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Recent FedSpeak Highlights

  • William C. Dudley Another thing to look at is should we have a range for the inflation rate rather than just a 2 per cent target? I think the 2 per cent objective is a little bit overly precise.

    [ January 18, 2018 ]

    A:  I would not start with the notion of what should we be looking at in terms of our inflation target. I would back up one step and say we should be thinking about the issue of the zero lower bound and what is the risk that in the next recession we could be pushed back to the zero lower bound, and then how do we feel about that and how do we feel about whether we have sufficient instruments to sort of manage that process... You really want to evaluate what are the tools we have to generate an economic recovery after the next recession if we are actually pinned at the zero lower bound. I think we are in some ways in better shape today than we were 10 years ago, because we actually have policies that we have pursued that I think have proven to be effective — namely forward guidance and quantitative easing. In some ways the risk of inflation expectations becoming un-anchored to the downside, which is one of the big risks of being pinned at the zero lower bound, that seems diminished relative to where we were 10 years ago in my opinion. But don’t get me wrong. This is definitely worth evaluating. This is a key issue for monetary policy. At the same time I don’t want to overstate the degree of concern I have. Because remember we have only been pinned at the zero lower bound once, in the post world war two period. That is a period of 70 years and we have only had one experience. I don’t want to totally upend monetary policy because of concerns we might go back to the zero lower bound, because I would worry a little bit that I was fighting the last war.

    Q: The reason people say you would not be fighting the last war is this debate we have just been discussing, which is that r* is going to stay low . . . 

    A: But we don’t know that yet. We don’t know what the terminal federal funds point is going to be in this particular business cycle . . . There is a presumption it will be low and there is a presumption we will not have that much room to lower it, but we don’t really know that yet. I don’t want to get ahead of ourselves. I think it is completely reasonable to evaluate all this and I think we have to really study it very carefully but I don’t think we want to jump to conclusions just because we got pinned at the zero lower bound in the last crisis and I don’t think we want to conclude that r* is necessarily depressed permanently and that has some long term consequences for monetary policy. In terms of my own thought process on this I guess thinking about a price level targeting regime is something worthy of evaluating. Ben Bernanke has proposed an asymmetric price level targeting regime where you basically make up shortfalls when you are running below your inflation target but don’t make up shortfalls when you are running above. 

    Q: Kind of complicated . . . 

    A: . . . on the downside it is complicated but I understand why he is proposing it that way. Price level targeting does have some attractive features ... that will help keep inflation expectations better anchored and that makes it more easy to actually recover from an economic downturn. So that is one thing to look at.

    Another thing to look at is should we have a range for the inflation rate rather than just a 2 per cent target? I think the 2 per cent objective is a little bit overly precise. I think almost never will actually be right spot on the 2 per cent objective. It would be worth at least evaluating whether a range might be a more appropriate way to communicate how well we want to do, or how well we think it is feasible to do in terms of our inflation target. 

    Q: A range from 1 to 3 [per cent]? 

    A: Let’s say from 1.5 to 2.5 [per cent]. The idea would be when you are at 1.5 to 2.5 [per cent] you are not very concerned. It is pretty close to your definition of price stability. But if you get outside of that range on either side you become more concerned. That would be something worthy of evaluating.

    Moving from a 2 per cent inflation target to a 4 per cent inflation target: I personally think that is a bridge too far for two reasons. Number one the mandate for us is not set by the Fed it is set by Congress, and Congress has said price stability. I think it is very hard to pretend that 4 per cent inflation is consistent with price stability. And two if you actually had a 4 per cent inflation target it would start to distort economic decision-making.  Think about it: at 2 per cent inflation the price level doubles every 35 years. At 4 per cent inflation it doubles twice as fast. That then really has consequences for retirees and businesses and investors. So I think I would be at this point at least pretty sceptical of the wisdom of moving to a higher inflation target.

    ... 

    Q: The Fed is supposed to be targeting 2 per cent currently, at any given time; is there any argument that you could target 2 per cent over the course of a cycle? That would get you towards this idea of a price level target without formally moving to a price level target, because you are looking at an average over time? 

    A: You could potentially have something that was sort of a soft version of price level targeting. The problem with price level targeting if you actually move to that formally is it raises a lot of questions. If you overshoot inflation how quickly do you have to bring inflation back to your 2 per cent average. If you had a more general thing that our goal is to achieve 2 per cent inflation over the medium to longer run that could be maybe a softer version of price level targeting, without having to describe all the nuances. One of the challenges of price level targeting is how do you communicate it? And the second challenge of price level targeting is if you do the symmetric version it is attractive when you undershoot inflation that you want to overshoot inflation. It is not so attractive that when you overshoot inflation you want to undershoot inflation. You want to undershoot inflation then the zero lower bound problem reasserts itself. That is really the problem of symmetric price level targeting. You are comfortable overshooting after you undershoot, you are not very comfortable if you have overshot to undershoot.

  • Loretta J. Mester If the economy evolves as I anticipate, I believe further increases in interest rates will be appropriate this year and next year, at a pace similar to last year’s.

    [ January 18, 2018 ]

    If the economy evolves as I anticipate, I believe further increases in interest rates will be appropriate this year and next year, at a pace similar to last year’s.

  • John Williams It would be a great honor to serve as vice-chairman of the Fed.

    [ January 18, 2018 ]

    John Williams, president of the Federal Reserve Bank of San Francisco, is gunning for one of the top positions in central banking, saying it would be a “great honour” to serve as number two under Jay Powell, the incoming chair.

    The regional Fed president said he would “welcome such an opportunity to contribute to the important mission of the Fed”, when asked by the Financial Times if he would be up for a move to Washington to serve as vice-chairman of the Fed’s Board of Governors.

    ...

    Mr Williams suggested the US outlook is as good as it has been for a number of years. The global economy had hit a turning point where expansion is on firmer foundations not only in the US but in Europe and elsewhere around the world, he said. That combined with some fiscal stimulus is “giving you a tailwind”, and could reduce the disinflationary pressures worldwide. 

    “All those forces provide me with greater confidence that the US economy is going to continue to grow actually somewhat above trend this year and is on a very good footing in terms of growth,” Mr Williams said. “That supports again my confidence that we will see inflation move gradually back to 2 per cent.”

    With equity markets continuing to surge, Mr Williams said one of the desirable side-effects of continuing to gradually lift rates is that higher borrowing costs could reduce some of the incentive for investors to pay excessively high prices for assets.

    “The worry you have is not about where they are today,” he said of asset prices. “Obviously we don’t want to in any way contribute to animal spirits or another kind of psychology that leads people to kind of lose track of those fundamentals and go crazy and pay whatever — speculate.”

  • Robert S. Kaplan I feel strongly and have a lot of conviction that the base case should be three moves for this year. And if I’m wrong, it could even potentially be more than that.

    [ January 17, 2018 ]

    I feel strongly and have a lot of conviction that the base case should be three moves for this year. And if I’m wrong, it could even potentially be more than that. But I certainly think it makes sense to have three removals of accommodation, and we’ll see how the economy unfolds during the year.

    I’d say I have a lot more conviction starting this year that three should be the number.

  • Eric Rosengren I would also suggest that the optimal inflation rate is not likely to remain constant over time...  In my view, adopting an inflation range that allows for movement in the effective medium-run inflation goal might be a helpful addition to the Fed’s monetary policy framework...  If we set the range to – for example – 1.5 to 3.0 percent ...this would represent a set of inflation outcomes that are similar to those the U.S. has experienced over the past 20 years.

    [ January 12, 2018 ]

    I would also suggest that the optimal inflation rate is not likely to remain constant over time. An alternative, which would recognize that the inflation target should not necessarily be constant, is an inflation range with an adjustable inflation target. Within this framework, one could think of our inflation goal as defined by two components: A range of inflation rates that policymakers would find acceptable across many economic circumstances, and a medium-term goal within that range that policymakers would set, perhaps year by year, depending on specific economic circumstances.

    In my view, adopting an inflation range that allows for movement in the effective medium-run inflation goal might be a helpful addition to the Fed’s monetary policy framework.  An inflation range that allows some movement in the inflation target, depending on economic fundamentals, would be treating the Fed’s inflation goal more like the natural rate of unemployment, where we recognize that the natural rate will shift over time with demographic and other workforce characteristics.

    Of course, the advantages of greater inflation target flexibility would likely be partly offset by some costs. For instance, it is likely that such flexibility would generate more uncertainty about inflation in the medium to long run, since we cannot know for sure how long productivity and demographic trends would persist.7 However, if we set the range to – for example – 1.5 to 3.0 percent, and were successful in keeping inflation mostly in that range, this would represent a set of inflation outcomes that are similar to those the U.S. has experienced over the past 20 years.

    ...

    One way to avoid periods of prolonged low interest rates would be to alter the inflation target in response to changes in our estimates of real interest rates – estimates that have been changing of late. This would make inflation, like the natural unemployment rate, a target that could vary over time. If, for example, the monetary policy framework set an inflation range of, say 1.5 to 3.0 percent, the FOMC could vary its medium-term inflation target to be high, low, or in the middle of the range depending on economic factors that the Committee could determine at the beginning of each year. For example, in the current environment, with low population growth and low productivity growth, policy could move even more gradually to remove accommodation, and allow inflation to be somewhat higher in its range. Should the labor force or productivity grow more quickly, the Committee could seek to gradually reduce the inflation target within its range.

    ...

    An inflation range with an adjustable medium-run inflation goal is one way to address such concerns, but there are a variety of alternative frameworks also worth considering.18 In my view, we are approaching a time when a comprehensive reconsideration of the monetary policy framework is likely warranted, given the experience of the past 10 years. Any change we make should be designed to provide policymakers with the flexibility to set monetary policy appropriately as key features of the economy change, as they have repeatedly over U.S. economic history.

  • Patrick Harker [An] issue I’m watching is the yield curve, and I’m sure I’m not alone in this room. My assessment is that the worries so far have been inflated.

    [ January 12, 2018 ]

    [An] issue I’m watching is the yield curve, and I’m sure I’m not alone in this room. My assessment is that the worries so far have been inflated.

  • William C. Dudley Over the longer term, however, I am considerably more cautious about the economic outlook.  Keeping the economy on a sustainable path may become more challenging.  While the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost...  While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.

    [ January 11, 2018 ]

    Broadly speaking, the prospects for continued economic expansion in 2018 look reasonably bright.  The economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth.  Under such conditions, I would expect the inflation rate to drift higher toward the FOMC’s 2 percent long-run objective.

    Over the longer term, however, I am considerably more cautious about the economic outlook.  Keeping the economy on a sustainable path may become more challenging.  While the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost.  After all, there is no such thing as a free lunch.  The legislation will increase the nation’s longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires.  While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.  In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private sector investment and diminishing the country’s creditworthiness.  These dynamics could counteract any favorable direct effects the tax package might have on capital spending and potential output.

  • Robert S. Kaplan We want to avoid a situation where we have such an overheating that we’re playing catch up.

    [ January 10, 2018 ]

    “We want to avoid a situation where we have such an overheating that we’re playing catch up,” Kaplan said at a business event. The cuts are in part a concern, he said, “because I think debt levels of the country are unsustainable.”

  • Charles L. Evans “I think we have to be mindful of the fact that as we have all repriced real interest rates downwards that’s going to find its way into lower long term interest rates,” he told reporters. “We’ve been increasing short-term rates; it’s natural then almost mechanically for there to be a flattening of it.”

    [ January 10, 2018 ]

    “I don’t see any evidence of inflation moving up really fast, or even moving up enough,” Evans told reporters Wednesday after speaking in Lake Forest, Illinois, where he disclosed that at the Dec. 12-13 policy meeting he thought “it would be good to sort of put off the increases until about the middle of this year just to make sure the inflationary concerns resolve themselves.”

  • Raphael Bostic From Bloomberg: Bostic said his base case for 2018 was for two or three rate increases.

    [ January 8, 2018 ]

    Bostic said his base case for 2018 was for two or three rate increases, slightly below the median of three rate increases expected by his colleagues.

  • Loretta J. Mester I probably have one more (hike than the consensus) or a bit steeper path just because I think growth is picking up a little bit.

    [ January 5, 2018 ]

    Asked in an interview whether she agreed with the central bank’s median forecast for three rate rises this year, she said she was “about” in line. “I probably have one more (hike than the consensus) or a bit steeper path just because I think growth is picking up a little bit,” she said, adding she expects unemployment, now 4.1 percent, to settle around 4.75 percent.

  • Patrick Harker My own view is that two rate increases are likely to be appropriate for 2018.

    [ January 5, 2018 ]

    Inflation continues to run below target, not just in the U.S. but in countries across the globe. Domestically, I expect inflation will run a bit above target in 2019 and come down to target the following year, but I am more hesitant in this view than I am on economic activity. If soft inflation persists, it may pose a significant problem, which I’ll get to shortly.

    For that reason, my own view is that two rate increases are likely to be appropriate for 2018.

    Of course, I’ll continue to monitor the data as they roll in, but that’s the view as we start out the new year.

  • James Bullard We’ve really made no progress in the last two years toward our inflation target.

    [ January 5, 2018 ]

    We’ve really made no progress in the last two years toward our inflation target.

  • James Bullard A lot of good things were done in this tax bill… I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.

    [ January 4, 2018 ]

    “A lot of good things were done in this tax bill,” said Bullard, who endorsed the alignment of U.S. corporate taxes closer to developed world norms and said he felt that raising the standard deduction would weaken the constituencies behind itemized tax breaks that can distort economic decisions. “I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.”

    Bullard said his “base case” was for only a modest increase in capital spending, and a possible shift in the economy’s long-term potential growth by a few tenths of a percentage point -- not a dramatic change for the near term but important over the long run.

    A lot of good things were done in this tax bill… I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.

  • Eric Rosengren I do worry that we may start to see “reach for yield” kinds of behaviors on financial investments that could potentially have broader implications at a time when monetary or fiscal policy can’t react if we get a big negative shock.

    [ December 27, 2017 ]

    On the financial stability front, it’s not just the United States that has had low interest rates—it’s a global phenomenon. I do worry that we may start to see “reach for yield” kinds of behaviors on financial investments that could potentially have broader implications at a time when monetary or fiscal policy can’t react if we get a big negative shock.

  • Robert S. Kaplan So, let me answer it this way. I've been in the markets my entire adult life. I've been watching them since before I was an adult. And what I have learned is I don't always know what the market is saying, but I know it always pays to try to decipher what it's saying. And I think the bond market is saying expectations for future growth are sluggish and I think it's worth paying attention to that.

    [ December 19, 2017 ]

    KAPLAN:  I said to you when we've talked before, gradual and patient is my key comment. My own [2018] dot was three.  The 10-year Treasury is something I'll be watching. And what the 10-year does will also influence how many rate increases next year...  The yield curve is something I'll be watching carefully. So that could go (ph) the other way.

    FERRO: The yield curve is flattening and I wonder whether what the signal really is there. Because most people would say there's a massive balance sheet over the ECB, there's a massive balance sheet over the BOJ and that's why we've got this flattening, that's why the ten year yield is not rising. Do you see anything can that does to argue and resonate with you?

    KAPLAN: So it's a part of it and, by the way, I wish that was all of it. But my own view is a part of what's going on is global liquidity. But I think the bigger part of why the ten year is muted is sluggish expectations for out year GDP growth.

    And what I mean by that if you look at where potential GDP growth is five years from now, I think it is actually declining from where we are today. Why is that happening?  Aging demographics, slowing workforce growth and sluggish productivity, unless the United States improves early childhood literacy, college readiness and little skills training.

    So I think the 10-year Treasury tells you more about expectations for future growth which are sluggish. And so if you told me where we're going to have solid GDP growth the next two or three years trailing off to maybe below two percent five years from now, I would have expected a flattish yield curve and that's what you're seeing.

     ...

    MCKEE: You're talking about the 10-year as an indicator of the market's view of long term potential growth. That is completely different than the man down in Washington who seems to think the tax cut is going to change the whole fundamental picture for the United States. Is the market wrong or is the president wrong?

    KAPLAN: So, let me answer it this way. I've been in the markets my entire adult life. I've been watching them since before I was an adult. And what I learned is I don't always know what the market is saying, but I know it always pays to try to decipher what it's saying. And I think the market is saying expectations for future growth are sluggish and I think it's worth paying attention to that.

  • Neel Kashkari An inverted yield curve ...  is one of the best signals we have of elevated recession risk and has preceded every single recession in the past 50 years.

    [ December 18, 2017 ]

    An inverted yield curve, where short rates are above long rates, is one of the best signals we have of elevated recession risk and has preceded every single recession in the past 50 years. While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing and that inflation and interest rates will likely be low in the future. These signals should caution the FOMC against further rate increases until it becomes clear that inflation is actually picking up.

  • John Williams Something like three rate increases next year, or two to three more increases in 2019, that seems like a reasonable view of this gradual removal of accommodation in a very benign environment.

    [ December 18, 2017 ]

    Something like three rate increases next year, or two to three more increases in 2019, that seems like a reasonable view of this gradual removal of accommodation in a very benign environment. Low unemployment, relatively low inflation - moving back to 2 percent [or] a little bit maybe above that. But it’s not an environment that I, at least right now, view as having really any big risks of either needing to tighten dramatically faster, or any real arguments not to continue on the path we’re on.

    Now, that could change. I’m sure you were going to ask - but one of the big question marks is how will the tax policies change -  what that package ends up looking like, and then obviously how that effects the economy in terms of consumer spending, business spending, and over the longer term how it affects the supply side of the economy.

    From Wall Street Journal interview published on December 5 but conducted before the blackout period.

  • Charles L. Evans I believe that leaving the target range at 1 to 1-1/4 percent at the current time would have better supported a general pickup in inflation expectations and increased the likelihood that inflation will rise to 2 percent.

    [ December 15, 2017 ]

    I am concerned that persistent factors are holding down inflation, rather than idiosyncratic transitory ones. Namely, the public’s inflation expectations appear to me to have drifted down below the FOMC’s 2 percent symmetric inflation target. And I am concerned that too many observers have the impression that our 2 percent objective is a ceiling that we do not wish inflation to breach, as opposed to the symmetric objective that it really is; that is, we would like to see the odds of inflation running modestly below 2 percent equal the odds of it running modestly above over the long run.

    I believe that leaving the target range at 1 to 1-1/4 percent at the current time would have better supported a general pickup in inflation expectations and increased the likelihood that inflation will rise to 2 percent along a path that is consistent with a symmetric inflation objective.

  • Janet L. Yellen Economists are not great at knowing what appropriate valuations are; we don't have a terrific record. And the fact that those valuations are high doesn't mean that they're necessarily overvalued...  I think when we look at other indicators of financial stability risks, there's nothing flashing red there or possibly even orange... If you ask me is this significant factor shaping monetary policy now; well, it's on the list of risks, but it's not a major factor

    [ December 13, 2017 ]

    Of course, the stock market has gone up a great deal this year. And we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that's worth pointing out.

    But economists are not great at knowing what appropriate valuations are; we don't have a terrific record. And the fact that those valuations are high doesn't mean that they're necessarily overvalued.

    ...

    I think what we need to and are trying to think through is if there were an adjustment in asset valuations, the stock market, what impact would that have on the economy? And would it provoke financial stability concerns?

    And I think when we look at other indicators of financial stability risks, there's nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system.  We're not seeing ... some buildup in leverage or credit growth at excessive levels. So you know, this is something that the FOMC pays attention to. But if you ask me is this significant factor shaping monetary policy now; well, it's on the list of risks, but it's not a major factor