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fomc-communication-counterfactual

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Regarding the ELB, the previous statement was silent on the global decline in neutral policy rates, the likelihood that the ELB will constrain monetary policy space in economic downturns, and the implications of this constraint for our ability to achieve our dual-mandate goals.

dovish

Instead, I would like to address a separate but not unrelated topic, the interaction of bank supervision and regulation with monetary policy, and how supervision and regulation might work to make monetary policy implementation more effective in the current environment, particularly as it relates to a bank's demand for reserves.2 But first, let me start with a brief take on the current economic outlook.

neutral

Case studies of individual industries show that, in some cases, the planning for technological modernization has not always been adequate, with the result that some purchases of high-tech equipment and software have not added much to productivity or profits.

neutral

Another factor viewed as likely to exert a moderating effect on the growth of economic activity was the expectation of some slowing in inventory investment.

neutral

And so when asset prices went back up, probably there’ll be a swing around there, a positive contribution.

neutral

we project that, under appropriate monetary policy, inflation will rise gradually to our symmetric 2 percent objective.

dovish

Some survey measures of inflation expectations declined during the period.

dovish

Fischer, Sahay, and Vegh (2002) present evidence of a strong correlation between fiscal deficits and money creation in high-inflation economies.

neutral

So and, and, you know, the shorter-term ones do tend to move around based on, for example, gasoline prices.

neutral

Nevertheless, most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.

neutral

So that’s the kind of thinking we’ll be doing, and, again, we’re looking—ultimately, we’re not going to declare victory until we see a series of these, really see convincing evidence, compelling evidence, that inflation is coming down.

hawkish

On the other hand, the fact that productivity growth has remained solid in recent years increases confidence that a larger fraction of those productivity gains reflects longer-term developments and a smaller fraction reflects cyclical factors.

dovish

In addition, the dramatic advances in biotechnology are significantly increasing a broad range of productivity-expanding efforts in areas from agriculture to medicine.

neutral

such developments underlined persisting uncertainties about behavior in labor markets and the level and growth of the economy's sustainable potential.

neutral

The extraordinary achievement of 1996, of course, was reaching such low levels of unemployment and inflation at the same time.

neutral

In the context of this discussion, many participants commented that their view of potential output growth was somewhat more optimistic than that of the staff.

hawkish

Some have been concerned that the Federal Reserve and the Treasury might be working at cross purposes today to the extent that reductions in the Treasury debt supply have lead to declines in longer-term Treasury rates at a time when monetary policy is aiming to slow the pace of economic activity to a more sustainable rate.

hawkish

In their discussion of the economic situation and outlook, meeting participants noted that the economic information received since the last meeting pointed to a somewhat more favorable outlook regarding both inflation and economic growth than they had earlier anticipated.

neutral

To this end, the new statement conveys the Committee's judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it "seeks to achieve inflation that averages 2 percent over time," and—in the same sentence—that therefore "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

dovish

A discernable upcreep was apparent in survey measures of short- and, to a limited extent, long-term inflation expectations over recent months.

hawkish

No matter the near-term path of reducing accommodation, the FOMC must respond decisively to the data so as to maintain our credibility that we will bring down inflation.

hawkish

These indicators suggested that the financial system was fairly resilient, as did the absence of a significant increase in funding stresses or margin calls earlier this year when prices of risky assets fell and volatility rose sharply.

neutral

In dissenting, Mr. Meyer noted that although the money growth ranges do not play an important role in the conduct of monetary policy today, Congress has mandated that the FOMC set and report ranges for money and credit growth.

neutral

What policy options exist to deal with the U.S. current account deficit?

hawkish

Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, members of the Board of Governors and participating Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2017 and over the longer run, conditional on each participant's judgment of appropriate monetary policy.

neutral

Nonetheless, if the influence of globalization on inflation is as substantial as many claim, we might have expected the standard model to have had difficulty in predicting recent inflation trends.

neutral

Inflation-targeting regimes may allow some consideration of real-side costs either by specifying relatively long adjustment periods, to allow a high probability that the central bank can bring inflation down to the target within the allotted time, or by including "escape clauses" that grant temporary exemptions for large supply shocks.

hawkish

At the conclusion of this 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 information reviewed at this meeting suggests that the expansion in economic activity is still robust.

neutral

Participants' assessments of the economic outlook were little changed, with the intermeeting information generally seen as suggesting that economic growth would remain moderate over coming quarters and then pick up gradually.

neutral

Communications about monetary policy over the intermeeting period generally had little effect on Treasury yields or the expected path of the federal funds rate.

neutral

Two changes have particular relevance for the employment leg of the dual mandate.15 The new framework calls for monetary policy to seek to eliminate shortfalls of employment from its maximum level, in contrast to the previous approach that called for policy to minimize deviations when employment is too high as well as too low.

dovish

In preparation for the Federal Reserve's semiannual report to the Congress on the economy and monetary policy, the members of the Board of Governors and the presidents of the Federal Reserve Banks submitted individual projections of the growth of GDP, the rate of unemployment, and core consumer price inflation for the years 2006 and 2007.

neutral

With the latter displaying relative vigor, the value of domestic imports was likely to continue to exceed that of exports by a substantial margin, thereby tending to perpetuate the large current account deficits that had worrisome implications for the future.

hawkish

In addition, coming to grips now with the outsized projected growth in entitlement spending in the early years of the next century could have a profound effect on current expectations of stability.

hawkish

Participants anticipated that inflation would continue to gradually rise as resource utilization tightened further and as wage pressures became more apparent

hawkish

the effect of prior changes in the foreign exchange value of the dollar on core consumer prices had apparently been limited.

neutral

We know that the short end of the yield curve is dominated by monetary policy and cyclical factors.

neutral

Measures of forward inflation compensation based on Treasury Inflation-Protected Securities and inflation swaps fell further.

dovish

However, economic activity continued to be depressed in areas affected by the downturn in the energy sector and falling agricultural commodity prices, al­though several participants noted that the recent firming in crude oil prices had led to a modest increase in drilling activity.

neutral

In these circumstances, any tendency for price pressures to mount was likely to emerge only gradually and to be reversible through a relatively limited policy adjustment.

hawkish

Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information bearing on the medium-term outlook before initiating the process of policy normalization.

neutral

So, if we maintain a highly accommodative monetary policy for a very long time from here and the economy performs as we expect—namely, it’s strong and the risks that are out there don’t materialize—my concern will be that we will have much more tightening in labor markets than you see in these projections.

dovish

Alternatively, monetary policy could convert the temporary disinflationary effect into a permanent one.

hawkish

maintaining low and stable inflation.

neutral

Given the difficulty in assigning productivity increases by industry, there is a dispute on how widely productivity implicit in the information revolution has spread across the economy.

dovish

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

neutral

From a longer-term perspective we have been guided by a firm commitment to contain any forces that would undermine economic expansion and efficiency by raising inflation, and we have kept our focus firmly on the ultimate goal of achieving price stability.

hawkish

Many indicated that they expected cyclical pressures associated with a tightening labor market to show through to higher inflation over the medium term.

hawkish

Accelerating productivity poses a significant complication for economic forecasting.

dovish

Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near zero for much of the period, and failures to deliver Treasury securities reached record highs.

dovish

Moreover, a 50 basis point reduction that was associated with the communication of a Committee view that the risks to achieving its objectives for economic activity were balanced might be mistakenly interpreted in the view of some members as a signal that the Committee had come to the end of its policy easing moves--a judgment they were not prepared to make at this time.

dovish

Deflation, like inflation, would distort resource allocation and interfere with the economy's ability to reach its full potential.

dovish

Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment.

dovish

Higher productivity is unambiguously good.

neutral

That means that we can run at low levels of unemployment and have a historically good—in some dimensions—labor market without having to worry about inflation.

neutral

Nonetheless, considerable uncertainty surrounded expectations of rising inflation.

neutral

As yields on inflation-indexed Treasury securities rose roughly in line with their nominal counterparts, longer-term inflation compensation remained about unchanged.

neutral

It was noted, however, that increases in compensation that exceeded productivity gains might be absorbed to some extent by a narrowing of firms’ high profit margins.

hawkish

Net exports subtracted more than 1/2 percentage point from GDP growth in both 2014 and 2015,

neutral

Higher and more stable growth combined with better ability to undertake long-term plans can help to improve the fiscal outlook for a country.

dovish

That should gradually return the economy to full utilization of its resources, while inflation remains subdued.

dovish

The pace of real GDP growth was forecast to be faster over the second half of this year than in the first half, primarily reflecting a modest increase in the rate of growth of private domestic final purchases and a sizable turnaround in inventory investment.

hawkish

Looking ahead, FOMC participants project the unemployment rate to continue to decline; the median projection is 5 percent at the end of next year and moves below 4 percent by 2023.

neutral

Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.

dovish

I’m old enough to remember what very high inflation was like.

neutral

The U.S. economy is in a good place, and we will continue to use our monetary policy tools to help keep it there.

hawkish

The drop in the unemployment rate over the past year, while welcome and significant, could overstate the degree of improvement in labor market conditions, in part because of the decline in the labor force participation rate.

neutral

I think we all agree that the economy is making progress, that we are close to an unemployment rate that is one that’s sustainable in the longer run.

hawkish

The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.

hawkish

But the members generally were concerned that inflation might begin to rise over the intermediate term, especially if labor markets tightened further.

hawkish

Signs of an actual change in inflation were still quite tentative and anecdotal, and they did not warrant an adjustment to policy at this meeting.

neutral

Subsequently, investors revised down the expected policy path after the June employment report and the Chairman's semiannual monetary policy testimony.

dovish

We're looking at wages and we're looking at ultimately inflation.

neutral

So on the first, the Committee’s forecasts and those of most outside forecasters do show growth running below its longer-run potential this year and next year.

dovish

This lack of congressional momentum could be interpreted as lack of congressional support for inflation targeting, or it could merely reflect a more neutral absence of strong opinions.

neutral

It would consist of inflation plus—plus productivity growth.

neutral

And we’re learning to, to engage in economic activity.

neutral

To be sure, our main tool, monetary policy, is a blunt instrument that cannot be targeted at individual industries or regions.

neutral

Inflation continued to run below the Committee's longer-run objective, held down in part by the effects of declines in energy and non-energy import prices.

dovish

Indeed, consumer expenditures appeared to have been expanding moderately over the previous few months, buoyed by increases in employment, personal income, and household wealth.

neutral

With about $250 billion of these inflation-protected securities now outstanding, we can get readings along the entire maturity structure of real interest rates.

neutral

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

neutral

Indeed, over the past century, by far the smallest part of the growth in America's real gross domestic product reflects increased physical product measured in bulk or weight.

neutral

An easing of supply constraints was expected to support continued gains in economic activity and employment as well as a reduction in inflation.

neutral

Persistently strong demand and increasingly supportive conditions in debt and equity markets suggested the possibility of rising inflation pressures.

hawkish

Overall inflation was projected to remain subdued, with the staff's forecasts for headline and core inflation little changed from the previous projection.

dovish

Participants generally interpreted the information that became available during the intermeeting period as suggesting that economic growth would most likely remain moderate over coming quarters and then pick up very gradually.

neutral

Members agreed to continue to monitor inflation developments closely.

neutral

So you have seen a shift this time in most participants’ assessments of the appropriate path for policy, and, as I tried to indicate, I think that largely reflects a somewhat slower projected path for global growth—for growth in the global economy outside the United States—and for some tightening in credit conditions in the form of an increase in spreads.

dovish

Even so, most members viewed a slowing to a rate closer to most estimates of the growth of the economy's potential as a reasonable expectation.

neutral

Participants discussed the open market operations that the Federal Reserve had undertaken since September to implement monetary policy, as well as forthcoming operational measures.

neutral

With inflation much higher than the federal funds rate, the real federal funds rate is negative, even after our rate increases this year.

hawkish

Staff Economic Outlook In the forecast prepared for the March FOMC meeting, the staff's outlook for real economic activity was broadly similar to that at the time of the January meeting.

neutral

That's particularly important, because the lags in the effect of policy on economic activity and prices mean that policy decisions are necessarily based on a view of the likely path for the economy over several years, relative to the Federal Reserve's legislated objectives of maximum employment and stable prices.

neutral

Recent FOMC Decisions and the New Monetary Policy Framework At our most recent FOMC meetings, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases, and that also provided unprecedented information about our policy reaction function.

neutral

These communications were, as you would expect, biased--they were all in response to decisions to raise interest rates and most often occurred when those increases came shortly before an election.

hawkish

In addition, though the unemployment rate has fallen since the middle of 2003, the participation rate currently remains near the low point reached in the first half of 2004.

hawkish

But overly optimistic expectations for long-run earnings growth were not being driven by easy money, and I see no reason to believe that an extra 50 or even 100 basis points on the funds rate would have had much of a damping effect on investor beliefs in the potential profitability of emerging technologies.

hawkish

More recent data are not available, but I suspect that trend has continued since 1992 as the strong performance of the economy, coupled with generally ample availability of credit, has created an environment conducive to the birth and growth of innovative enterprises of all ownership types.

neutral

After taking account of both frictional and structural unemployment, what unemployment rate is roughly equivalent to the maximum level of employment that can be sustained in the longer run?

neutral