lael brainard : the " new normal " and what it means for monetary policy speech by ms lael brainard, member of the board of governors of the federal reserve system, at the chicago council on global affairs, chicago, illinois, 12 september 2016. * * * in the months ahead, my colleagues and i will continue to assess what policy path will best promote the sustained attainment of our goals. with that in mind, i would like to start by describing the contours of today ’ s economy that will be particularly important in shaping the appropriate path of policy before reviewing recent developments. these contours represent noteworthy departures from the “ old normal ” that prevailed in the decades prior to the financial crisis. i would argue that policy today must rely less on the old normal as a guidepost and instead be sensitive to the contours that shape today ’ s “ new normal. " 1 key features of the “ new normal " because monetary policy is forward looking, policymakers must assess how key features of the economic environment are most likely to influence the future path of the economy and shape policy accordingly. at a time when our assessment of the economy is evolving, several features of the “ new normal " — some of which are interrelated — appear particularly noteworthy for our policy deliberations : 1. inflation has been undershooting, and the phillips curve has flattened first, for the past several decades, policymakers relied on the empirical relationship between unemployment and inflation embodied in the phillips curve as a key guidepost for monetary policy. the phillips curve implied that as labor market slack diminished and the economy approached full employment, upward pressure on inflation would result. however, since 2012, inflation has tended to change relatively little — both absolutely and relative to earlier decades — as the unemployment rate has fallen considerably. 2 at a time when the unemployment rate has fallen from 8. 2 percent to 4. 9 percent, inflation has undershot our 2 percent target now for 51 straight months. 3 in other words, the phillips curve appears to be flatter today than it was previously. with the phillips curve appearing to be a less reliable guidepost than it has been in the past, the anchoring role of inflation expectations remains critically important. on expected, similar to realized, inflation, recent developments suggest some reasons to be concerned more about undershooting than overshooting. although some survey measures have remained well anchored at 2 percent, consumer surveys have moved to the lower end of their historical

preparation for his own role in history. almost as important were the hundreds of fed economists, lawyers, bank supervisors, and market specialists who worked around the clock to craft creative solutions to every financial market challenge. i will never know how many hours it took to develop and implement all of the programs they presented in a series of emergency board meetings. i do know that they responded to every question and strived to mitigate every risk that was identified. and while the strain was evident in their tired eyes, the collegiality and intellectual rigor that i have come to know as a hallmark of the federal reserve never wavered. finally, for me, was the knowledge of all those small businesses that depended on credit to run their businesses. the fed provided credit to banks large and small. in addition, through other programs, we supported securities made up of loans to households and businesses, including loans for business equipment, for inventory, for insurance payments, for business credit cards, and for loans guaranteed by the small business administration. to be sure, lenders reacted to uncertain economic conditions and weaker borrowers by tightening credit standards. but, with liquidity provided by the federal reserve, loans to borrowers who met the tighter standards continued to flow. the u. s. economy continues to face challenges, but i am convinced that the forceful actions of the federal reserve in 2008 helped prevent what might have been a far worse scenario. the federal reserve was originally created to guard against financial panics. but in modern times, many people think of its primary role as responsibility for monetary policy. the congress has given the federal reserve two objectives, known as our dual mandate, to foster maximum employment and price stability. in its conduct of monetary policy, the fed bis central bankers ’ speeches influences the level of output and the level of prices in the economy through changes to interest rates and credit conditions. during more normal times, the federal reserve ’ s policymaking is focused on short - term interest rates, our main tool for steering the economy. the fed influences the costs of borrowing to buy everything from cars to condos to computers by controlling short - term interest rates. interest rates can be lowered to stimulate borrowing and spending when demand is otherwise weak, or raised to dampen demand and curb inflation. before i arrived in august 2008, the federal reserve had already responded to the weakening in the economy by aggressively lowering its federal funds rate target from 5 – 1 / 4 percent in september 2007 to 2 percent. from a historical