at all times, but it is even more critical when the federal funds rate is at or near its effective lower bound. in this environment, a decline in inflation expectations that drives up the real interest rate and thereby increases the real cost of credit cannot be offset by simply lowering the federal funds rate. thus, in a very direct sense, a fall in inflation expectations when the target interest rate is at the zero bound represents a de facto tightening of monetary policy and of financial conditions. such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum. in this situation, the fomc must be clear and resolute in its commitment to its price stability objective. this is why the most recent fomc statement clearly stated that underlying inflation was running somewhat below levels consistent with the dual mandate. there are a range of options we could pursue if we judged it worthwhile to go even further in communicating our objectives and intent. we could be even more explicit with regard to the inflation rate that the committee views as compatible with price stability, for instance, by stating an explicit inflation objective as is common practice in other advanced economies. this could help anchor inflation expectations at the desired rate. it would also clarify the extent to which the current level of inflation falls short of that rate. if we were to go down this path, it would be important to note that any provision of more information on our inflation objective would not be a signal that the inflation element of the dual mandate had become more important than the full employment objective. instead, it would principally reflect the fact that inflation being “ too low ” ( just like inflation being “ too high ” ) is an impediment to achieving the full employment objective of the dual mandate. if we judged it desirable, we could go still further and provide more guidance on how monetary policy would react to deviations from any stated inflation objective. one possibility would be to keep track of inflation shortfalls when the federal funds rate is constrained by the zero bound, as is the case today. for example, if inflation in 2011 were a 0. 5 percentage point below the fed ’ s inflation objective, the fed might aim to offset this miss by an additional 0. 5 percentage point rise in the price level in future years. in the current environment, such an approach would have some advantages as well as some disadvantages. when there is a large amount of slack in the economy

john c williams : the economic outlook - the “ new normal ” is now remarks by mr john c williams, president and chief executive officer of the federal reserve bank of new york, at the economic club of new york, new york city, 6 march 2019. * * * as prepared for delivery thank you for the kind introduction. it ’ s a great pleasure to be here today and a huge honor to be joining the board of the economic club of new york. this institution has been an essential forum for debate for many decades, and i sincerely hope today will be no exception. i ’ m going to start with a spoiler : at a certain point during this speech i will talk about interest rates. i imagine that if i don ’ t, you ’ ll feel you ’ ve been shortchanged. so before i get going, i ’ ll give the usual fed disclaimer that the views i express are mine alone and do not necessarily reflect those of the federal open market committee or anyone else in the federal reserve system. r - star now that ’ s out of the way, i want to take you back a long time ago, to a galaxy far, far away. it ’ s 2001 : destiny ’ s child is topping the charts, you were marveling over your motorola flip phone, and i was a young economist at the board of governors in washington, d. c. at the time, i was burning the midnight oil, along with a fellow economist, thomas laubach, trying to understand what the burst of productivity growth generated by the tech boom meant for interest rates, both in the short term and in the long run. this led us to develop a model for measuring r - star. i know what ’ s going through your mind : “ what is this r - star that you speak of? ” r - star is how economists describe the neutral or natural rate of interest. it ’ s the rate that we expect to prevail in the long run when interest rates are neither providing a boost to the economy nor trying to cool things down. it ’ s neither accommodative, nor contractionary. in other words, it ’ s the “ normal ” interest rate we expect in “ normal ” economic times. g - star one of the major factors determining r - star is … you guessed it, g - star! g - star is what economists mean when they describe trend growth, sustainable growth, or potential growth of the economy. the two main