, workforce development, and economic development. three stages of monetary policy normalization in thinking about the outlook for monetary policy, it ’ s useful to remember how we got to where we are today. the financial crisis and the great recession led the fomc to lower the federal funds rate target to near zero and to keep it there for seven years. this lengthy spell at zero reflected the long shadow of the crisis — evident in the subsequent subdued growth rate and inflation rate — and the need for the economy to convalesce after enormous trauma. with the unemployment rate still very high and inflation low, the federal reserve embarked on a long journey through terra incognita of unconventional monetary policy actions, including large - scale asset purchases and forward guidance on the future path of interest rates. we weren ’ t alone : indeed, some central banks across the globe went even further down the road of unconventional policies. in part due to the fed ’ s actions, the u. s. economy gradually recovered, and as a result the fomc has been slowly but surely moving monetary policy “ back to normal. ” this process can be thought of in three stages. stage 1 : lift - off the first stage in policy normalization focused on the lift - off of the federal funds rate target from near zero, which occurred in december 2015. but, well before that happened, the fomc went to great effort to communicate its thinking to the public to better prepare it for the upcoming change in policy. 2 importantly, we also made extensive preparations to ensure that we were ready and able to raise rates as needed, in the context of a very large fed balance sheet and bank reserves. and, consistent with the fed ’ s aim to be as transparent as possible, we published our plans on how we would use interest rates paid on bank reserves and overnight reverse repurchase agreements to keep the federal funds rate within the fomc ’ s target range. 3 at the time — in light of the shallow recovery and low inflation — the fomc was very focused on balancing the risk of a premature removal of accommodation against concerns that excesses could eventually develop in the economy. in the end, lift - off went without a hitch. the approach developed back then has served us extremely well in controlling the federal funds rate, and has proven to be flexible as market conditions have evolved. i will come back to this point later. 2 / 5 bis central bankers'speeches stage 2 : normalization the second stage

07 - 25. html 4 / 14 7 / 25 / 2019 inflation targeting and economic welfare | speeches | rba the second explanation for low inflation is the continuing existence of spare capacity in parts of the global economy. the existence of spare capacity was an important factor explaining low inflation in the aftermath of the global financial crisis. and today, it remains a factor in some countries, including here in australia. but, on the surface, it is a less convincing explanation for low inflation in countries where unemployment rates are now at multi - decade lows. based on conventional measures of capacity utilisation, these economies are operating close to their sustainable limits. one explanation for continuing low inflation in this environment is that the current rate of aggregate demand growth is simply not fast enough to put meaningful pressure on capacity. if so, stronger demand growth would be expected to see inflation pick up. another possibility is that the unemployment rate, by itself, no longer provides a good guide to spare capacity, partly due to the flexibility of labour supply. i will come back to this idea in the discussion of inflation outcomes in australia. the third explanation is that globalisation and advances in technology have changed pricing dynamics. there are two main channels through which this appears to be happening. the first is by lowering the cost of production of many goods. and the second is by making markets more contestable and increasing competition. the main effect of these changes should be on the level of prices, rather than on the ongoing rate of inflation. but this level effect is playing out over many years, so it appears as persistently low inflation. it is widely accepted that the entry into the global trading system of hundreds of millions of people with access to modern technology put downward pressure on the prices of manufactured goods. reflecting this, goods prices in the advanced economies have barely increased over the past couple of decades ( graph 4 ). but the effects of globalisation and technology extend beyond this and into almost every corner of the economy, including the services sector. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 07 - 25. html 5 / 14 7 / 25 / 2019 inflation targeting and economic welfare | speeches | rba graph 4 in today's globalised world, there are fewer and fewer services that can be thought of as truly non - traded. many services can now be delivered by somebody in another country. examples include : the preparation of architectural drawings, document design and publishing, customer