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Financial Services Innovation Lab, Georgia Tech 19

Broad equity price indexes fell sharply over the intermeeting period on net.

For example, although a number of features of Brazilian law promote the independence of the nation's central bank, the bank's de facto independence may be limited by the power of the president to remove members of the Monetary Policy Committee.

On balance, most participants still expected inflation to moderate later this year and in 2009.

Low readings on overall and core consumer price inflation in recent months, as well as the weakened economic outlook, kept near-term inflation expectations reported in surveys well below their high levels in mid-2008.

But I want to emphasize that we do have a commitment to raising inflation to 2 percent.

With inflation low and resource use slack, the Committee saw no need for tightening policy in the near future.

The Outlook for Economic ActivityThe midpoint of the range of projections for real GDP growth declines noticeably from about 2-1/2 percent for 2007 to roughly 2 percent in 2008; then it returns to about 2-1/2 percent in 2009 and 2010.

Nonetheless, participants viewed the housing situation and its potential further effect on employment, income, and wealth as one of the major sources of downside risk to the economic outlook.

And then, what the statement emphasizes, and this is the same language we used in December and January, we used the language especially if inflation is running below our 2 percent objective.

Some of the increase in sentiment and changes in asset prices could be tied to expectations of more expansive fiscal policy, another upside risk.

Sargent, T. "Discussion of 'Policy Rules for Open Economics' by Lawrence Ball," in J.B. Taylor, ed., Monetary Policy Rules.

Our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound.

The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.

I’m just saying, that, that is what fiscal policy can do that, really, monetary policy can’t do—is, is invest in the future productive capacity of the economy, raise potential growth.

Many observed, however, that a favorable outcome to the hostilities in the Middle East and lower oil prices in line with quotations in futures markets should generate a positive response in equity markets, boost consumer sentiment, and foster a rebound in consumer spending as the year progressed.

Lower potential growth implies lower returns and therefore lower rates.

Indeed, the National Bureau of Economic Research's Business Cycle Dating Committee determined in July that the recession that began in March of last year ended in April, making it not only the deepest recession on record, but also the briefest.2 The recovery that commenced in the summer of 2020 was quite robust, and, with one quarter to go, GDP growth in 2021 is projected by the Fed and many outside forecasters to be the fastest since 1983.

Some business contacts indicated that wage and price pressures were subdued; however, in one District, contacts pointed to rising wage pressures and labor shortages.

That said, the data also indicate that a surge in COVID-19 cases in the summer and supply-chain bottlenecks held back economic activity in the third quarter.

If we adjust the 6.7 percent headline unemployment rate for the decline in participation since February and the Bureau of Labor Statistics estimate of misclassification, the unemployment rate would be 10 percent, similar to the peak following the Global Financial Crisis.

Inflation was still expected to be somewhat higher this year than last year, largely reflecting an upturn in the prices for food and non-energy imports.

And, and that’s why we have adopted the flexible average inflation-targeting framework.

It is important to recognize the importance of moving interest rates in response to changing conditions and the potential for destabilizing policy when policy resists the natural tendency for interest rates to rise during cyclical upswings, especially when the economy is near its potential.

most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.

Similarly, measures of underlying inflation continued to be somewhat low relative to levels seen as consistent with the dual mandate over the longer run.

But I continue to believe that the underlying rate inflation in the U.S. economy is hovering close to our 2 percent longer-run objective and, thus, that the unwelcome surge in inflation this year, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory.

Fiscal policy, on the other hand, can be an instrument of growth policy, through its effect on national saving via the structural budget deficit, through incentive effects on work, saving and investment via tax rates and tax structure, and through public investment in human capital and physical infrastructure.

They generally judged that risks to the growth outlook, including strains in global financial markets, were significant and tilted to the downside

Further evidence that firms still have not fully adapted their operations to the latest state of technology also is provided in a recent study4 that attempts to measure the "technological gap"--that is, the difference between the productivity of leading-edge capital and the average productivity embodied in the current capital stock.

Inflation has continued to run below our longer-run objective, in part reflecting lower energy prices.

Some members nonetheless referred to indications of increasing expenditures for various categories of high-tech equipment and software, and they noted that impetus to demand from a positive outcome in the war against Iraq should have a favorable effect on business capital spending, especially if it were accompanied by a rally in the stock market.

Last year, we had 1.9 percent productivity, which is much higher.

Furthermore, policymakers hoped that additional tools at their disposal--so-called incomes policies enforced by “jawboning,” guideposts, and price and wage controls--were ready to combat and control any resulting upcreep in inflation with minimal macroeconomic cost.

Household mortgage debt was expected to expand at a reduced rate in the fourth quarter, reflecting softer home prices and declining home sales, as well as a tightening in credit conditions for some borrowers.

To this end, the new statement conveys the Committee's judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it "seeks to achieve inflation that averages 2 percent over time," and—in the same sentence—that therefore "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

And that, I think, does raise, raise the risk that high inflation will be more persistent.

While favorable financing would help to sustain the housing sector, members anticipated that any further impetus to growth from that sector was likely to be limited.

Instead, an upturn in foreign economic activity would depend more on recovery in the United States.

Such departures of expectations from perfect rationality can be an important source of observed inflation dynamics.

The high oil prices would themselves cut into demand growth and tend to stabilize the system.

There was a lot of pent-up demand.

This observation raises the question of why, in some cases, the putative productivity benefits of investments in new technologies do not occur until years after those investments are made.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. "

In that regard, the prospective strength of demand pressures and related outlook for productivity were subject to a wide range of uncertainty, and there were reasons to believe that economic growth could well slow without any adjustment to policy.

So we do say that risks to the financial system—we say in our longer-run statement of goals and monetary policy strategy that risks to the financial system that could prevent us from achieving our goals are something that we do take into consideration.

The first question is whether the degree of easing implemented in response to financial market turbulence and the abrupt downward revision in the forecast should be reassessed in light of the subsequent improvement in financial conditions and the continued robustness of domestic demand.

And that’s because of this misalignment between supply and demand.

Those indicators were mixed regarding the pace of economic activity within the manufacturing sector.

A particular phenomenon that touches on all these issues is the movement of asset prices, especially the prices of equities and residential real estate.

So, up until the first week of October 2021, the story of high inflation being temporary was holding up, and the labor market improvements had slowed but were continuing.

Fiscal policy was expected to be somewhat less expansionary next year, though still an important contributor to economic growth.

So the—the sooner we get the virus under control, the sooner people can regain that confidence and regain their economic activity.

Financial factors also seemed likely on balance to accommodate continuing growth in consumer spending, in particular the marked increases that had occurred in the value of stock holdings and a still-ample availability of credit to most households.

Under these circumstances, policymakers must be cognizant of the shortcomings of our published price indexes to avoid misguided actions that will provoke unintended consequences.

We have not seen wage growth pick up.

Moreover, it was difficult to anticipate how much the higher food and energy prices might affect inflation expectations and wage demands and thereby potentially become embedded more generally in the price structure.

Flexible inflation averaging would bring some of the benefits of a formal average-inflation-targeting rule, but it could be more robust and simpler to communicate and implement.

These included a decline in the cost of business capital, a recent rise in orders and backlogs of nondefense capital goods, persisting gains in productivity that undoubtedly pointed to growing profit opportunities, progress in strengthening business balance sheets, and reduced capital overhangs.

Furthermore, in the latest report, FOMC participants indicated that the current degree of uncertainty about GDP growth is even higher than the typical level of uncertainty over the past two decades.

For example, one—in the long-run, the size of the balance sheet is going to depend on the public’s demand for our liabilities, including currency and reserves.

Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009.

And, of course, despite the improvements seen in the May jobs report, the unemployment rate, at 13.3 percent, remains historically high.

However, equity prices subsequently retraced some of the earlier declines as concerns about trade policy seemed to ease and corporate earnings reports for the first quarter of 2018 generally came in stronger than expected.

Although inflation remained remarkably subdued and any increase in inflationary pressures likely would tend to emerge only slowly, the strength in demand had developed against the backdrop of financial conditions that, broadly considered, were not substantially different from those now prevailing.

But strong demand and a very tight labor market have also contributed to inflation pressures, and the FOMC can help alleviate those pressures by removing the extraordinary monetary policy accommodation that is no longer needed.

Measures of longer-term inflation expectations edged up in early January, but remained lower than they had been in all but the last few weeks of 2008.

I would describe some measures of wage growth as having moved up some.

If we don’t see the improvement that’s projected in the baseline outlook, that the June 18, 2014 opposite would be true and the pace of the timing and pace of interest rate increases would be Chair Yellen’s Press Conference FINAL later and more gradual.

These measures, along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to support the economy until the recovery is complete.

Many have observed the rise in the real federal funds rate to a level well above its historical average and concluded that monetary policy is currently restrictive.

In fact, applying a formal regression analysis to the full sample from 1989 to 2002, we found a number fairly close to this one, namely, a stock price multiplier for monetary policy of about 4.7.

In these circumstances, an easing at some point of current uncertainties and strengthening confidence should induce inventory rebuilding, with positive implications, at least for a time, for the expansion of economic activity.

Moreover, survey data on labor market attitudes of both consumers and businesses had not signaled a significant deterioration in employment prospects.

and special factors, including liquidity risk premiums, that might be influencing the pricing of Treasury Inflation-Protected Securities and inflation derivatives.

Additionally, can one make any other generalizations concerning recessions that follow asset-price booms and busts and how they differ from other recessions?

What I have elsewhere referred to as "currency competition" may be a driving force behind these changes in inflation outcomes and expectations and may be reflected in low nominal long-term interest rates and the flattening of yield curves.5 I’d like to briefly review what I mean by currency competition.

Members who preferred to retain an asymmetrical directive agreed that, although there was little likelihood of a further policy change during the intermeeting period, such a directive was the best way to convey their concerns about the risks of rising inflation and the potential need for policy tightening over time.

But in our new century, the simple notion of price has turned decidedly ambiguous.

One member anticipated little if any effect on economic growth and unemployment and did not agree that the outlook for economic activity and inflation called for further policy accommodation.

Measures of core inflation remained much more subdued, although they also moved up in some countries.

The recent depreciation of the dollar, while perhaps putting some upward pressure on prices, would damp the deterioration in net U. S. exports.

Nonetheless, the leveling off in that disturbing trend is an encouraging sign of what we can achieve if we can maintain strong and flexible labor markets accompanied by low inflation.

Survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months,

Stock prices in the basic materials and industrial sectors underperformed the broader market, reportedly reflecting an increase in trade tensions with China.

Yields on longer-term inflation-indexed Treasury securities, which are relatively illiquid, rose more sharply than did those on nominal securities.

Table 2 Distribution of Employment and of Displaced Workers by Industry Category Industry Employment Displaced Workers Restructuring 23.1 42.2 Nonrestructuring 76.9 57.8 Total 100 100 Source: Displaced Worker Supplement to the CPS.

Mr. Plosser noted that the Committee could not afford to wait until there was clear evidence that inflation expectations were no longer anchored, as by then it would be too late to prevent a further increase in inflation pressures.

Productivity and the equilibrium real interest rate.

Our test for this step was making "substantial further progress" toward our employment and inflation goals.

So we view maximum employment as the maximum sustainable level of employment, meaning it’s not so much that it will cause the economy to overheat.

In the Committee's discussion of possible adjustments to policy during the intermeeting period, members agreed that the retention of an asymmetric directive toward tightening was consistent with their view that the risks remained biased toward higher inflation.

Indeed, the discrepancy between actual and predicted money growth was sufficiently large that the P* model, if not subjected to judgmental adjustments, would have predicted deflation for 1991 and 1992.

in particular, the Fed's loss of credibility significantly increased the cost of achieving disinflation.

Following the GFC, it took more than eight years for employment and inflation to return to similar mandate-consistent levels.

The problem with the current situation is that, that if you have a sustained period of supply shocks, those can actually start to undermine or to work—to work on de-anchoring inflation expectations.

However, the dollar partially retraced these increases following the much weaker-than-expected U. S. employment report for May, finishing the period a bit stronger against the currencies of the AFEs and about 3 percent higher against EME currencies.

And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.

The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and progress in reducing the unemployment rate was expected to be gradual.

The number of black-owned firms increased nearly 50 percent and the number of Hispanic-owned firms jumped 80 percent between 1987 and 1992--between two and three times the rate of growth of non-minority-owned firms.

The recent information on inflation was seen as disappointing.