richard h clarida : the federal reserve's review of its monetary policy strategy, tools, and communication practices speech by mr richard h clarida, vice chairman of the board of governors of the federal reserve system, at the conference on “ monetary policy strategy, tools, and communication practices ” ( a fed listens event ), hosted by the federal reserve bank of chicago, chicago, illinois, 5 june 2019. * * * good morning, and welcome to day two of the federal reserve system conference on monetary policy strategy, tools, and communication practices. 1 i think you will have to agree that the presentations and discussion yesterday were uniformly thoughtful, substantive, and stimulating, and today we will have another impressive lineup of speakers and panelists addressing timely topics that are relevant to our review. and let me convey on behalf of chair powell, the board of governors, and the reserve bank presidents, a sincere and deep appreciation to all the participants on this program, especially the authors of the seven outstanding papers, for the time, thought, and energy that went into preparing their contributions. yesterday professors eberly, stock, and wright provided us with a thorough and thoughtful evaluation of the federal reserve ’ s monetary policy strategy, tools, and communications since 2009. they conclude that the policy tools that the federal open market committee ( fomc ) relied on — " level policy ” and “ slope policy, ” to use their terminology — helped restore the u. s. economy to health and bring it close to the statutory goals of maximum employment and price stability assigned to us by the congress. as was noted several times yesterday, in recent years forecasters and policymakers have been surprised by the decline in the unemployment rate and the size of the sustained ongoing gains in payroll employment. fomc participants ’ estimates of the longer - run normal rate of unemployment in the summary of economic projections illustrate this point — they have drifted lower over time as labor market conditions have improved and inflation has remained quiescent. 2 the paper by professors abraham and haltiwanger provided us with an innovative search - andmatching model to estimate labor market slack — which complements the standard estimates based on unemployment gaps and phillips curve relationships. on that same general topic, the panel discussion of national and community leaders moderated by governor brainard provided a valuable perspective on the labor market that could not otherwise be gleaned from the aggregate statistics we often consult. of course, notwithstanding what is taught in many u. s.

) usually mirror one another over the cycle. in the current episode, these two measures have diverged to a greater degree than has been typical in the past. this divergence is likely related to another defining feature of this expansion, the investment boom which has raised the level of net investment to the point where the capital stock is expanding rapidly, raising capacity and preventing the increase in demand from overtaking supply. the unemployment rate is signaling that the labor market is tight ; but the capacity utilization rate indicates that supply and demand are well balanced, at least in the industrial sector of the economy. as a result, there has been some upward pressure on wages, but no pass - through to higher price inflation. firms report an absence of pricing leverage because nothing gives a firm pricing power like excess demand and there is no apparent excess demand for u. s. firms, especially in the global market place where there is plenty of slack abroad. the most intriguing explanations of the recent favorable performance are structural changes which may have expanded the limits to productive capacity and trend growth. these possibilities come in two forms : structural change in the labor market which lowers nairu and structural change in the product market, specifically higher productivity growth, which, at least temporarily also lowers the nairu, and which pushes out the limit of trend growth. one explanation for why we can sustain stable inflation with lower unemployment is the worker insecurity hypothesis. according to this theory, corporate restructuring, globalization, and technological change have increased workers ’ insecurity about their jobs. as a result, workers have been willing to accept some restraint on their real wages in order to increase their prospects of remaining employed, leading to a more moderate rate of increase in wages than would otherwise have occurred at any given rate of unemployment. while this is consistent with a decline in the nairu, we cannot very precisely test the worker insecurity hypothesis itself. but it does fit some of the facts of the current labor market experience. my conclusion is that nairu has declined, even taking into account the role of temporary factors, though i cannot pin down definitely the source of the decline. i am simply adjusting my estimate to the data. the worker insecurity hypothesis is a possible explanation. an example of a product market structural change would be an increase in trend productivity growth. this is clearly the most intriguing of all the potential explanations, because it ties together so many puzzles. it can explain why we are in a midst of an investment boom, why the profit share