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Recent FedSpeak Highlights

  • Eric Rosengren A reasonable case can be made for continuing to pursue a gradual normalization of monetary policy... A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.

    [ September 9, 2016 ]

    My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.

    ...

    [N]ot all the risk is on the downside. It is important to note that an overheated economy – one that significantly exceeds sustainable output and employment – would pose risks to maintaining full employment over time. Here history is instructive... monetary policy has not been a precise tool, capable of gently guiding the economy back to full employment in periods when we have exceeded sustainable, full employment... [T]he calibration of monetary policy during such a tightening cycle is difficult: The U.S. economy often slows down more than is optimal, frequently resulting in a recession...

    This problem could be compounded if delays in tightening earlier in the cycle lead to conditions that require more rapid increases in interest rates later in the cycle, risking a more pronounced slowing in growth and rise in unemployment.

    A second risk of waiting too long to tighten is that some asset markets become too ebullient. Figure 12 shows that real commercial real estate prices have risen quite rapidly over the past five years, particularly for multifamily properties. Because commercial real estate is widely held in the portfolios of leveraged institutions, commercial real estate cycles can amplify the impact of economic downturns as financial institutions need to write down the value of loans and cut back on lending to maintain their capital ratios.

    In sum, the risks to the forecast are becoming increasingly two-sided, in my view. Weakness emanating from abroad poses short-term downside risks to the domestic U.S. economy. However, the U.S. economy has been relatively resistant to shocks from abroad of late, as evidenced recently by the aftermath of the Brexit vote. Yet as I have described today, there are also longer-term risks from significantly overshooting the U.S. economy’s growth – given the bluntness of monetary policy tools, and the possibility of growing imbalances in some asset classes.

    ...

    So if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate. A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.  

     

  • John Williams In the context of a strong economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. Let me be clear: In arguing for an increase in interest rates, I’m not trying to stall the economic expansion. It’s just the opposite: My aim is to keep it on a sound footing so it can be sustained for a long time.

    [ September 6, 2016 ]

    In the context of a strong economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. Let me be clear: In arguing for an increase in interest rates, I’m not trying to stall the economic expansion. It’s just the opposite: My aim is to keep it on a sound footing so it can be sustained for a long time.

    History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession. A gradual process of raising rates reduces the risks of such an outcome. It also allows a smoother, more calibrated process of normalization that gives us space to adjust our responses to any surprise changes in economic conditions. If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver. Not to mention, a sudden reversal of policy could be disruptive and slow the economy in unintended ways.

  • Jeffrey Lacker In principle, we know the remedy for unraveling inflation expectations: raise rates rapidly. But in such a scenario, it would be hard to calibrate policy settings carefully enough to avoid precipitating a contraction in real activity.

    [ September 2, 2016 ]

    In principle, we know the remedy for unraveling inflation expectations: raise rates rapidly. But in such a scenario, it would be hard to calibrate policy settings carefully enough to avoid precipitating a contraction in real activity.

  • Jeffrey Lacker In the last couple of years, U.S. monetary policy has frequently been described as “data dependent.” By itself, however, that phrase conveys little beyond the premise that the current stance of monetary policy has not been irrevocably locked in. The question is how does monetary policy depend on the data?

    [ September 2, 2016 ]

    In the last couple of years, U.S. monetary policy has frequently been described as “data dependent.” By itself, however, that phrase conveys little beyond the premise that the current stance of monetary policy has not been irrevocably locked in. The question is how does monetary policy depend on the data? Benchmarks like the Taylor rule provide a concrete and quantitative answer to that question by linking policy to inflation and employment, the Fed’s two mandate goals. Responding to additional developments that are not clearly related to inflation and employment has the potential to confuse the public, increasing uncertainty about our future conduct and raising doubts about our commitment to our two goals.

  • Eric Rosengren When the economy is close to achieving the dual mandate – as the U.S. economy is now – very low rates may cause the economy to attain and exceed sustainable employment, risking greater imbalances that could negatively impact the economy in the future. And this may be an unfavorable tradeoff. In other words, a somewhat faster move to rate normalization may defer somewhat how quickly we achieve the dual mandate goals of full employment and price stability, but could reduce the risk of a larger divergence from the dual mandate in the next downturn. This is one of the challenges of monetary policymaking that requires empirical analysis, historical perspective, and judgment.

    [ August 31, 2016 ]

    In my view, commercial real estate is, by itself, unlikely to trigger financial stability problems. But should prevailing economic conditions change in response to a large negative economic shock, commercial real estate prices could decline relatively quickly, leading to large losses at leveraged firms. Because commercial real estate debt is widely held by depository institutions, this could cause a contraction of credit – similar to the credit crunch experience in the United States in the early 1990s.
    ...
    So the concern I put forward today is the scenario where widespread declines in commercial real estate prices could ripple through the financial sector and lead to a significant tightening of credit for many borrowers. And given that, I would pose the natural next question: if one agrees that there is building pressure in commercial real estate, should it have any bearing on the setting of monetary policy?

    U.S. monetary policymakers should focus on achieving maximum employment consistent with stable prices currently, of course, but also over time. Very low interest rates may move the economy closer to the central bank’s dual mandate goals more quickly than would higher interest
    rates, but it is important to evaluate “at what cost.” When the economy is far away from achieving the dual mandate goals, asset prices tend to be weak – providing an added rationale for accommodative policy. However, when the economy is close to achieving the dual mandate – as the U.S. economy is now – very low rates may cause the economy to attain and exceed sustainable employment, risking greater imbalances that could negatively impact the economy in the future. And this may be an unfavorable tradeoff.

    In other words, a somewhat faster move to rate normalization may defer somewhat how quickly we achieve the dual mandate goals of full employment and price stability, but could reduce the risk of a larger divergence from the dual mandate in the next downturn. This is one of the challenges of monetary policymaking that requires empirical analysis, historical perspective, and judgment.

  • Charles L. Evans No one discusses that 2004–06 pace of tightening as anything but gradual — it was certainly not steep enough to generate financial stability concerns. And while there are important differences in the environment today, this example does lead one to believe that, if necessary, we could normalize policy much faster than currently envisioned and still keep the pace gradual enough to avoid a disorderly change in financial conditions.

    [ August 31, 2016 ]

    Some worry that if the FOMC gets behind the curve and has to raise the funds rate moderately faster than, say, what is in the Fed’s most recent SEPs, fixed-income markets will be spooked and we’ll see a spike in long-term interest rates that could be detrimental both to growth and to financial stability.
    ...
    Normally, the risks of large spikes in long-term rates are probably intensified by fast-money investors (hedge funds and the like) making carry trade bets on low-term premia. These investors have an eye toward a quick exit when rates begin to rise — behavior that can snowball into something like the taper tantrum we saw in 2013 when long-term rates spiked 100 basis points in response to a sudden change in expectations for the path of Fed asset purchases. Instead, today I have been talking about the positions of real-money, long-horizon investors. Given their expectations of low-for-long policy rates, they are less likely to think that some unexpected tightening will lead to substantially higher rates over the long term. Rather, such a tightening would likely be seen as simply flattening the yield curve.

    Put differently, long-run expectations for policy rates provide an anchor to long-run interest rates. So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path.

    Finally, if inflation or term premium risks rose substantially, the alternative funds rate path for funds rate increases that might accompany a tighter-than-expected policy is still likely to be quite gradual.
    ...
    No one discusses that 2004–06 pace of tightening as anything but gradual — it was certainly not steep enough to generate financial stability concerns. And while there are important differences in the environment today, this example does lead one to believe that, if necessary, we could normalize policy much faster than currently envisioned and still keep the pace gradual enough to avoid a disorderly change in financial conditions.

  • Stanley Fischer We're not planning to do anything in [the direction of negative rates].

    [ August 30, 2016 ]

    Federal Reserve Vice Chairman Stanley Fischer said negative interest rates seem to be working in other countries, while reinforcing that they aren’t on the table in the U.S.

    While the Fed isn’t “planning to do anything in that direction,” the central banks using them “basically think they’re quite successful,” Fischer said Tuesday on Bloomberg Television with Tom Keene in Washington. He reiterated that Fed rate increases will be data dependent without giving a specific timeline.

    Fischer’s comments on negative rates come days after Chair Janet Yellen left the subject out of a speech on the future U.S.
    monetary policy toolkit, suggesting that they’re not an option that’s up for discussion at the Fed. Fischer is a former Bank of Israel governor and a prominent figure in international economics, so his remarks constitute an important acceptance that the unconventional and often controversial policy might be working in other jurisdictions.

    “We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with”
    for savers, they typically “go along with quite decent equity prices.”

    Fischer’s assessment compares with the views of Mark Carney, the governor of the Bank of England, who earlier this month rejected the idea of negative rates as an effective option. “What we’ve seen in other countries is, to be honest, they’ve got this a bit wrong,” Carney said in a radio interview in early August.

    Swiss National Bank President Thomas Jordan has said that negative rates are “absolutely necessary” in his country.

  • Esther L. George To gauge if you're too soon or too late — by the time you know that, you have waited too long. We don't want to find ourselves there. So I can't know if we have plenty of time. What I can see is, the two metrics we often use — employment and inflation — I make a forecast based off of those, and those suggest to me that now is a good time. And I thought 'now' was good going back earlier this year, to say things are moving in a way that a small, gradual move would be consistent [with the Fed's objectives].

    [ August 29, 2016 ]

    AB: Do you think there is still time to normalize interest rates before another crisis strikes, or have low rates distorted the market too much?

    GEORGE: We don't know — we can't know that. And that's why you have to use your best gauges. And one of the gauges is, you have to have a forecast. If you know decisions you make today operate with a lag, you have to have some understanding based on how much I trust the data I've seen to make a forecast of where I think the economy is going. You have to be willing to adjust if it doesn't turn out that way. But to gauge if you're too soon or too late — by the time you know that, you have waited too long. We don't want to find ourselves there. So I can't know if we have plenty of time. What I can see is, the two metrics we often use — employment and inflation — I make a forecast based off of those, and those suggest to me that now is a good time. And I thought 'now' was good going back earlier this year, to say things are moving in a way that a small, gradual move would be consistent [with the Fed's objectives].

  • Janet L. Yellen I believe the case for an increase in the federal funds rate has strengthened in recent months.

    [ August 26, 2016 ]

    Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook

  • Loretta J. Mester CNBC: You think we could do 3% [GDP] in the 2nd half of the year? MESTER: Yeah, we could do that.

    [ August 26, 2016 ]

    CNBC: So what do you have dialed in for the full year [for GDP]? We talked to somebody yesterday that had a 2% forecast for the full year, [which means] that they’d have to do 3% on the back-end.

    MESTER: You know, I think that’s reasonable. It’s going to be hard to get to 2%, given [the necessity of a 2nd half] 3%, but I don’t think that’s an unreasonable forecast.

    CNBC: You think we could do 3% [GDP] in the 2nd half of the year?

    MESTER: Yeah, we could do that.

  • James Bullard The important point about our framework is there’s a rate hike, but there’s not this on-the-cusp-of-200-basis-points story, which is the story that we’re telling in our dot plot.

    [ August 26, 2016 ]

    Our forecast does call for a rate rise, but I’m agnostic on exactly when we do that... I do like to move on good news on the economy, so if we got to a meeting and we felt things were looking stronger, that might be a good time to do that.
    ...
    The important point is not that there is a rate hike. The important point about our framework is there’s a rate hike, but there’s not this on-the-cusp-of-200-basis-points story, which is the story that we’re telling in our dot plot. And that’s what I’m trying to break down. We don’t have anywhere near that kind of certainty about where the long-run outcome is for the U.S.

  • Esther L. George I think even if you assume that there is a lower terminal rate, we would be stimulative even under that condition. So, I think regardless, even if you think R* is lower, it might warrant that we should begin moving a little more systematically than we have been.

    [ August 25, 2016 ]

    BLOOMBERG: I think most of our audience has heard the term R*. It’s become quite the trendy term these days – the rate that neither stimulates nor retards the economy has come way down – how much stock do you put in that argument, and how much, if so, have you moved down, because you said that you’ve pretty much kept your [forecast for the neutral rate] in place?

    GEORGE: I think it’s possible that R* is lower today, but again, we don’t know. And I think even if you assume that there is a lower terminal rate, we would be stimulative even under that condition. So, I think regardless, even if you think R* is lower, it might warrant that we should begin moving a little more systematically than we have been.

  • Robert S. Kaplan I would actually say every Fed meeting is a live meeting.

    [ August 24, 2016 ]

    I would actually say every Fed meeting is a live meeting, so seriously. I know some people, you know, comment to varying degrees, but, yeah, so every meeting is a live meeting.

  • Stanley Fischer We are close to our targets.

    [ August 21, 2016 ]

    Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment. The economy has done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent--and the core consumer price index inflation rate is currently above 2 percent.

    So we are close to our targets. Not only that, the behavior of employment has been remarkably resilient. During the past two years we have been concerned at various stages by the possible negative effects on the U.S. economy of the Greek debt crisis, by the 20 percent appreciation of the trade-weighted dollar, by the Chinese growth slowdown and accompanying exchange rate uncertainties, by the financial market turbulence during the first six weeks of this year, by the dismaying pothole in job growth this May, and by Brexit--among other shocks.

  • John Williams The fact is we won’t need as much job growth going forward. We’re pretty much at full employment now, so the future is less about meeting a goal and more about maintaining a result.

    [ August 18, 2016 ]

    I should know better by now, but even if I change the channels for an hour or two, I’m constantly surprised by the commentary that seems to miss the larger playing field. In a robust labor market, we simply don’t need to create as many jobs as we did when we were trying to climb out of the hole dug for us by the recession. Over the past few years, we’ve seen outstanding numbers—in 2014 and 2015 the economy added nearly 3 million jobs a year, and 2016 is on track to deliver about another 2¼ million jobs.

    That’s great news, but the fact is we won’t need as much job growth going forward. We’re pretty much at full employment now, so the future is less about meeting a goal and more about maintaining a result. That means creating enough new jobs to keep up with the increase in the size of the labor force.

  • John Williams If we wait until we see the whites of inflation’s eyes, we don’t just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark. And that creates its own risks of a hard landing or even a recession.

    [ August 18, 2016 ]

    In the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. I have a few reasons for saying that.

    First, Milton Friedman famously taught us that monetary policy has long and variable lags. Research shows it takes at least a year or two for it to have its full effect... If we wait until we see the whites of inflation’s eyes, we don’t just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark. And that creates its own risks of a hard landing or even a recession.

    Second, experience shows that an economy that runs too hot for too long can generate imbalances, ultimately leading to either excessive inflation or an economic correction and recession. In the 1960s and 1970s, it was runaway inflation. In the late 1990s, the expansion became increasingly fueled by euphoria over the “new economy,” the dot-com bubble, and massive overinvestment in tech-related industries. And in the first half of the 2000s, irrational exuberance over housing sent prices spiraling far beyond fundamentals and led to massive overbuilding. If we wait too long to remove monetary accommodation, we hazard allowing these imbalances to grow, at great cost to our economy.

  • James Bullard "The policy rate will likely remain essentially flat over the forecast horizon to remain consistent with the current regime.”

    [ August 17, 2016 ]

    In the new [regime-based] narrative, the concept of a single, long-run steady state is abandoned. Instead, there is a set of possible ‘regimes’ that the economy may visit.” He added that regimes are generally viewed as persistent and that switches between regimes, while possible, are not forecastable. He said that the current regime appears to be characterized by slow growth, low real rates of return on safe assets and no recession.

    In terms of monetary policy, which is regime-dependent, the implication is that “the policy rate will likely remain essentially flat over the forecast horizon to remain consistent with the current regime.”
    ...
    “If there are no major shocks to the economy, this situation could be sustained over a forecasting horizon of two and a half years,” he said. “These facts suggest that it may be time to quit using the old narrative.”

  • Dennis Lockhart At these low [growth] numbers, an apparent decelerating pace of growth would not seem compatible with policymakers' thinking about raising interest rates. Yet I, as one Fed policymaker, am not prepared to rule out at least one rate hike before year's end.

    [ August 16, 2016 ]

    At these low [growth] numbers, an apparent decelerating pace of growth would not seem compatible with policymakers' thinking about raising interest rates. Yet I, as one Fed policymaker, am not prepared to rule out at least one rate hike before year's end.

    When the history of the post-recession economic expansion is written, it will be described as a long period of relatively slow growth. Through mid-2015, GDP growth averaged a little over 2 percent. Over the last year, GDP growth has averaged just 1.2 percent. Over the first half of 2016, GDP growth has averaged just 1.0 percent at an annual rate. At face value, it might appear that economic momentum is decelerating.

    At these low numbers, an apparent decelerating pace of growth would not seem compatible with policymakers' thinking about raising interest rates. Yet I, as one Fed policymaker, am not prepared to rule out at least one rate hike before year's end.
    ...
    In my official forecasts submitted quarterly as part of the FOMC process, and in my public comments, I have marked down my expectations of what is sufficient growth. I've come to the view that GDP growth at around 2 percent in today's economy is sufficient to achieve the Fed's monetary policy objectives of full employment and price stability in a reasonable timeframe.

  • Dennis Lockhart My baseline forecast calls for achievement of the Fed's core monetary policy objectives over the next year and a half.

    [ August 16, 2016 ]

    My baseline forecast calls for achievement of the Fed's core monetary policy objectives over the next year and a half.

  • James Bullard I guess I wouldn’t want to make [the entire policy outlook] contingent on whether inflation’s at 1.9 percent or 2 percent or 2.1 percent. I think that’s kind of a false precision about inflation. We don’t measure it that well. And so what we’re saying is that, you know, in the world of macroeconomics, if you’re at 1.7, 1.8, 1.9, that’s pretty close to 2.

    [ August 12, 2016 ]

    SIEGEL: So you’d have to go a little higher [toward the 2% target before] you thought that inflation were a problem?

    BULLARD: Right. So I guess I wouldn’t want to make [the entire policy outlook] contingent on whether inflation’s at 1.9 percent or 2 percent or 2.1 percent. I think that’s kind of a false precision about inflation. We don’t measure it that well. And so what we’re saying is that, you know, in the world of macroeconomics, if you’re at 1.7, 1.8, 1.9, that’s pretty close to 2. And you should think of this as a regime that’s likely to be persistent over the next couple of years. We do think inflation will creep up a little bit here, but it’s certainly not been increasing at a rapid rate over the last several years.