, given the starting point for the outlook, the forecasts will trace out a path for the economy to preserve or reestablish maximum employment and price stability that will reflect FOMC participants' views of the relative variation in output and inflation that is possible in the short run.

Participants discussed several risks that, if realized, could necessitate a steeper path of increases in the target range; these risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level, perhaps owing to fiscal stimulus or accommodative financial market conditions.

However, it was noted that slower growth in productivity might have become the norm.

A commonly used analogy takes the U.S. economy to be an automobile, the FOMC to be the driver, and monetary policy actions to be taps on the accelerator or brake.

In that regard, the changes in the macroeconomic environment that underlie our monetary policy review may have some implications for financial stability.

All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern.

However, reports from a couple of Districts indicated that the agricultural sector was still weak, with low commodity prices continuing to put financial pressure on farm-related businesses.

Many members of the Committee, participants, have said that they think policy should be based on the actual evolution of economic activity and inflation, which tends to be variable over time, and that’s why I say I anticipate it will be data dependent.

With the boost from these factors fading, real GDP growth was projected to step down noticeably in 2023 and to be roughly equal to potential output growth in 2023 and 2024.

You know, we’re, we’re—inflation measures are always going to be a bit volatile.

In their discussion of developments in asset markets, the participants' comments focused on two related issues: the low level of long-term interest rates and the continued run-up in home prices.

Monetary policy decisions are judgment calls, informed by forecasts and discussions about how the economy is likely to evolve, alternative possibilities, and potential responses to policy actions.

Staff Economic Outlook In the economic forecast prepared by the staff for the June FOMC meeting, real GDP growth in the second half of this year was expected to step up from its pace in the first half.

Well, you know, if the economy were disappointing, we—you know, our actions wouldn’t purely be based on inflation, we would also take employment into account.

Most projected somewhat slower growth through next year, and a smaller reduction in unemployment, than they had projected in April.