robert t parry : monetary policy in a new environment - the us experience speech by mr robert t parry, president and chief executive officer of the federal reserve bank of san francisco, at the joint bundesbank / bis conference on “ recent developments in financial systems and the challenges for economic policy ”, held in frankfurt, 28 - 29 september 2000. * * * it ’ s a pleasure to have this opportunity to give you a us perspective on the challenges of conducting monetary policy in an environment of structural change. in the us, there is, of course, no modern - day parallel to the historic events in the financial sector here in europe. the formation of a monetary union and a multinational central bank poses precedent - setting challenges for policy. at the same time, the us has seen massive and rapid changes in its financial sector. i ’ ll argue, however, that while these changes in the us financial sector have posed challenges, they have not posed significant problems for the fed ’ s conduct of monetary policy for quite some time. of course, financial change was a major issue in policy 20 years ago. at that time, financial deregulation and innovation undermined the stability of the monetary aggregates, which were a central part of fed policymaking. since that history is probably familiar territory to you, i plan to review it only briefly. the bottom line is that by the mid - 1980s, we had relegated the monetary aggregates to a minor role. since then, the fed has been able to accommodate ongoing deregulation and respond to shocks in the financial sector by focusing on adjustments in the federal funds rate. more recently, the challenges for the fed have been on the real side of the economy - and here i ’ m referring especially to a technology shock. while a technology shock that boosts productivity is a wonderful thing, it also has created uncertainty about the proper course for policy. as i understand it, productivity growth rates have not yet begun to accelerate in europe. however, it would seem to be only a matter of time before the ecb will face the challenge of responding to a comparable technology shock. in any event, i ’ d say that our recent experience makes a good case study in conducting monetary policy in the face of great uncertainty - an issue of importance to any central bank. let me start with a brief look at the history of our experience with financial change. in the late 1970s, the buildup of us inflation pushed nominal interest rates up against the legal interest rate ceilings on

0 and 4. 0 percent annually. the recovery, though moderate, is based on a greater monetary stimulus and lower market interest rates ; stronger fiscal stimulus ; increased trading partners ’ growth ; a real depreciation of the peso ; and improved private expectations. as already noted, for this projection, the board assumes that the medium - term growth of the chilean economy is between 4 and 4. 5 percent. the domestic demand growth forecast for 2014 has also been corrected downward, particularly for investment. this change responds to actual second - quarter indicators that fell short of the forecast, and to the capital goods corporation ’ s investment projects that were revised downward in the last survey. in contrast, a stronger impulse from public expenditure is expected, particularly from investment. on the private consumption side, we expect it to keep growing for the rest of the year at a slower pace than was forecast in june ( table 2 ). annual cpi inflation, still affected by high monthly variations early in the year and the direct effects of the recent depreciation of the peso will remain above 4 percent throughout the remainder of 2014. by 2015, in line with the lower inflationary pressures that are inferred from the cyclic evolution of the economy and the high basis of comparison, annual inflation of both the cpi and the cpiefe will have a quick descent to 3 percent. then it will hover around 3 percent until the end of the forecast horizon, this time the third quarter of 2016 ( figure 9 ). this inflation trajectory is based on the assumption that the indirect effects of the nominal and real depreciation of our currency will be more than offset by the state of the capacity gaps over the projection horizon. the board ’ s assessment yields that the current level of the real exchange rate ( rer ) is consistent with the cyclical state of the economy and the internal and external financial conditions, although it is slightly above the range of its estimated longterm values. as a methodological assumption, it considers that the exchange rate will have a slight appreciation in real terms over the long run, as the cyclical conditions of our economy normalize. about the mpr, the changes in the domestic macroeconomic scenario have lowered its expected level compared with june. as a working assumption, we estimate that the mpr will follow a path comparable with what can be inferred with different expectations measures available at the closing of this report. these measures suggest that the mpr will see additional cuts going forward, that will take