stanley fischer : the us economy and monetary policy speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the 31st annual group of thirty international banking seminar, washington dc, 9 october 2016. * * * with friday morning ’ s labor market data prominently in the news, i will start with the labor market and end with a discussion of monetary policy. 1 recent reports pertaining to the labor market, including friday ’ s release, have been solid, showing continued improvement. so far this year, payrolls are reported to have increased by 180, 000 per month. that is down from last year ’ s gains of 230, 000 per month but well above what is needed to provide jobs for new entrants into the labor force. despite the strong job growth, the unemployment rate, at 5 percent in september, has essentially moved sideways this year as individuals have come back into the labor market in response to better employment opportunities and higher wages. as a consequence, the labor force participation rate has edged up against a backdrop of a declining longer - run trend owing to aging of the population. this increase is a very welcome development. all told, with the unemployment rate not far from levels that most federal open market committee ( fomc ) participants view as normal in the longer run and the rise in the participation rate, i see the u. s. economy as close to full employment, with some further improvement expected. real gross domestic product ( gdp ) rose at a subdued 1 percent pace during the first half of the year and only 1 - 1 / 4 percent over the past four quarters. this pace likely underestimates the momentum in aggregate demand because it includes a sizable inventory correction that began early last year. it is likely that this correction has by now run its course, and most analysts are expecting inventories to make a positive contribution to demand over the second half of the year and for gdp to increase in the neighborhood of 2 - 3 / 4 percent. 2 household spending has been the main contributor to real gdp growth over the past four quarters, and, with solid gains in employment and household income and upbeat consumer sentiment, this sector should continue to support growth over the second half of the year. in contrast, residential construction has cooled this year despite rising home prices and low interest rates. housing starts have been moving sideways, suggesting little pickup in construction over the near term. in addition, business investment spending has been weak, held down in part by declining activity

no inclination on the part of the fed to move to a less expansionary stance of monetary policy. the united states makes its monetary policy for its own domestic needs : no - one could expect it ( or any other country ) to do otherwise. the problem is that a number of other countries, which fix their exchange rates to the us dollar, effectively also match us monetary policy. another group of countries, even though they have no desire to match us monetary policy, are nevertheless limited in the extent to which they can depart from it by exchange rate considerations. the net effect of all this is that, to some extent, the united states sets the world ’ s monetary policy - a partial return to the situation that prevailed under the bretton woods system. this may or may not be a bad thing, depending on where you view it from. for some parts of the world, where economic activity is subdued and domestic inflationary pressures non - existent, an extremely low interest rate structure like that in the united states may be suitable. but for other parts of the world, it could lead to the build - up of imbalances. for the world as a whole, we do not yet know whether the maintenance of an extremely low average interest rate is helpful or harmful to its longer - term interests. on the one hand, the after - effects of the bursting of asset price bubbles are still exerting downward pressure on goods and services prices in the united states and europe, and in japan ( where it has been going on for a decade or more ). more importantly, the downward pressure on goods prices - particularly internationally traded manufactured goods prices - caused by the massive expansion in chinese capacity continues apace. this is a structural phenomenon which has been with us for some time now and can be expected to remain important for the foreseeable future, particularly with india joining in. it is what economists call a positive supply shock, and among many of its effects, the one most relevant to the current discussion is that it has made the maintenance of low cpi inflation easier than it formerly was. while these influences are important, we should not forget that the international business cycle is also alive and well, and can be expected to have an influence as we go forward. good economic growth and expansionary policies are now starting to make their presence felt in a range of international markets. commodity prices ( as shown in the crb index, graph 4 ) have risen over the past two years and are now at their highest level