janet l yellen : unconventional monetary policy and central bank communications speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the university of chicago booth school of business us monetary policy forum, new york, 25 february 2011. * * * the u. s. monetary policy forum has become an important venue for promoting an exchange of views among policymakers, academics, and financial market participants. i ’ m pleased to participate in this panel on lessons learned about unconventional monetary policy. in my remarks today, i ’ ll highlight the role of central bank communications in bolstering the effectiveness of unconventional monetary policy. 1 it is not my intention to provide new information about the outlook for the u. s. economy or monetary policy. the federal open market committee ( fomc ) has deployed unconventional monetary policy tools to promote economic recovery and price stability since late 2008. in particular, after the intensification of the financial crisis, conventional monetary policy became constrained by the zero lower bound on nominal interest rates. at that point, the fomc began to provide forward guidance about the likely path of the federal funds rate, and the federal reserve also announced a program to buy agency debt and mortgage - backed securities ( mbs ). over time, the purchase program was augmented substantially and was expanded to include longer - term treasury securities. furthermore, on several occasions, the fomc has communicated to the markets about the likely longer - term trajectory of its holdings of treasury securities, agency debt, and agency mbs. in the remainder of my remarks, i will present some evidence regarding the effectiveness of these policy tools and discuss important similarities and differences in the transmission mechanisms through which they influence the economy. i will also present some simulations of a macroeconometric model to illustrate the importance of clear and effective communication in conjunction with the use of these unconventional policy tools. some general observations it is important to recognize at the outset that conventional and unconventional monetary policy actions bear many similarities. forward guidance concerning the path of the federal funds rate, for example, is explicitly intended to influence market expectations concerning the future trajectory of shorter - term interest rates and thereby affect longer - term interest rates. that said, standard monetary policy actions also typically alter not just current short - term rates, but the anticipated path of short - term rates as well, influencing longer - term rates through the identical channel. in fact, central bankers have long recognized that this “ expectations channel ” operates most effectively when

these forecasts are based on the assumption of a three - month libor of 0 % and a depreciating swiss franc. in the foreseeable future, there is no risk of inflation in switzerland. if foreign demand were to fall off more sharply than expected, downside risks to price stability would emerge. global economic outlook following a very weak second quarter, the global economy picked up again slightly in the third quarter, benefiting from the resumption of production following the earthquake disaster in japan. the decline in commodity prices during the third quarter also had a positive effect. in japan, the us and china in particular, aggregate economic activity strengthened slightly. in the euro area, on the other hand, economic growth was weak. the outlook for global growth is nevertheless subdued, and has, if anything, deteriorated since the last monetary policy assessment. the most recent us economic data have been somewhat better than expected, but the escalation of the european debt crisis has clouded the economic outlook for the euro area. bond yields for fiscally weak states have risen markedly. the growing unease among market participants is also reflected in the increased volatility on the financial markets. mounting borrowing costs and the high level of uncertainty are contributing to a marked worsening of the business climate in the euro area. bis central bankers ’ speeches the snb has adjusted its growth assumptions for the euro area over the next three years substantially downwards. for the rest of the world, on the other hand, our forecasts remain essentially unchanged. uncertainty about the future outlook for the global economy remains extremely high. in particular, the european sovereign debt crisis poses grave risks for the international financial system and the real economy. swiss economic outlook in switzerland, the pace of growth slowed considerably in the third quarter. according to preliminary estimates, annualised real gdp increased by only 0. 9 %. in particular, the substantial appreciation of the swiss franc over the summer is weighing heavily on the swiss economy. exports fell sharply. at the same time, domestic final demand stagnated. the economic slowdown was accompanied by a slight decrease in technical capacity utilisation. in manufacturing, it is now around the long - term average. in the construction industry, it has declined slightly, but remains at a very high level. narrow profit margins and mounting concerns over the international outlook held companies ’ demand for labour in check. the introduction of the minimum exchange rate has corrected the massive overvaluation of the swiss franc and has given