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Financial Services Innovation Lab, Georgia Tech 19

The boom was fueled by a sustained acceleration of productivity and an accompanying rise in corporate profits--fundamental changes that justified a major rise in equity prices.

By 2009, the forecasts for both the headline and core PCE price indexes showed inflation receding from its 2008 level, in line with the previous forecasts.

forecasts of more moderate growth in aggregate demand at a pace around potential output had substantially reduced the odds on rising inflation, the risks still were pointed in that direction on balance.

And inflation is well above target.

Using more-conventional specifications of Phillips curves, the research at the Federal Reserve Board (Ihrig and others, 2007) and the OECD (Pain, Koske, and Sollie, 2006), as well as Ball (2006), finds that foreign output gaps are not important determinants of domestic inflation.

Here is where unit labor costs, or specifically the relationship between productivity growth and wage increases, would come into play.

And part of that just is the effect of lower interest rates.

Moreover, investing in EMEs has become more attractive as many EMEs have improved their macroeconomic policies and institutional frameworks over recent decades; growth differentials may partly be reflecting these improvements.

Median inflation in the nine countries likewise declined, averaging 9-1/2 percent in 1995-99 and 5 percent in 2000-04.Return to text 4.

In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Again, that’s not a forecast, I’ve made a hypothesis, which would imply slower improvement in unemployment.

Moreover, a change in the ranges might be misinterpreted as a signal of greater reliance on the broad monetary aggregates in the formulation and conduct of monetary policy.

Despite some recent turbulence, owing in part to geopolitical events, stock prices have logged robust gains over the past 3-1/2 years, and broad equity indices have now retraced most of the ground lost between 2000 and 2002.

In light of increased uncertainties and muted inflation pressures, we now emphasize that the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion with a strong labor market and inflation near its 2 percent objective.

At the same time, the incentive to take advantage of increasingly efficient high-tech equipment and software typically available at declining prices would continue to provide an important underpinning for further large gains in investment spending, with favorable implications for continued rapid growth in productivity.

Fourth and finally, the statement codifies the key lesson from the Global Financial Crisis—that financial stability is necessary for the achievement of our statutory goals of maximum employment and price stability.

The “extended period” language is conditioned on exactly those same points: “Extended period” is conditioned on resource slack, on subdued inflation, and on stable inflation expectations.

And obviously there are benefits from a strong economy to every household in the economy, including savers, from having a better job market and a more secure economy.

Monetary policy seeks to buffer the economy from unexpected adverse disruptions, or "shocks."

On this path, unemployment would decline modestly below current estimates of the natural rate and remain there for some time.

I will then turn to three challenges our dynamic economy is posing for policy at present: First, what would the consequences of a sharp rise in the price of oil be for the U.S. economy?

This linkage establishes one important connection between the FOMC's target funds rate and interest rates more broadly.

In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC's estimates of "shortfalls [emphasis added] of employment from its maximum level"—not "deviations.

In these circumstances, I believe, it is appropriate to put greater weight on incoming data to determine whether the stance of monetary policy should be changed.

They noted that the realization of such a development could make it harder for the Committee to achieve 2 percent inflation over the longer run.

Nonetheless, the members also noted that the rise in compensation increases had been damped and that there continued to be few indications of accelerating price inflation in the statistical and anecdotal information available at this time

However, those concerns generally were seen as outweighed by the benefit of avoiding tying the Committee's decision too closely to the unemployment rate alone,

Participants also generally agreed that the recent data had not led them to significantly change their outlooks for the most likely rates of economic growth and inflation in coming quarters.

It can be argued that this meant getting the economy back to its 2019 state with very low unemployment and inflation near 2 percent.

The remarkable coming together of technologies that we label IT has allowed us to move beyond efficiency gains in routine manual tasks to achieve new levels of productivity in routine information-processing tasks that previously depended upon other facets of human input--computing, sorting and retrieving information, and acting on pieces of information.

The labor market improved in August, and the unemployment rate edged down to 5.

The staff's June projections for the unemployment rate, real GDP growth, and inflation over the next few years were all a little lower, on balance, than those in its March forecast.

Proponents of this strategy sometimes describe this approach as reducing inflation cycle-to-cycle or describe the economy as being one recession from price stability.

A few participants judged that the expectations regarding the path of the federal funds rate implied by prices in financial markets were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate and that it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers' own expectations for that path.

Because, under a simple feedback policy, private-sector expectations are likely to be broadly consistent with the central bank's plans, the effectiveness of monetary policy would be enhanced as well.

In Japan, private consumption rebounded strongly, and private investment and net exports continued to boost growth.

So, you know, as I mentioned, the Committee acutely feels its obligation to move to make sure that we restore price stability and is determined to use its tools to do so.

I look forward to my conversation with Steve Liesman and to your questions, but first, please allow me to offer a few remarks on the economic outlook, Federal Reserve monetary policy, and our new monetary policy framework.

We heard anecdotes today in the meeting about firms that might be government contractors that were, you know, not sure about whether the contracts would still be in place come January and making employment decisions based on that.

This aggregate growth-accounting framework forms the economic underpinning of key comprehensive productivity statistics produced by the Bureau of Labor Statistics.

The unemployment rate was likely to remain low going forward, and various participants remarked that there were some indications that further strengthening in overall labor market conditions was possible without creating undesirable pressures on resources.

However, making significant use of this option would bias credit flows in the direction of depository institutions and, if the volume of these loans were large enough, could affect the interest rates on the assets, specifically bank loans held by such institutions.

You know, what you hear out there is that demand—you talk to banks, and they’ll say demand for loans is very, very low right now.

The moderation reflected lower growth in most major expenditure sectors.

As a result, growth of spending on consumer durables was expected to be appreciably below the rapid pace in the first half of last year, and housing demand would increase only a little from its recent level.

if you ask me, is this a significant factor shaping monetary policy now, well, it’s on the list of risks, it’s not a major—it’s not a major factor.

And as reserves reach durably ample levels, we intend to slow the pace of purchases such that our balance sheet grows in line with trend demand for our liabilities.

During expansions, equity prices tend to rise, although they often decline before a downturn in the economy.

The review of regional economic developments by the Federal Reserve Bank presidents pointed to moderate expansion in economic activity across much of the nation, though growth was described as modest in a few regions and relatively robust in some others.

The household saving rate, which had already risen considerably, would eventually level out and cease to hold back consumption growth.

Core consumer price inflation continued to slow, and inflation expectations remained subdued over the closing months of 2003.

An unexpectedly sharp increase in wages or inflation could tell you that you’re reaching those points.

I shall endeavor to place this most unusual phenomenon in the context of the broader changes in our economy and, hopefully, explain why the value of education, especially to enhance advanced skills, is so vital to the future growth of our economy.

Participants expected that productivity growth would pick up as firms slowed hiring to a pace more in line with output growth but acknowledged that the improvement might be limited, particularly if business investment spending were to remain soft.

Conversely, fiscal policy expansion in the surplus countries could be used to augment domestic demand, but any such adjustments would need to take account of medium-term goals for fiscal consolidation.

However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear.

I have downplayed the role of the U.S. federal budget deficit today, and I disagree with the view, sometimes heard, that balancing the federal budget by itself would largely defuse the current account issue.

Those participants saw substantial slack in resource utilization and hence continued to judge that inflation was likely to remain subdued over the medium term as the economy continued to recover.

Pure bubbles--increases in asset prices that are 100 percent air--are, I suspect, rare.

Even as the outlook for real activity has weakened, there have been some important developments on the inflation front.

Stock options are incorporated, based on gains upon exercising the options, in the productivity and cost measure, but not in the ECI.

With capacity utilization already at high levels, relatively rapid growth in inventory investment, if it were superimposed on stronger-than- projected expansion in final demand, could portend serious pressures on resources and inflationary consequences for the economy.

We might look to the historical experience with oil price shocks in the 1970s—not a happy story.

But in many countries around the Chair Yellen’s Press Conference FINAL world that are important commodity exporters, the decline we’ve seen in oil prices has had a depressing effect on their growth, their trade with us and other trade partners, and caused problems that have had spillovers to the global economy as well.

Survey and market measures of long-term inflation expectations did not suggest that the earlier higher inflation readings were going to persist.

This is a tangible recent example of the need both to judge how the equilibrium real interest rate that is relevant for policy might have changed from a perceived long-run level and to set policy against the background of such an understanding.

Private nonfarm payroll employment increased appreciably on balance over September and October.

it does have a bearing on the inflation outlook.

Nonetheless, given a recovery in U. S. domestic demand approximating their current forecasts, growth in imports likely would exceed that of exports by a wide margin over the forecast horizon.

My fellow governors and I routinely receive from our staff a translation of the term structure of Treasury yields into implied forward rates, volatility inferred from options prices, and paths for expected monetary policy action consistent with futures prices.

So for many, many years, we’ve been far from maximum employment and stable prices, and so the need for accommodative policy has been—has been clear.

The Federal Reserve’s response is guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system.

While recognizing the value of smoothing, I still feel that in the interest rate targeting regime the Fed now uses, we should at times be ready to change interest rates quite quickly in response to economic conditions.

However, at 7.7 percent, the unemployment rate remains elevated.

Overall, research indicates that trade with developing economies in particular has slowed the rate of growth of import prices faced by industrialized countries, with estimates of the reduction ranging widely from 1/2 to 2 percentage points.

In other cases, it’s pretty clear that inflation has spread more broadly across services.

Members saw the persistence of a relatively vigorous expansion in overall economic activity as a likely prospect in the context of continuing stimulus from fiscal and monetary policies, accommodative financial conditions, growing business optimism, favorable consumer sentiment, and robust increases in productivity.

Lessons from Past Productivity Booms First, many of the technological innovations associated with past productivity booms were general purpose technologies (GPTs) with widespread applicability.

To the extent that these producers are foreign, there should be a corresponding drop in domestic demand.

The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years.

Also, the Committee will pay close attention to measures of inflation expectations to ensure that those expectations remain well anchored.

Construction employment posted another large increase, probably owing in part to hurricane-related activity.

However, it is not yet clear how high we will need to raise the federal funds rate and how much time will pass before we begin to see inflation moving back down in a consistent and lasting way.

Because good forecasts are so crucial to good monetary policy, I hope and expect to see a great deal more work exploring the robustness of alternative forecasting methods.

Inflation is much too high, and I strongly believe that bringing inflation back to our target is a necessary condition for meeting the goals mandated by Congress of price stability and maximum employment on a sustainable basis.

falling non-oil import prices likely subtracted 1/4 percentage point from the annual rate of core inflation.10 Finally, the trajectory of federal government debt relative to GDP and views regarding the debt's sustainability can also influence the effects of fiscal policy.

multifactor productivity growth fell to a pace of 0.4 percent, the slowest pace of any of the periods shown on the table.

But the cumulative force of recent developments appears likely to yield a slowing in the pace of growth next year.

Long-term unemployment in the current economy is—is the worst—really the worst it’s been in the postwar period.

Clearly, businesses regarded such investments as highly profitable, and they appeared to be leading to gains in productivity that in turn were helping to offset rising compensation and to maintain profit margins in highly competitive markets.

I strongly supported the FOMC's decision last week, and I expect to support additional rate increases until we see significant progress toward bringing inflation down.

In those Districts in which activity had been adversely affected by the drop in energy prices, drilling activity was either contracting less rapidly or was stabilizing.

Over the same period, demand for auto loans reportedly strengthened further at many banks.

The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

But the importance of price stability has sometimes been insufficiently appreciated in our central bank's history, and, as Allan Meltzer will soon point out, such episodes have had unfortunate consequences.

Real GDP was forecast to decline and the unemployment rate to rise, on net, in the first half of this year.

Indeed, I would argue that over the past eight years, the framework served us well and supported the Federal Reserve's efforts after the Global Financial Crisis (GFC) first to achieve and then, for several years, to sustain—until cut short this spring by the COVID-19 pandemic—the operation of the economy at or close to both our statutorily assigned goals of maximum employment and price stability in what became the longest economic expansion in U.S. history.

Such a directive would imply that any tightening should be implemented promptly if developments were perceived as pointing to rising inflation.

Domestic demand growth has slumped in many foreign economies because of varying combinations of an increase in saving rates and a decline in investment.

Our current framework for implementing monetary policy is working very well.