lael brainard : monetary policy in a time of uncertainty speech by ms lael brainard, member of the board of governors of the federal reserve system, at the brookings institution, washington dc, 17 january 2017. * * * there are many sources of uncertainty affecting the trajectory of the u. s. economy and, by extension, the appropriate path of monetary policy. in particular, there has been speculation about significant changes to fiscal policy of late, although the magnitude, composition, and timing of any fiscal changes are as yet unknown and will depend on the incoming administration and the new congress as well as the vicissitudes of the budgeting process. even once any changes are enacted, uncertainty will remain about their effects on the overall economy. it thus seems possible that monetary policy could be affected for some time by uncertainty surrounding fiscal policy and its effects on the economy. 1 macroeconomic outcomes are difficult to predict before i turn to the possible effects of fiscal policy, it is helpful to remind ourselves of the immense uncertainty that accompanies any attempt to forecast future economic developments. many possible surprises could materially affect the future path of the u. s. economy, such as shocks to the price of oil, the foreign economic outlook, the rate of productivity growth, the sentiment of households and businesses, financial stability, and fiscal policy, to name a few. the resulting uncertainty makes it difficult to predict the future path of activity, unemployment, and inflation. by statute, the federal reserve is mandated to conduct monetary policy to promote the long run goals of maximum employment and stable prices. in today ’ s framework, the federal open market committee ( fomc ) has defined stable prices to mean 2 percent inflation. the fomc adjusts the stance of policy in light of incoming economic information and its implications for the outlook. uncertainty about future employment and inflation naturally translates into uncertainty about the path of future monetary policy. one useful measure of uncertainty is the magnitude of forecast errors, or the extent to which macroeconomic outcomes have differed from professional economic forecasters ’ expectations. 2 over the past 30 years, outside forecasts of the unemployment rate four quarters ahead have missed the actual unemployment rate by more than 3 / 4 percentage point in either direction one - third of the time. since notable departures from forecast values of unemployment and inflation occur with some frequency, it should not be surprising that the associated forecasts of interest rates have a similar track record. one - third of the time over the past

economic outlook from historical forecast errors ( pdf ), ” financial and economic discussion series 2007 – 60. washington : board of governors of the federal 1 these remarks represent my own views, which do not necessarily represent those of the federal reserve board or the federal open market committee. 2 the analysis of forecast errors presented here uses data from 1986 to 2015 from the federal reserve bank of philadelphia ’ s november survey of professional forecasters. for more on the construction of forecast errors, see reifschneider and tulip ( 2007 ) and board of governors ( 2014 ). 3 the short - term interest rate used in this analysis is the three - month treasury bill rate. 4 annual data on cyclically adjusted federal deficits can be found in table c - 2 of the congressional budget office ( 2016, p. 126 ) report the budget and economic outlook : 2016 to 2026. the analysis takes a three - year centered moving average of the cbo ’ s estimates of the cyclically adjusted federal deficit, which can be quite volatile from year to year, and compares this average for the year prior to the new administration to the average in the sixth year of the new administration. 5 for example, see table 3 in the congressional budget office ( 2015, p. 6 ) report estimated impact of the american recovery and reinvestment act on employment and economic output in 2014. 6 see brainard ( 2015 ). 7 see laubach and williams ( 2015 ). for the most up - to - date laubach - williams estimates of the natural rate of interest, a concept closely related to the neutral rate, see www. frbsf. org / economicresearch / files / laubach _ williams _ updated _ estimates. xlsx. also see the most recent median estimates of the real neutral rate from the new york federal reserve bank ’ s survey of primary dealers ( www. newyorkfed. org / markets / primarydealer _ survey _ questions. html ) and survey of market participants ( www. newyorkfed. org / markets / survey _ market _ participants. html ). for estimates of the real neutral rate based on the summary of economic projections, see bongard and johannsen ( 2016 ). 8 for an analysis of macroeconomic behavior near the zero lower bound, see evans and others ( 2015 ). 9 see cucuru ( forthcoming ). 10 for estimates of the effect of exchange rate changes on inflation and gdp growth, see gruber, mccall