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Financial Services Innovation Lab, Georgia Tech 19

There are a variety of versions of this basic approach, depending on measures of utilization and inflation rates and depending on whether the adjustment is made in response to past and current movements in utilization and inflation rates or in response to forecasts of these variables.

In contrast to price inflation, labor costs appeared to have remained quiescent.

When long-term rates rise in response to a cyclical strengthening, it reflects, in large part, the expectation of higher short-term interest rates.

First, the expansion of trade may cause domestic inflation to depend to a greater extent on the prices of imported goods--not only because imported goods enter the consumer basket or (in the case of imported intermediate goods) affect the costs of domestic production, but because competition with imports affects the pricing power of domestic producers.

The Committee's accompanying statement indicated that economic growth had been quite strong so far this year.

You know, monetary policy is a forward-looking exercise, and I’m going to—I’m just going to stick with that.

In contrast, Spanish economic activity stagnated in the third quarter, Greek GDP extended its decline, and more-recent indicators point to continued weakness in peripheral European economies.

The GDP (in real terms, after inflation) has been growing continuously for eight years and this long expansion, instead of petering out, has accelerated in the last couple of years.

This outcome would be entirely consistent with the new framework the Federal Reserve unanimously adopted in August 2020 and began to implement at our September 2020 Federal Open Market Committee (FOMC) meeting.2 Recent FOMC Decisions and the New Monetary Policy Framework At FOMC meetings convened since the new framework was announced last August, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases to bring it in line with our new framework.

Our tools work on demand.

Market-based measures of inflation compensation continued to indicate expectations that inflation would decline notably in coming quarters, and measures of medium-term inflation compensation fell over the intermeeting period.

These policy moves would therefore prevent the far greater economic pain associated with entrenched high inflation, including the even tighter policy and more severe restraint on economic activity that would then be needed to restore price stability.

My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation.

However, we now know that an unexpected and unrecognized slowdown in productivity growth occurred in 1973.

As keen observers of local economies, the directors here and elsewhere contribute vitally to the formulation of monetary policy by offering important insights absent, by definition, from even the most careful analysis of aggregate data.

In short, rising commodity prices are a better signal of strengthening economic activity than of inflation at the consumer level.

Operationally, maintaining price stability requires abiding by the Taylor principle of raising nominal interest rates more than one for one in response to movements in inflation, especially those movements perceived as persistent.

On balance, in light of the uncertainties in the outlook and given that a variety of special factors would continue to contain inflation for a time, the Committee could await further developments bearing on the strength of inflationary pressures without incurring a significant risk that disruptive policy actions would be needed later in response to an upturn in inflation and inflation expectations.

But to the extent that continues to be the case, that should make it easier to restore price stability.

Countries differ in this regard, both in formal mandate and in actual practice.12 As an extensive academic literature shows, however, the general approach of inflation targeting is fully consistent with any set of relative social weights on inflation and unemployment

A couple of participants noted that uncertainties concerning both the level of, and the source of shifts in, potential output made it difficult to base decisions about monetary policy on real-time measures of the output gap.

Looking ahead, some growth in overall consumer spending appeared likely in association with the now more firmly entrenched economic expansion.

Of course, we can’t do anything about long-run employment opportunities, but we can help the economy recover more quickly.

They remarked that a stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead and observed that this meant that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed.

As a result, recent high inflation readings are transitory and not broad based.

We have a 2 percent symmetric inflation objective, and, for a number of years now, inflation has been running under 2 percent.

With respect to inflation, the netting of the crosscurrents suggests a modest increase in inflation in 1998, albeit from a steadily downward-revised and very low rate in 1997.

And, in my judgment, we may have to rely more on measures other than apparent excess demand to get reliable indications of pending changes in inflationary pressures.

Estimates by the staff of the Federal Reserve indicate that about 40 percent of the growth in outstanding home mortgage debt during the past five years originated as financing the extraction of home equity.

A few observed that the combination of recent labor market improvements and continued softness in inflation had led them to lower their estimates of the longer-run normal rate of unemployment.

The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

In contrast, M3 growth slowed considerably in April after a robust March advance.

several expected that declines in the foreign exchange value of the dollar in recent months would also likely help return inflation to 2 percent over the medium term.

Moreover, broad equity price indexes had declined and borrowing costs for nonfinancial firms had increased, including a recent rise in corporate bond yields across most risk categories.

that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability.

I mean, it really depends on how long it takes for wages and, more than that, prices to come down for inflation to come down.

In the absence of such shocks, and assuming appropriate monetary policy, participants' economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year.

The staff also reported that in the leveraged loan market risk spreads had narrowed and nonprice terms had loosened further.

We should first recognize that the form of the U.S. government is different than that of most inflation-targeting countries.

largely as a consequence of further increases in nominal labor compensation gains that would not be fully offset by growth in productivity.

The entire Committee is committed to achieving our 2 percent inflation objective over the December 16, 2015 medium term, just as we want to make sure that inflation doesn’t persist at levels above our Chair Yellen’s Press Conference FINAL 2 percent objective.

If we think that the potential growth rate of the economy is somewhere between, somewhere around 1.75 percent, 2.8 percent is strong economic growth.

By the same token, the rate of price inflation was lower than had been reported, consistent with the findings of a number of studies of distortions in published price data.

In these circumstances, the Committee believed that some further measured policy firming was likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.

The pace of job gains slowed and the unemployment rate held steady.

But I do think that—and I do think also that unemployment insurance benefits will run out in September, so to the extent that’s a factor, which is not clear, it will no longer be a factor fairly soon.

And, as I think all of us—having that expectation and that if the economy continued to progress along the lines that we expected and we continued to see the risks as balanced—do regard it as appropriate to gradually remove accommodation that’s in place by having several interest rate increases this year.

Moreover, we should recognize that these disinflationary effects could dissipate or even be reversed in coming years.

Monetary policy clearly can do little about the first-round effects of a permanent rise in energy prices, which include both its direct impact on the energy component of overall consumer prices and the pass-through of higher energy costs into prices of non-energy goods and services.

In my baseline view, while I do believe it will likely take some time for economic activity and the labor market to fully recover from the pandemic shock, I do project right now that the economy will begin to grow and that the unemployment rate will begin to decline starting in the second half of this year.

The gains in employment over July and August were generally seen as larger than anticipated.

With underlying inflation running below 2 percent for many years and COVID contributing to a further decline, it is important that monetary policy support inflation expectations that are consistent with inflation centered on 2 percent over time.

Finally, I would like to note that the Committee strives to explain its monetary policy decisions as clearly as possible, and we continue to explore ways of enhancing the clarity of our public communications.

Core consumer inflation had moved lower,

In fact, the Federal Reserve’s upcoming Community Affairs Research Conference will feature several papers that explore these issues.5 Homeownership The important issue of loan pricing aside, expanded access to mortgage credit has helped fuel substantial growth in homeownership.

By contrast, economic activity in China and other developing countries showed greater buoyancy.

Participants pointed to potential interactions between financial stresses and the housing market contraction as the primary source of continuing downside risks to growth.

In coming months, as those earlier declines drop out of the calculation, inflation should move up closer to 2 percent and stabilize around that level over the medium term.

Nonetheless, with rising productivity and moderate wage gains likely continuing to help hold down unit labor costs, the outlook for subdued inflation remained promising, especially for the nearer term.

Answering this question is central to our outlook for both of our dual-mandate goals of maximum employment and price stability.

Mortgage rates, corporate bond rates, and other yields and asset prices moved in sympathy, with important effects on the cost of borrowing and hence, presumably, on aggregate demand.

Several participants noted that the unseasonably warm weather of recent months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing.

Some participants suggested that shifts of funds from abroad into U. S. Treasury securities may have put downward pressure on term premiums; the shifts, in turn, may have reflected in part a reaction to declines in foreign sovereign yields in response to actual and anticipated monetary policy actions abroad.

As a further step in enhancing the clarity of our communications, the Committee recently decided to begin publishing information about participants’ assessments of appropriate monetary policy—that is, the path of policy that each participant judges as most likely to foster mandate-consistent outcomes for employment and inflation if the economy evolves as expected.

Mortgage credit conditions generally remained tight over the intermeeting period, though signs of easing continued to emerge amid further gains in house prices.

Here in the United States, my colleague Governor Mike Kelley has stated that we are likely to see some disruptions to economic activity because of Year 2000 problems but the effects are likely to be temporary and quickly reversed.

We expect the economy will continue to perform well, with the job market strengthening further and inflation rising to 2 percent over the next couple of years.

And it is not—it’s not exactly the same as watching global growth, where you see growth weakening, you see central banks and governments responding with fiscal policy, and you see growth strengthening, and you see a business cycle.

Future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

A couple of participants remarked that the very low levels of inventories would likely be a factor supporting increases in production as demand continued to recover.

So the term “trend inflation”—usually there are a variety of statistical techniques that can be used to extract a trend from a series.

It was the year of synchronized global growth.

While there were no current indications that inflation might be accelerating and no policy move was called for at this time, the members saw a need for continuing vigilance.

Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.

August 26, 2022 Monetary Policy and Price Stability Chair Jerome H. Powell At “Reassessing Constraints on the Economy and Policy,†an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming Share Watch Live Thank you for the opportunity to speak here today.

But there’s also a role for monetary policy.

Looking beyond the near term, the members anticipated that as the prevailing uncertainties began to diminish, the economy's resiliency abetted by broadly accommodative monetary and fiscal polices and the continuation of a strong uptrend in productivity would underpin a gradual economic recovery.

Returns on indexed bonds are tied to forecasts of specific published price indexes, which may or may not reflect the market's judgment of the future purchasing power of money.

The FOMC's primary monetary policy tool is its target range for the federal funds rate.

As a result, most market interest rates rose somewhat in the period after the November 16 meeting.

Were we to introduce an interest rate rule, how would we judge the meaning of a rule that posits a rate far above or below the current rate?

For all these conceptual uncertainties and measurement problems, a specific numerical inflation target would represent an unhelpful and false precision.

The stock market soared, and--remarkably enough--core inflation moderated.

Moreover, the resulting robust gains in labor productivity have been well ahead of compensation growth and have dramatically boosted corporate profits.

With the boost from these factors fading, real GDP growth was projected to step down noticeably in 2023 and to be roughly equal to potential output growth in 2023 and 2024.

Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain and who indicated that they expected to meet any near-term increase in the demand for their products without boosting employment

The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.

The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.

Market-based measures of inflation compensation remain low

What I do want to share with you is how the equity market fits into my thinking about monetary policy.

Real outlays for office and computing equipment continued to grow rapidly as prices of personal computers and networking equipment remained on a steep downtrend.

The literature on this topic extends at least as far back as William Brainard’s original paper on uncertainty and policy almost forty years ago.7 Brainard’s analysis showed that if policymakers are uncertain about how real activity and inflation will be affected over time by monetary actions, they should be less aggressive in responding to changes in economic conditions than would be the case if they knew the true model of the economy.

I would like to address two aspects of the issue of underemployment of minorities: first, the implications of ignoring the potential that already exists and, second, the need to encourage young people to seek the types of education and training that will meet the demands of work in the twenty-first century.

So unless productivity accelerates further, its disinflationary effect should continue to erode for a time.

We indicated that, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.

If episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, it has significant implications for risk management and, by implication, macroeconomic modeling and monetary policy.

Another factor that has contributed to the swing toward current-account surplus among the non-industrialized nations in the past few years is the sharp rise in oil prices.

Indicators of longer-term inflation expectations are little changed, on balance.

Today, the Federal Reserve's duties fall into four general areas--some that would have been familiar to the central bankers in the Fed's early years and some that would have been unfamiliar: maintaining the stability of the financial system and containing systemic risk that may arise in financial markets supervising and regulating banking organizations to ensure the safety and soundness of the nation's banking and financial system and to protect consumers from harm in their use of credit and banking services playing a major role in operating and overseeing the nation's payment system, including providing certain financial services to financial institutions, the U.S. government, and foreign official institutions conducting monetary policy in pursuit of stable prices and maximum sustainable employment We have an all-too-recent example of the Fed as a source of financial stability in its response to the financial aftermath of the terrorist attacks of September 11, 2001, which occurred just before I joined the Board in December 2001.

However, some areas that were affected by the slowdown in the energy sector experienced house price declines or increases in mortgage delinquency rates.