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Financial Services Innovation Lab, Georgia Tech 19

M3 growth slowed less than that of M2 in November, in part because of stepped-up issuance of large time deposits as banks reduced their reliance on funding from overseas offices.

Despite a large increase in the overall consumer price index for September, measures of inflation compensation calculated using yields on nominal and inflation-protected Treasury securities were about unchanged over the intermeeting period, although they remained a bit above the levels seen before Hurricane Katrina.

To be sure, financial market signals are noisy, and day-to-day movements in asset prices are unlikely to tell us much about the cyclical or structural position of the economy, let alone r* and expected inflation.

To provide some evidence for this assertion, as well as some reasons for it, I draw your attention to a speech that Chairman Greenspan made earlier this year, entitled "Risk and Uncertainty in Monetary Policy" (Greenspan, 2004).

Some participants suggested that the persistently high level of unemployment reflected the impact of structural factors, including mismatches between the skills of the unemployed and the skills demanded in sectors in which jobs were currently available.

The prospect of additional fiscal stimulus likely contributed to a steeper U. S. Treasury yield curve, increased inflation compensation, and broad dollar depreciation.

In contrast, a few participants cautioned that, despite increases in market-based measures of inflation compensation in recent months and the stabilization of some survey measures of inflation expectations, the levels of these indicators remained too low to be consistent with the Committee's 2 percent inflation objective.

Some participants believed that considerable labor market slack remained, especially when indicators other than the unemployment rate were taken into account, including the unusually large fraction of the labor force working part time for economic reasons.

Less uncertainty about future inflation could lower the risk premiums on nominal Treasury bonds, lowering the risk-free interest rate.

Most participants remarked that the standard of "substantial further progress" had been met with regard to the Committee's price-stability goal or that it was likely to be met soon.

Econometric methods were also refined to improve estimation and to accommodate more-complex dynamics in money demand equations.

To do this will demand not only greater specialized knowledge, but also an ability to deal with risk and uncertainty.

Moreover, measures of labor compensation showed only moderate gains while relatively wide profit margins could allow firms to absorb somewhat larger increases in labor and other costs without boosting prices.

Back then, FOMC participants were forecasting unemployment rates around 7-3/4 percent and 7 percent for year-end 2013 and 2014, respectively, in our Summary of Economic Projections; as of the June 2013 round, these forecasts have been revised down roughly 1/2 percentage point each.

And inflation is moving—moving up, I think, toward our 2 percent objective.

Participants generally expected that household demand would gradually strengthen over coming quarters in response to the rise in household wealth from the substantial increase in equity prices that had occurred over the intermeeting period as well as the support for income provided by fiscal policy.

The persistence of underutilized resources was expected to foster some moderation in core price inflation.

On the upside, bottlenecks, supply disruptions, and historically high rates of resource utilization were seen as potential sources of greater-than-expected inflationary pressures, particularly if there were a significant rise in inflation expectations that altered inflation dynamics.

To quantify the importance of the shift in the balance of demand and supply and of the consequent change in the term premium, we can appeal to the research literature on the term structure of interest rates.

These members indicated that the economic outlook remained positive and that they anticipated, under an unchanged policy stance, continued strong labor market conditions and solid growth in activity, with inflation gradually moving up to the Committee's 2 percent objective.

The lagged effects of the substantial easing in monetary policy this year and the fiscal stimulus measures already enacted into law were expected to buttress demand and economic recovery over the next year.

Theory also teaches that the increase in the rate of return on capital--even if generated by a rise in the growth rate of technical change--ultimately requires an increase in real market interest rates.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive: "Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability.

Increases in the prices of energy, other commodities, and non-oil imports, as well as reports from some business contacts that higher costs were increasingly being passed through to prices, suggested that the downtrend in inflation had ended.

Many expected those conditions to be met later this year, although several members were concerned about downside risks to the outlook for real activity and inflation.

Monetary policy has a role, and it really is in, you know—our original role was providing liquidity to financial systems when they’re under stress, and that’s—that’s really part of what we did today.

Indeed, a number of members saw merit in the staff forecast that some further disinflation was a likely prospect in such circumstances.

These arguments imply that slack in labor markets remains considerable and therefore that a reduction in the unemployment rate toward its longer-run normal level would not have much effect on inflation.

In contrast, changes in inflation rates in some services categories, such as shelter costs, tend to be more persistent.

Looking beyond this spring, my views on the appropriate pace of interest rate increases and balance sheet reduction for this year and beyond will depend on how the economy evolves.

The absence of further large gains in stock prices, should recent trends persist, would remove this stimulus and probably induce some moderation in the growth of consumer spending.

M2 expanded in February, however, as liquid deposits resumed their growth.

Profit margins have been running a little higher this year than last, aided importantly by strong growth in labor productivity.

Households' longer-term inflation expectations also edged up in both November and December.

Risks to the inflation projection also were seen as balanced.

The unemployment rate is at a 50-year low, inflation is close to our 2 percent objective, gross domestic product growth is solid, and the Federal Open Market Committee's (FOMC) baseline outlook is for a continuation of this performance in 2020.2 At present, personal consumption expenditures (PCE) price inflation is running somewhat below our 2 percent objective,

The corresponding depreciation in other countries currencies will result in a gradual increase in the foreign currency price of U.S. exports, compared to the prices of foreign produced goods.

There is, to be sure, no trade-off and hence no inconsistency between full employment and price stability in the long run.

remained well below their levels at the beginning of the year, and that weaker demand and earlier declines in oil prices had been holding down consumer price inflation.

We understand that inflation dynamics evolve constantly over time, but they don’t change rapidly.

Our mandate, sorry, is price inflation.

the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate.5 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 will conduct policy to achieve inflation outcomes that keep long-run inflation expectations anchored at our 2 percent longer-run goal.

The bulk of the variation comes from what finance academics call "changes in discount rates," which is a fancy way of saying the non-fundamental stuff that we don't understand very well--and which can include changes in either investor sentiment or risk aversion, price movements due to forced selling by either levered investors or convexity hedgers, and a variety of other effects that fall under the broad heading of internal market dynamics.

Some members observed that while slower growth in consumer spending was the most probable forecast, they saw an upside risk from the wealth effects of the large rise that had occurred in the value of stock market holdings.

First, if, as projected, core PCE inflation this year does come in at, or certainly above, 3 percent, I will consider that much more than a "moderate" overshoot of our 2 percent longer-run inflation objective.

Risks to the inflation projection also were seen as balanced.

But many other commodity prices have fallen further, and the reason I would give for that is that the emerging markets—China, the rest of Asia, and some other parts of the world—plus Europe, of course, are softer, and so global commodity demand is weaker.

Because economic downturns typically result in even greater uncertainty about asset values, such episodes may involve an adverse feedback loop whereby financial disruptions cause investment and consumer spending to decline, which, in turn, causes economic activity to contract.

Over the intermeeting period, yields on short- and intermediate-term nominal Treasury securities fell, while yields on inflation-indexed Treasury securities of comparable maturity increased somewhat, pushing inflation compensation considerably lower at those horizons.

Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further.

This volatility can impede the effective implementation of monetary policy, and we are addressing it.

As I mentioned, monetary policy operates with lags, so, the policies we have in place, we think, will gradually—only gradually—move inflation back to 2 percent.

But is it really true that prices are more responsive to productivity than wages?

Broad stock price indexes rose, on net, over the intermeeting period, boosted in part by favorable earnings reports from the retail sector.

In particular, we are closely monitoring the emergence of the coronavirus, which is likely to have a noticeable impact on Chinese growth, at least in the first quarter of this year.

Members agreed that the statement should continue to convey that inflation risks remained of greatest concern and that additional policy firming was possible.

Although some of the recent data on economic activity had been better than anticipated, most participants saw the incoming information as broadly in line with their earlier projections for moderate growth; accordingly, their views on the economic outlook had not changed appreciably.

These base effects will contribute about 1 percentage point to headline inflation and about 0.7 percentage point to core inflation in April and May.

Workers in the lowest-wage quartile face an extremely elevated rate of unemployment of around 23 percent.7 The advent of widespread vaccinations should revive in-person schooling and childcare along with demand for the in-person services that employ a significant fraction of the lower-wage workforce.

Today, just nine months later, the unemployment rate is 7.6 percent--a larger decline than most FOMC participants expected in September.

survey-based measures of longer-term inflation expectations were little changed.

Some members commented, however, that the relationship between the output gap and inflation was quite loose and that the outlook for productivity remained uncertain.

Fourth, I will discuss the major findings of the review as codified in our new Statement on Longer-Run Goals and Monetary Policy Strategy and highlight some important policy implications that flow from them.

With crude oil prices expected to gradually decline from their current levels, the boost to retail food prices from the drought anticipated to be only temporary and comparatively small, long-run inflation expectations assumed to remain stable, and substantial resource slack persisting over the projection period, the staff continued to forecast that inflation would be subdued through 2014.

There is much about the inflation process that we do not understand, and I have been surprised at the extent of the pickup in core inflation this year.

Rapid increases in healthcare and other insurance costs and the lagged passthrough of large increases in oil prices would tend to maintain upward pressure on prices.

So, as I mentioned, we’re going to be looking at all of those things: activity, labor market, inflation.

The complementarity of price stability with the other goals of monetary policy is now the consensus view among economists and central bankers.

A more robust contour for final sales over the forecast horizon would lead to somewhat greater pressure on resource margins, despite the expected strong growth of structural productivity, though the level of activity would remain below the economy's potential for some time.

We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people.

The flow of macrodata received since May has been surprisingly strong, and GDP growth in the third quarter is estimated by many forecasters to have rebounded at roughly a 30 percent annual rate.

For example, the evidence suggests that changes in the demographic composition of the labor force affect NAIRU and it is also likely that government programs, including unemployment compensation and welfare, also affect NAIRU.

In light of these significant policy actions, the risks to growth were now thought to be more closely balanced by the risks to inflation.

With a series of inflationary supply shocks, it is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2 percent in the longer run, which would make it much more challenging to bring inflation back down to our target.

The recent decline in mortgage rates had sparked some refinancing and purchase activity, but the extent of the longer-term impact of lower rates on housing demand remained uncertain.

Most participants continued to think that the cyclical pressures associated with a tightening labor market were likely to show through to higher inflation over the medium term.

With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.

For example, monetary policy makers might attempt to influence market expectations of future short rates as an alternative to changing the current setting of the overnight rate.

Some measures of inflation expectations were down notably over the intermeeting period.

"6 In the second half of the 1990s, this measurement puzzle was at the heart of monetary policymaking.7 Chairman Alan Greenspan famously argued that the United States was experiencing the dawn of a new economy, and that potential and actual output were likely understated in official statistics.

Balance Sheet Policies and Reserve Demand Taking stock, I note that one approach to the constraints on policy imposed by the current low level of interest rates is to make what were previously unconventional tools—balance sheet policies and forward guidance—as conventional as possible.

Germany and Japan--whose economies have been growing slowly despite very low interest rates--have not.

The Committee directs the Desk to purchase GSE debt, GSE-guaranteed MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity.

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

For instance, in countries where sovereign or corporate debt levels are high, higher interest rates could increase debt-servicing burdens and concerns about debt sustainability, which could be exacerbated by currency depreciation.

The changes we made last year to our Statement on Longer-Run Goals and Monetary Policy Strategy are well suited to address today's challenges.

But I have showed that past experience actually indicates that a reduction in vacancies can take place without a big loss of employment, and this is the kind of soft landing anticipated by FOMC participants.

The risk of higher inflation in this environment has two dimensions.

In addition, the maximum sustainable levels of output and employment cannot be known with any assurance (Mishkin, 2007b).

Based on historical experience, it seems improbable that all of the large rise in multifactor productivity could be attributed to cyclical or transitory factors.

Many participants commented that measures of short-term inflation expectations were elevated or that far-forward measures of inflation compensation were near the upper edge of their historical range.

My impression is that most investors agree that the change is an improvement in openness and transparency of monetary policy.

Inflation rose further in most foreign economies, reflecting a reversal of price declines seen in the spring of 2020, higher energy and commodity prices, and supply bottlenecks.

During the first stage, the inflation rate would exceed the long-term desired inflation rate, as the price-level gap was eliminated and the effects of previous deflation undone.

Pressures on labor resources were likely to ease somewhat as the expansion of economic activity slowed,

These members expected that the target range would be maintained at this level 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.

It was a question of not getting inflation up to our target on a robust, symmetric kind of a way.

Well, our policy approach doesn’t involve intentionally trying to raise inflation.

But before I return to the prospects for 1998 and the challenges for monetary policy, I will offer a retrospective on 1997.

So, with this coronavirus arriving, we judged that the—the net effects of this will be to—to have inflation move down even a little bit more.