charles i plosser : communication challenges speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, before the 2014 us monetary policy forum – “ initiative on global markets ”, at the university of chicago booth school of business, new york city, 28 february 2014. * * * the views expressed are my own and not necessarily those of the federal reserve system or the fomc. highlights • president plosser believes the federal open market committee has to revamp its current forward guidance regarding the future federal funds rate path because the 6. 5 percent unemployment threshold has become irrelevant. • president plosser points out that before offering new forward guidance, the fomc ought to be clear about its purpose. is it purely a transparency device, or is it a way to commit to a more accommodative future policy stance to add more accommodation today? • president plosser notes that commitment is required to be successful in either approach to forward guidance. policymakers cannot maintain discretion and simultaneously commit to forward guidance and expect that guidance to be effective. introduction it is a pleasure to return to this event. the organizers have put together another great and timely program with distinguished participants. however, with governor stein and presidents kocherlakota, evans, and myself all here, i am beginning to wonder if we are in washington rather than in new york. nevertheless, it is great to be on the program with so many of my fellow policymakers. if you listen carefully to each of us, you will understand why i start with the usual caveat that my remarks represent my own views and not necessarily those of the federal reserve system or my colleagues on the federal open market committee ( fomc ). communication and transparency have been important themes in monetary policy discussions over the past decade or more. indeed, in 2007 this monetary policy forum began with alan blinder ’ s keynote address titled “ making monetary policy and talking about it. ” in part, this emphasis on communication and transparency reflects the steady evolution in the theory and science of monetary policy. reflecting this emerging consensus, the federal reserve during the tenure of chairman bernanke has taken a number of actions to promote increased transparency about its actions and policies. in fact, president evans and i served on a subcommittee led by current chair yellen specifically focused on improving communication. our efforts to improve communication took on heightened importance as the fomc responded to the financial crisis and recession. since december 2008

, which will reduce slack and allow inflation to move back to target. in this perspective, there are headwinds that are temporarily restraining economic growth, but these can be offset with aggressive monetary accommodation. an alternative view of shocks and gaps but there is an alternative interpretation. let ’ s look at a rather simple, but i think useful, figure. 1 the figure shows the level of real gdp as well as various vintages of potential gdp estimated by the u. s. congressional budget office ( cbo ). the cbo defines potential gdp as a “ measure of the economy ’ s maximum sustainable output, in which the intensity of resource use is neither adding to nor subtracting from inflationary pressure. ” 2 such a definition obviously has embedded in it some implicit assumptions about an underlying economic model, but i will return to this point shortly. i would like to draw your attention to two noteworthy features. first, during the recession, gdp fell sharply, as we all know. but since the end of the recession in june 2009, the economy has continued to grow at roughly the same pace as it grew before the recession. there has been little evidence of the rapid growth required to return the economy to the path of potential gdp as estimated by the cbo in 2007. while that may still happen, there has not been the v - shaped recovery to date anticipated by many. the shock that hit the economy appears to have had very persistent, if not permanent, effects. from a statistical perspective, the economy appears to have taken a permanent hit to the output level. the second noteworthy feature illustrated in the figure is that the cbo has revised its estimate of the path of potential gdp numerous times since the beginning of the recession. specifically, almost every year since 2007, it has revised down potential gdp. i am showing only three vintages here as an example. if you look at the “ gap, ” or the difference between the actual level of gdp – measured as of february 2013 when the latest cbo estimate of potential was released – and estimated potential, it is about half the size that it would have been if the path of potential gdp had not been revised. the gap is closing not because gdp has rebounded toward the earlier estimates of potential – but because potential gdp has fallen. and this has occurred in spite of aggressive policies – especially monetary policy – that were intended to boost economic growth rates. so, what might one infer from these observations? i want to offer a perspective based on