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Financial Services Innovation Lab, Georgia Tech 19

Household expenditures on new homes were likewise at an elevated level, although members reported weakness in some price segments and geographic areas of the housing market.

Expectations of price increases over the near-term--specifically, over the next year--have, in fact, risen noticeably on the heels of the actual increase in inflation.

Slump in foreign domestic demand I would like to turn now to developments at the global level that may have helped to widen the U.S. current account deficit.

Members still saw the economic expansion continuing, and most believed that inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee's dual mandate for maximum employment and price stability.

Inflation Targeting and Central Bank Behavior," Federal Reserve Bank of New York, mimeo.

The contemplated reserve conditions are expected to be consistent with considerable moderation in the growth in M2 and M3 over coming months.

In response to an unanticipated movement in spending and hence the quantity of money demanded, a small variation in interest rates would be sufficient to bring money back to path but not to correct the deviation in spending.

But this belief will persist only as long as we on the Federal Open Market Committee continue to ratify the public’s expectations that inflation will remain low and stable.

These concerns were centered around the fact that corporate borrowers could no longer raise funds in the bond or commercial paper markets at reasonable prices or, at some times and for some borrowers, at all.

We have a three-part baseline projection, which involves increasing growth that’s picking up over time as fiscal drag is reduced, continuing gains in the labor market, and inflation moving back towards objective.

The Committee, based on its assessment at each meeting, has felt comfortable saying that, based on its assessment of those factors, it considers that it will be likely appropriate to maintain the current target range for a considerable time after the asset purchase program ends, especially if inflation remains below the 2 percent objective.

As a consequence, a sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation’s underlying productive capacity.

Higher interest rates are working to temper demand and bring it into better alignment with supply, which is still constrained.

The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth.

Participants agreed that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term.

Unfortunately, from the point of view of both the analyst and the policymaker, the link between an asset's price and the structure of its return is hard to pin down, as it typically embodies complex factors that are inherently difficult to measure, such as expected future earnings, riskiness, and risk aversion.

Nonetheless, the current account deficit continued to grow as a result of the surge in U.S. investment and productivity and the associated capital inflows seeking the higher U.S. rates of return.

A Framework for Analyzing the Growth of Labor ProductivityA great success story for the American economy has been the resurgence of productivity growth that began around 1995.1 From 1973 to 1995, labor productivity in the nonfarm business sector increased at an annual rate of 1-1/2 percent.

The average rate of growth of CRE loans at banks continued to be strong in October and November.

Moreover, economic theory indicates that the equilibrium level of short-term real interest rates would likely remain low relative to estimates of its level before the financial crisis if trend growth of total factor productivity does not pick up and if demographic projections for slow growth in working-age populations are borne out.

Key factors that influence consumer spending--including a low unemployment rate, ongoing gains in real labor compensation, and still elevated measures of households' net worth--were supportive of a pickup in consumer spending to a solid pace in the near term.

Some occasions call for significant swings in currency or reserves because of seasonal demands for cash and loans.

Most other market interest rates declined further on balance over the period in an atmosphere of greater volatility in financial markets.

But if our assessment is correct that inflation is temporary, it would be unwise for us to take actions that might slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate is that we are not far behind.

In the September Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS), dealers indicated, on net, that they loosened credit terms applicable to several important classes of counterparties and types of collateral over the past three months amid increased demand for funding for most types of securities covered in the survey.

the anticipated decline in the unemployment rate was somewhat slower than in the previous projection.

That transition itself could help bring inflation down, because, presumably, people would spend a little less on goods while they start spending more on travel and all sorts of travel services and things like that.

However, several participants pointed out that the 3-month change in that index had firmed recently, signaling some improvement in the inflation outlook.

In the labor market, about half of the 22 million jobs that were lost in the spring have been restored, and the unemployment rate has fallen since April by nearly 7 percentage points to 7.9 percent as of September.

In the modal outlook, monetary policy tightening to temper demand, in combination with improvements in supply, is expected to reduce demand–supply imbalances and reduce inflation over time.10 The real yield curve is now in solidly positive territory at all

That ex post relationship, the correlation between actual--instead of intended--domestic saving and domestic investment was the object of the seminal work by Feldstein and Horioka a quarter century ago.4 Without the evident worldwide fall in home bias over the past decade, noted earlier, the United States would not have been able to finance its recent current account deficits, and, accordingly, these deficits would have been smaller.

Although the unemployment rate is at a 50-year low, wages are rising broadly in line with productivity growth and underlying inflation.

If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

The members also agreed on the desirability of retaining the assessment that the risks with regard to the outlook for economic growth were balanced.

Total nonfarm payroll employment increased at a solid pace in October and November, and the unemployment rate declined, reaching 4.

The staff forecast prepared for this meeting suggested that economic activity likely would start to turn up early in 2002 as inventory liquidation tapered off, and would gather strength only gradually.

The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth.

And similar, sometimes even sharper, trajectories of house prices have been witnessed in some economies in which the central banks said they were paying more attention to asset prices.

In furtherance of these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in January for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996.

By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation.22 To counter these risks, we are prepared to use our full range of tools to support the economy.

At the same time, however, the staff increased the growth rate forecast for 2006 to reflect the boost to economic activity from the rebuilding effort.

Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances at 0.

Participants expected economic activity to contract sharply in the fourth quarter of 2008 and in early 2009.

We’re charged by Congress with trying to pursue maximum employment, and we have taken that very seriously.

And, at a high level, yes, I would say, and I’ve said before, that it’s really fiscal policy that is more powerful and that has much more to do with—fiscal policy can do those things that will increase the longer-run growth rate of the United States by improving productivity and labor force September 18, 2019 participation and the skills and aptitudes of workers.

In contrast, CRE loan growth at banks was weak in July and August, likely partly driven by the recovery of CMBS markets.

Looking ahead, an abatement or reversal of some of the temporary factors reducing prices was likely to raise measured inflation.

We had a 10 percent unemployment rate, and our congressional mandate is maximum employment and price stability.

But now, let’s go to your—the part of your question about inflation.

Still, most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve's objectives.

However, some participants indicated that underlying inflation remained subdued

With regard to our price-stability mandate,

Here's a wonderful game: Assume that the ECB governing council or the Bank of England's Monetary Policy Committee replaced the Federal Open Market Committee and made monetary policy in the United States--or vice versa.

Because current inflation is affected by inflation expectations, the smaller increase in expected inflation will lead to a smaller increase in actual inflation as well.

In conjunction with the FOMC meeting in April, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2010.

another is the growing literature on the interaction of learning, inflation dynamics, and monetary policy.

By fostering increased interactions among central banks, academics, and the public in many different countries, globalization has helped spread a common culture that stresses the benefits of achieving price stability.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

these participants noted the risk that such cautious attitudes toward hiring could slow the pace at which the unemployment rate normalized.

These productivity gains result from many forces, including business investment that has increased the amount and quality of capital available to the workforce, business process innovations, and the growth of innovative, research-intensive industries such as information technology and biotechnology.

This was before inflation really was under control, but, you know, it’s very interesting to look at the history.

labor productivity remained on a strong upward trend.

For example, if financial market participants thought that the Federal Reserve were not dedicated to maintaining long-run price stability, they would be less willing to hold dollar-denominated assets and the resulting decline in the exchange value of the dollar would tend to add to inflationary pressures.

There are also asymmetric price effects from cost shocks—prices go up very quickly but often tend to come down more slowly, as consumers slowly learn that the bottlenecks have gone away.

The second requirement contributes to the first and also to smoothing fluctuations in output around full employment.

Some business executives reportedly believed that, with aggregate demand expanding robustly and the lower foreign exchange value of the dollar putting upward pressure on import prices, a degree of "pricing power" had returned.

The implication is that trend productivity and, ultimately, potential growth are lower than expected.

However, growth of mortgage loans on banks' books slowed somewhat in the first half of this year.

In the United States, Congress has set the objectives for monetary policy in the Federal Reserve Act, as amended in 1977.

Most Committee members, while acknowledging the deficiencies of structural models, viewed them as useful in their efforts to understand how the inflation process was changing and also as input to inflation forecasts.

For example, wages and prices that are set for some period in the future will of necessity embody the inflation expectations of the parties to the negotiation

The available data for October suggested that the contribution of the change in net exports to real GDP growth in the fourth quarter would be much less negative than the drag of nearly 2 percentage points in the third quarter.

Available information suggested that economic activity in the major foreign industrial countries continued to advance, but at an uneven pace; in Germany, activity rebounded from the contraction in the first quarter, while in Japan a considerable slowing of growth had occurred in the second quarter after very rapid expansion in the first quarter.

subsequently moved up against the backdrop of an improving global growth outlook, higher commodity prices, depreciation of the dollar, and the stronger-than-expected reading on core inflation in the December CPI release.

Despite the progress to date and the signs of acceleration in the recovery, employment is still considerably short of where it was when the pandemic disrupted the economy and it is well below where it should be, considering the pre-pandemic trend.

Although in a number of sectors of the economy the imbalances between demand and supply—including labor supply—are substantial, I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity.

Jorgenson, Ho, and Stiroh use a similar methodology and find a range from a little less than 1-1/2 percent to about 3 percent with a central tendency of around 2-1/4 percent.5 These estimates are clearly plausible, but history does raise some warning flags concerning the length of time that productivity growth continues elevated.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.

It is precisely because none of these preconditions hold that monetary policy is so difficult and principles are needed to guide its implementation.

As U.S. business investment has recently begun a cyclical recovery while residential investment has remained strong, the domestic saving shortfall has continued to widen, implying a rise in the current account deficit and increasing dependence of the United States on capital inflows.9 According to the story I have sketched thus far, events outside U.S. borders--such as the financial crises that induced emerging-market countries to switch from being international borrowers to international lenders--have played an important role in the evolution of the U.S. current account deficit, with transmission occurring primarily through endogenous changes in equity values, house prices, real interest rates, and the exchange value of the dollar.

Misconceptions about Inflation Targeting I would like to turn now, briefly, to comment on a few key misconceptions about inflation targeting that have gained some currency in the public debate.

In the housing sector, demand had continued to display appreciable strength in recent months in association with relatively moderate mortgage rates and very positive consumer assessments of homebuying conditions.

The cutback in residential construction has directly reduced the annual rate of U.S. economic growth about 3/4 percentage point on average over the past year and a half.

In discussing the increases in U. S. longer-term interest rates that occurred in the wake of the June FOMC meeting and the associated press conference, meeting participants pointed to heightened financial market uncertainty about the path of monetary policy and a shift of market expectations toward less policy accommodation.

May 13, 2021 The Economic Outlook and Monetary Policy Governor Christopher J. Waller At The Global Interdependence Center's 39th Annual Monetary and Trade Conference, The LeBow College of Business, Drexel University, Philadelphia, Pennsylvania (via webcast) Share Watch Live Thank you, Kathleen, and thank you, George and the Global Interdependence Center, for the invitation to speak to you this afternoon.

For instance, monetary policymakers must accurately assess how disasters such as hurricanes, wildfires, and flooding affect labor markets, household and business spending, output, and prices.7 In deciding whether to alter monetary policy or, instead, to "look through" such shocks, policymakers need to assess the likely persistence of the effects and how widespread they are.

Broad stock price indexes rose, on net, over the intermeeting period, as investors responded to strong second-quarter earnings reports and indications that the economy may be stabilizing.

Indicators for China in July pointed to only a modest slowing of output growth from its torrid pace in the first half of the year.

Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound.

In the past, a reasonable goal might have been to maintain a zero deficit in our on-budget accounts--those accounts that exclude the Social Security and Medicare surplus--and to begin a serious discussion of reforms to Social Security and Medicare to bring them closer into actuarial balance.

Crude oil prices continued to rise, reaching record levels in nominal terms over the intermeeting period.

It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down.

The staff forecast for total PCE price inflation in 2018 was revised up slightly, mainly because of a faster-than-expected increase in consumer energy prices in the second half.

Of course, the cost of this critical stabilization was the high unemployment and lost output associated with the sharp 1981-82 recession.

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

After precipitous drops in March and April, employment rose strongly in May and June as many people returned to work from temporary layoffs.

We’re also, as part of our review, looking at potential innovations, changes to the way we think about things, changes to the framework that would lead us—that would be more supportive of achieving inflation on a 2 percent—on a symmetric 2 percent basis over time.

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

But you didn’t under the merely adverse scenario, which featured an inflation shock followed by a quick rise in short-term rates.

Term premiums could be lower when inflation expectations are well anchored or the macroeconomy is less volatile.