Datasets:

gtfintechlab

/

fomc_communication

like 4

Follow

Financial Services Innovation Lab, Georgia Tech 19

What about the effects of a productivity shock on inflation?

The real federal funds rate probably was not greatly out of line with its appropriate level, and the rise in longer-term interest rates and the exchange rate meant that financial conditions were now exerting more restraint than earlier this year.

In this environment, America's prospects for economic growth will greatly depend on our capacity to develop and to apply new technology--a quest that inevitably will entail some risk-taking.

Inflation compensation for 2007 declined modestly, perhaps reflecting the further drop in spot energy prices, but was largely unchanged at longer maturities.

The large current account deficit was seen as a factor pointing to potential depreciation of the dollar over time, with adverse repercussions on domestic inflation albeit favorable effects on exports.

Productivity and TechnologyLet me now turn from the overall economic outlook to productivity and technology developments.

The logic goes as follows: Easier monetary policy, for example, raises stock prices.

In particular, we may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment.

Participants noted that the improved performance of investment suggested that the expansion was becoming more balanced, with strengthening business spending potentially offsetting some moderation in the growth of household spending from the elevated rates of recent years.

Labor force participation isn't growing as much as one would expect with the hot job market, but apparently it's growing enough to keep the job creation machine humming.

Nonetheless, employment is still 9.5 million below its pre-pandemic level for the economy as a whole.

Most participants continued to see the risks to inflation as balanced.

The Federal Reserve has a dual mandate from the Congress to pursue policies that aim to achieve and sustain maximum employment and price stability.

Monetary policy has an ambiguous effect on trade imbalances.

and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery.

However, this shortfall partly reflected the earlier declines in energy prices and decreasing prices of non-energy imports, and some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit.

that longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends

To be sure, the prices of assets and the level of debt seem to reflect expectations of a benign economic environment--one in which policy will tighten only gradually, the economy will continue to strengthen and inflation will remain low, and the demand for houses and equities will remain solid.

Reserve market conditions associated with this directive had been expected to be consistent with some moderation in the growth of M2 and M3 over coming months.

Of course, the basic problem in tackling the inflation of the 1970s is that we have one observation and many competing theories.

Inflation continued to climb in June, reaching 9.1 percent as measured by the consumer price index.

It is an honor to be here with Ben Bernanke and Janet Yellen, who pioneered the original Statement on Longer-Run Goals and Monetary Policy Strategy in 2012.

Any such rise in inflation expectations and associated upward pressure on inflation itself would likely prove costly to reverse.

A soft labor market will keep a lid on the growth in the cost of employing workers.

The dominant force of late appears to have been a significant increase in the structural rate of productivity growth.

After deteriorating further early in the period, foreign equity prices bounced back and credit spreads on emerging market bonds narrowed, in both cases returning to December levels in most countries.

Accordingly, in the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, the Committee decided that a slightly higher or a slightly lower federal funds rate might be acceptable during the intermeeting period.

also how far it will fall and if it will fall soon enough to avoid spurring a concerning rise in longer-term inflation expectations.

overall consumer prices had been pushed up recently by sharp rises in energy prices.

But also we want to see inflation move up back to our 2 percent objective over the medium term, and so seeing above-trend growth and continuing tightness—greater tightness in labor and product markets—I think that will help us achieve our objective as well with respect to inflation.

As a result, growth of spending on consumer durables and houses was expected to slow

Productivity accelerated.

Eventually, financial markets may develop the instruments and associated analytical techniques for unearthing these implicit changes in the price level with some precision.

In the context of this discussion, many participants commented that their view of potential output growth was somewhat more optimistic than that of the staff.

Investor perceptions of a somewhat less accommodative tone of Federal Reserve communications, as well as the softer-than-expected reading for the April CPI, likely contributed to the decline in inflation compensation.

While moderating the pace of purchases and the eventual increase in the federal funds rate may well affect capital flows, interest rates and asset prices in EMEs, the overall macroeconomic effects need not be disruptive.

The economy is continuing to make progress toward the FOMC’s objective of maximum sustainable employment.

Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2 percent objective over time.12 5.

Participants observed that both overall inflation and inflation for items other than food and energy remained near 2 percent on a 12-month basis.

Progress at Home and Abroad Over the past several quarters, we have seen improvement in inflation and activity both at home and abroad following a period when the drag on domestic activity from abroad was considerable.

Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world.

We, frankly, didn’t even get inflation back up to target—without seeing wages getting out of touch with—with where they should be, so that’s the—that’s the biggest thing we can do.

Broad U. S. stock price indexes declined, on net, over the intermeeting period, apparently in response to the downbeat economic data.

For asset purchases, the Committee declared that tapering would wait "until substantial further progress has been made toward the Committee's maximum employment and price stability goals.

On balance, core consumer price inflation was projected to remain subdued and quite possibly edge lower.

Global growth estimates continue to be marked down, and global disinflationary pressures cloud the outlook for U.S. inflation.

The weakness in labor market conditions remained an important concern to meeting participants, with unemployment expected to remain elevated for some time.

Nearly all measures of total and core prices had decelerated over the past year, and in the context of forecasts implying a continued sizable gap between actual and potential output, the risk that inflationary pressures would intensify significantly over coming quarters appeared to be quite limited

A European Central Bank analysis concluded that the release of capital buffers increased headroom for banks relative to not only their regulatory thresholds, but also their internal risk controls, and enabled banks to continue providing credit to households and businesses.6 And of course, monetary policy is focused on restoring price stability in a high-inflation environment.

The implications of the spread of e-money for monetary policy would arise from the substitution of e-money for both currency and deposits, shrinking the size of the monetary base.

In particular, investors noted that the Committee attributed some of the recent increase in inflation to transitory factors, retained its earlier balance of risks assessment, and reiterated its belief that policy accommodation could be removed at a pace that would likely be measured.

What they have had is low unemployment, lots of social problems.

Financial conditions affecting emerging market economies continued to improve for a time after the Committee eased monetary policy at its November 17 meeting, but that trend was subsequently reversed after Brazil's legislature decided to reject a key fiscal reform measure.

However, participants generally saw these downward pressures on inflation starting to abate next year, with widespread distribution of vaccines reducing social-distancing concerns and spurring economic activity.

In discussing the effect of labor market conditions on inflation, a number of participants expressed skepticism about recent studies suggesting that long-term unemployment provides less downward pressure on wage and price inflation than short-term unemployment does.

The prices of their exports are lower than they would be if market forces were given greater scope in foreign exchange markets, and they are supplying more goods and services to the rest of the world than they themselves are demanding.

Foreign economic growth declined in the second quarter.

If you lay the crosscurrents on top of that—concerns about global growth and trade developments—you have the full picture.

Consistent with the view that recent lower inflation readings could be temporary, a number of participants mentioned the trimmed mean measure of PCE price inflation, produced by the Federal Reserve Bank of Dallas, which removes the influence of unusually large changes in the prices of individual items in either direction; these participants observed that the trimmed mean measure had been stable at or close to 2 percent over recent months.

More broadly, post-crisis monetary policy supported asset values, reduced interest payments, and increased both employment and income.

While liquid deposits continued to grow slowly, heightened demand for safety and liquidity appeared to boost holdings of retail money market mutual funds.

For the twelve months ended in September, prices of consumer items other than food and energy increased by a considerably smaller amount than in the year- earlier period.

In contrast, blue-collar employment fell sharply in most of the other countries.

In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consider- ation to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period.

Recent data, supported by anecdotal reports from several though not all parts of the country, suggested that residential building activity was slowing somewhat, apparently in lagged response to earlier increases in mortgage interest rates.

A second question is whether moving in this direction would matter much for the conduct of monetary policy in the United States.

Moreover, anecdotal evidence suggested that most firms had little ability to raise their prices in the current economic environment.

Many of them expected that inflation was likely to rise gradually over the medium term, as resource slack diminished and inflation expectations remained stable.

Moreover, in light of the anticipated modest pace of economic recovery, the Committee expects that over coming quarters the unemployment rate will decline only gradually toward its mandate-consistent levels.

However, core inflation had been subdued in recent months and longer-run inflation expectations remained contained.

Employment had risen a little,

In the staff forecast prepared for this meeting, the economy was seen as likely to expand at a pace a little above that of its longer-run potential over this year and next, while hiring was expected to firm some more, resulting in a further decrease in the unemployment rate.

Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability.

In their discussion of inflation developments, participants noted that readings on overall and core PCE inflation, measured on a 12-month change basis, had continued to run below the Committee's symmetric 2 percent objective.

It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.

And, and some of the answer to that may be price.

A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve's balance sheet retained ample capacity relative to the scale of the U. S. economy.

A more-timely data source, average hourly earnings, decelerated slightly to a 4.4 percent annual rate over the third quarter, down from 4.6 percent annual growth in the second quarter.

The recent rebound in oil prices contributed to a strong appreciation of the Canadian dollar, the Brazilian real, and the Mexican peso.

Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was below 2 percent in July.

We said that we expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved, and also that we expect it will be appropriate to maintain the current 0 to 1/4 percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

Increased rates and a smaller balance sheet raise the cost of borrowing and thus reduce household and business demand.

Participants judged that an appropriate firming of the stance of monetary policy, along with an eventual waning of supply–demand imbalances, would help to keep longer-term inflation expectations anchored and bring inflation down over time to levels consistent with the Committee's 2 percent longer-run goal.

However, investor demand for high-quality commercial mortgage-backed securities (CMBS) reportedly was robust, although issuance of CMBS remained muted.