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Financial Services Innovation Lab, Georgia Tech 19

The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. "

Moreover, substantial gains in productivity were muting the effects of rising labor compensation on unit costs, and vigorous competition in numerous markets was continuing to make it very difficult or impossible for business firms to raise their prices to cover rising costs or enhance profit margins.

Broad equity price indexes decreased slightly, on net, as substantial early gains arising from investors' improved perceptions about the inflation outlook and better-than-feared second-quarter earnings were more than offset by later losses arising from expectations that the Committee would follow a more restrictive policy than previously expected.

Another reason for the reliance on judgment in the forecasting process is the practical requirement that the forecast for inflation be consistent with the staff's overall view of the economy, including the forecasts for key economic variables such as wages, interest rates, and consumption spending.

Job gains had been solid, on average, in recent months, and the unemployment rate had remained low.

Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals.

The unemployment rate declined in May and , 2020 June but, at 11.1 percent, remains far above its level before the outbreak and greater than the Chair Powell’s Press Conference FINAL peak during the Global Financial Crisis.

Employment continued to expand unevenly,

sustained outsized gains in productivity could further damp hiring.

In the residential real estate sector, home sales and construction had increased from very low levels, and house prices appeared to be stabilizing.

In fact, it’s already—it’s already understood, I think, that—that there’s more—even though we’re at 3½ percent unemployment, there’s actually more slack out there, in a sense.

What monetary policy affects, primarily, is the state of the business cycle, the amount of excess unemployment or the extent of recession in the economy.

However, with the contraction in housing activity expected to abate this year, the pace of economic growth was anticipated to edge back up to a level that was close to the staff's estimate of potential output growth by the end of 2007 and to remain in that same range throughout 2008.

We take the level of the stock market into account when we consider the economic outlook and monetary policy.

Factors pointing to potentially higher inflation included increased pressures on food prices stemming from disappointing harvests in some areas and relatively low grain supplies.

In contrast, under a price-level-targeting scheme, continuing deflation combined with an upward-sloping path for the price-level target causes the size of the price-level gap to increase over time.

For 1998, the Committee agreed on a tentative basis to set the same ranges as in 1997 for growth of the monetary aggregates and debt, measured from the fourth quarter of 1997 to the fourth quarter of 1998.

An anticipated sharp slowdown in the pace of inventory accumulation also would damp domestic production as the growth of stocks was brought into balance with the expected more moderate trajectory of final sales.

Policy tightening started last year, as emerging markets including Mexico and Brazil increased rates substantially amid expectations of accelerating inflation.

Indeed, most anticipated that inflation will slow for a time to rates somewhat lower than those they judge consistent with the dual goals of price stability and maximum employment, initially reflecting the recent declines in the prices of energy and other commodities and later responding to several years of substantial economic slack.

In addition, the May 1, 2019 trimmed mean measures of inflation did not go down as much.

Maintaining low inflation rates reduces the levels of future uncertainties and, hence, increases the scope of investment opportunities.

For example, Kozicki and Tinsley (2001) show that it is far easier to make sense of the term structure of Treasury yields if one assumes that expectations about long-run inflation adjust in a reasonable adaptive manner.

We have not focused on whether we meet the liftoff test, because we don’t meet the liftoff test now because we’re not at maximum employment.

Through this channel, the decline in inflation volatility should be reflected in a smaller inflation risk premium in nominal bond yields, which is exactly what is estimated in the Kim, Walsh, and Wei (2019) yield curve model (figure 4, "Term Premium Decomposition").

More fundamentally, however, the members believed that current growth in aggregate demand, should it persist, would continue to exceed the expansion of potential output and, by putting added pressure on already tight labor markets, would at some point foster inflationary imbalances that would undermine the economic expansion.

At the same time, an acceleration in productivity also appears to have a direct disinflationary effect.

Setting the horizon on the interest rate caps to reinforce forward guidance on the policy rate would augment the credibility of the yield curve caps and thereby diminish concerns about an open-ended balance sheet commitment.

The civilian unemployment rate was 4.

Several participants raised concerns regarding the longer-run effects of the pandemic, including how it could lead to a restructuring in some sectors of the economy that could slow employment growth or could accelerate technological disruption that was likely limiting the pricing power of firms.

A few participants commented that both survey- and market-based measures of short-term inflation expectations were at historically high levels.

First, longer-maturity obligations may be more attractive because of more stable inflation, better-anchored inflation expectations, and a reduction in economic volatility more generally.

After robust growth in the second quarter, M2 decelerated somewhat and M3 was about unchanged in July.

also because such actions help to head off undesirable changes in inflation down the road.

In December 1996, before my time at the Board, John Campbell of Harvard and Robert Shiller of Yale made a presentation at the Fed, in which they used dividend-price ratios and related measures to argue that the stock market was overvalued.

To summarize these international data, one might say that something brought inflation down in the 1980s and 1990s,

Traditionally, these two measures of excess demand move together over the cycle.

Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

also term premiums to compensate for the risk associated with commitments to extend credit so far in the future, including the risk of future inflation.

Industrial production had slipped in recent months and private payroll employment had changed little,

With today's action, the real federal funds rate--measured as the difference between the nominal funds rate and a moving average of core PCE inflation--would move slightly into positive territory.

October 12, 2021 U.S. Economic Outlook and Monetary Policy Vice Chair Richard H. Clarida At the 2021 Institute of International Finance Annual Membership Meeting: Sustainable Economic Growth and Financial Stability in a Diverging, Decarbonizing, Digitizing, Indebted World, Washington, D.C. (via webcast) Share It is my pleasure to meet virtually with you today at the 2021 Institute of International Finance Annual Membership Meeting.1 I regret that we are not meeting in person, but I look forward, as always, to a conversation with my good friend and one-time colleague Tim Adams.

The resulting uncertainty makes it difficult to predict the future path of activity, unemployment, and inflation.

However, given the difficulty in distinguishing between changes in asset prices dominated by fundamental forces and those driven by non-fundamental forces, policymakers should not target asset prices or try to guide them to the policymakers' estimate of fundamental value.

The implication is that monetary policy is already well positioned to slow the expansion.

During much of the recovery, forecasters have been overly optimistic about growth

Industrial production picked up in response to the advance in final demand and a slowdown in the runoff of excess inventory stocks.

The Committee again anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored.

In this regard, members referred to earlier unsustainable rates of investment by many high-tech firms that were now obliged to retrench despite still high rates of growth in the demand for their products and services.

In these models, each asset price contains a risk premium that represents the additional return demanded by risk-averse investors for bearing risk.

During the five years before the crisis, core goods made a small negative contribution to inflation.

In the view of a number of members, rapid growth of the monetary aggregates, though it had slowed very recently, was a further indication that financial conditions were not restraining economic activity.

In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy.

Long-run price stability certainly is essential for achieving maximum employment.

The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction.

Staff Review of the Financial Situation On balance, financial conditions in the United States remained supportive of growth in economic activity and employment: The expected path of the federal funds rate was slightly lower in the long run, yields on longer-term Treasury securities moved down modestly, equity prices rose, corporate bond spreads narrowed, and the foreign exchange value of the dollar was little changed.

And the equity market itself has been the subject of analysis as we attempt to assess the implications for financial and economic stability of the extraordinary rise in equity prices--a rise based apparently on continuing upward revisions in estimates of our corporations' already robust long-term earning prospects.

Real residential investment appeared to have declined again in the fourth quarter, likely reflecting in part decreases in the affordability of housing arising from both the net increase in mortgage interest rates over the past year and ongoing, though somewhat slower, house price appreciation.

Petroleum prices have been under particular pressure, reflecting not only stronger demand but also risks that supplies could be constrained by terrorism or political disruption.

And it may generally take longer still for a policy change to alter the course of inflation.

Indeed, CPI inflation does appear to have become more sensitive to import prices over time, both in the United States and in other OECD countries (Pain, Koske, and Sollie, 2006).3 Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output?

And it’s natural that if it can be employed that, just as monetary policy is doing a lot to try to June 15, 2016 stimulate growth, that fiscal policy should play a role.

Because there is considerable uncertainty about the persistence, breadth, and magnitude of climate-related shocks to the economy, it could be challenging to assess what adjustments to monetary policy are likely to be most effective at keeping the economy operating at potential with maximum employment and price stability.8 We need only look back to the oil price shocks of the 1970s and 1980s to see how difficult it was for monetary policymakers to assess accurately the likely persistence of the effects on inflation and output and the appropriate response.

A few participants particularly stressed the high uncertainty associated with the expected future path of the unemployment rate and commented that the unemployment rate could rise by considerably more than in the staff forecast.

And I think, more broadly, monetary policy is also supporting household spending and home buying by keeping the labor market strong, keeping workers’ incomes rising, and keeping consumer confidence at high levels, where it currently is.

Labor market conditions had improved further, with solid job gains and a lower unemployment rate; taken as a whole, labor market indicators suggested that the underutilization of labor resources was continuing to diminish.

In the United Kingdom, however, gilt yields declined and the pound weakened against the dollar in response to weaker-than-expected inflation data and to an upward revision by the Bank of England, at its early February policy meeting, of its assessment of the degree of slack in the labor market.

In considering the statement to be released following this meeting, members concurred that it should note that even with the rise in oil prices, the expansion remained firm and labor markets continued to improve gradually.

The central tendency rises to 2.4 to 2.7 percent next year, somewhat above estimates of the longer-run growth rate.

This is perhaps because the emphasis on price stability is taken by some as carrying a hint of restrictive policy and as an inclination to always be leaning against cyclical increases in demand.

The foreign exchange value of the dollar, which depreciated immediately following the FOMC's November announcement of further asset purchases, subsequently appreciated amid intensifying concerns about stresses in the euro area and some apparent reassessment by investors of the monetary policy outlook in the United States.

The Federal Open Market Committee (FOMC) has been responsible for monetary policy decisions in the United States since it was established by the Banking Act of 1935, two decades after the founding of the Fed itself.2 The movement toward committees reflects the advantages of committees in aggregating a wide range of information, perspectives, and models.

To do that you've got to have price stability, and we've got to get back to price stability so that we can have a labor market where people's wages aren't being eaten up by inflation and where we can have a long expansion too.

Job gains had been strong, on average, in recent months, and the unemployment rate had remained low.

House price appreciation appeared to have slowed from the elevated rates seen over the past summer.

In these circumstances, domestic demand would need to decelerate considerably for growth to proceed at a sustainable pace.

And that is a statement about productivity growth, which has been pretty disappointing.

By definition, this excess of U.S. payments to foreigners over payments received in a given period equals the U.S. current account deficit, which, as I have already noted, was $666 billion in 2004--close to the $617 billion by which the value of U.S. imports exceeded that of exports.

still being clear about the Committee's intention to provide the monetary accommodation needed to support a return to maximum employment and stable prices.

While deflation appears to have eased in Japan recently, it is difficult to know how much of the improvement is due to monetary policy, and, of the part due to monetary policy, how much is due to the zero-interest-rate policy and how much to quantitative easing.

Whether one looks at trailing or forward price-to-earnings ratios, equity risk premiums, or option prices, there is little basis for arguing that markets show excessive optimism about future returns.

A few participants also noted that uncertainty about the extent of resource slack in the economy was considerable and that it was quite possible that the economy could soon be operating close to potential, particularly if labor force participation rates did not turn up much while employment continued to register gains.

The effect of a productivity slowdown on employment growth is likewise ambiguous in the medium term.

Yet, with a few exceptions, the available data show that productivity growth in other advanced countries has not increased to the extent seen in the United States.

Indeed, an oft-quoted quip by economist Robert Solow held that, as of the late 1980s, "computers are everywhere except in the productivity statistics.

Although participants had revised downward their projections for growth since their previous forecasts in June, they continued to anticipate that economic growth would pick up and the unemployment rate would decline gradually through 2014.

The price of a ton of cold rolled steel sheet, or a linear yard of cotton broad-woven fabrics, could be reasonably compared over a period of years.

Moreover, the staff still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate.

Several participants noted ongoing challenges in the agricultural sector, including those associated with increased trade uncertainty, weak export demand, and the effects of wet weather and severe flooding.

We are not seeing any evidence to date that a strong labor market is putting excessive cost-push pressure on price inflation.

Yet as research has repeatedly demonstrated, these sorts of fundamentals only explain a small part of the variation in the prices of assets such as equities, long-term Treasury securities, and corporate bonds.

Despite the substantial monetary easing that had been implemented already and the fiscal stimulus, including federal tax rebates, that was in train, the forecast anticipated that sluggish hiring and the decline in household wealth would restrain the growth of both consumer spending and housing demand.

Depository institutions continued to bid aggressively for 28-day funds at the Term Auction Facility (TAF) during the intermeeting period, and demand for funds was strong at both of the 84-day TAF auctions.

Money versus Interest Rates For most of the post-World War II period, monetary economists have vigorously debated whether the Fed should target money or interest rates in setting policy.

In these circumstances, a pause seemed desirable to monitor the still-incomplete effects of the Committee's easing over the past year--a significant part of which had been implemented in recent months--and the contours of the turnaround in economic activity.

The monitoring range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year.

But we are also searching for an absolute concept, the point of balance between supply and demand in the respective markets that divides excess demand from excess supply--in effect, the origin in a diagram relating inflation to excess demand and supply.

Meeting Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants-the four members of the Board of Governors and the presidents of the twelve Federal Reserve Banks-provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011.

Therefore, maximum employment (at least if interpreted as full employment or being at NAIRU) and price stability, the statutory mandate of the Federal Reserve, are compatible in the long run.

Once this process is completed, however, we might expect consumer price inflation to move into better alignment with long-run expectations and thus settle in around 2 percent.