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Recent FedSpeak Highlights

  • Eric Rosengren As part of the monetary policy normalization strategy, the FOMC should, of course, continue to consider whether it needs to maintain such a large balance sheet.

    [ January 9, 2017 ]

    My own view is that the SEP median forecast seems reasonable if we continue to see real GDP growing faster than the so-called “potential” rate. My own forecast is that we will achieve both elements of the dual mandate by the end of 2017 – and as a result, I believe that a still gradual but somewhat more regular increase in the federal funds rate will be warranted.

    In addition to short-term interest rates, the Federal Reserve has a second policy tool at its disposal, the balance sheet, shown in Figure 14. The central bank’s balance sheet has been roughly level over the past two years. With the federal funds rate expected to continue its gradual rise from the zero lower bound, the risk of returning to the zero lower bound should diminish. The FOMC has published a statement on its policy normalization principles and plans. As part of the monetary policy normalization strategy, the FOMC should, of course, continue to consider whether it needs to maintain such a large balance sheet.

  • Jerome H. Powell I would also agree that monetary policy may sometimes face tradeoffs between macroeconomic objectives and financial stability. Indeed, it would be a divine coincidence if that were not the case.

    [ January 7, 2017 ]

    Thank you for this invitation to discuss low interest rates and the financial system. The framing of this topic raises the question of whether low interest rates have somehow undermined the stability and functioning of the financial system. I will argue that "low for long" interest rates have supported slow but steady progress to full employment and stable prices, which has in turn supported financial stability…

    Isolating the effects of these policies is challenging, but studies generally show that they lowered rates across the curve and moved other asset prices as well. It is even more challenging to evaluate their effects on aggregate demand. Low rates and higher asset prices should support household and business spending and investment through various channels. But low rates may also perversely induce some households to save more in order to meet their targets for retirement.

    ...

    I have argued that low rates have supported aggregate demand and brought us very close to full employment and 2 percent inflation; that forces other than monetary policy have been pushing rates lower for more than 30 years; and that the core of the financial system is now much stronger and more resilient than before the crisis. All of that said, I would also agree that monetary policy may sometimes face tradeoffs between macroeconomic objectives and financial stability. Indeed, it would be a divine coincidence if that were not the case…

    The question is whether low rates have encouraged excessive risk-taking through the buildup of leverage or unsustainably high asset prices or through misallocation of capital. That question is particularly important today. Historically, recessions often occurred when the Fed tightened to control inflation. More recently, with inflation under control, overheating has shown up in the form of financial excess. Core PCE inflation remained close to or below 2 percent during both the late-1990s stock market bubble and the mid-2000s housing bubble that led to the financial crisis. Real short- and long-term rates were relatively high in the late-1990s, so financial excess can also arise without a low-rate environment. Nonetheless, the current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system.

    If we look at the channels listed here, the picture is mixed, but the bottom line is that there has not been an excessive buildup of leverage, maturity transformation, or broadly unsustainable asset prices.

  • Charles L. Evans I still think two moves is not an unreasonable expectation for next year, but it's going to depend on how the data roll out. If it's a little bit stronger, three is not going to be implausible. Whether it starts in March or it starts in midyear it's going to depend on how the data are, what expectations look like.

    [ January 6, 2017 ]

    "I still think two moves is not an unreasonable expectation for next year, but it's going to depend on how the data roll out. If it's a little bit stronger, three is not going to be implausible. Whether it starts in March or it starts in midyear it's going to depend on how the data are, what expectations look like."

    "We're going to have to wait and see what the details are on that in order to properly assess that," he said. But, "We added a little bit of expected fiscal stimulus [to our December forecasts] just because we thought it was a more positive development as opposed to just a more contractionary financial development."

    Still, the fiscal stimulus assumptions had a "very modest effect" on the Chicago Fed's forecasts, he emphasized.

    And he still does not expect the inflation rate to reach 2% until 2018 at the earliest, Evans said.

  • John Williams Right now, my view is a lot of the fiscal stimulus people have been talking about would have a relatively modest effect.

    [ January 6, 2017 ]

    WILLIAMS: More fiscal stimulus, I think, will have a modest effect on economic growth over the next couple of years.

    CNBC: Can you give us kind of the ranges around which we mean growth? I mean, there's numbers thrown out that growth could accelerate to 3%, 4%, 5%, but my guess is you think the natural growth rate of the economy is below 2%?

    WILLIAMS: Right. So my view in terms of the demographic and productivity trend we've been seeing for the last decade or so is growth is likely to be 1.5% to 1.75%. Now, some policies could change that if we find ways to do a lot more to invest in people and technology. More broadly in infrastructure. I think we can shift that upwards. Right now, my view is a lot of the fiscal stimulus people have been talking about would have a relatively modest effect.

    CNBC: When you say shift upwards, are you looking for an extra half point, extra point? What kind of numbers can an economy do of this size? Can we add two percentage points of growth?

    WILLIAMS: I think when you look back at history, and the periods where we have had very rapid productivity growth that would give us an extra two points of growth, that's periods of groundbreaking changes and technology and how the economy works. That could happen in the future. I don't have a crystal ball about that, but you're talking about transformative change to the economy.

  • Jeffrey Lacker While there is currently tremendous uncertainty around the shape and size of any federal policy initiatives, the direction of the effect on monetary policy seems pretty clear.

    [ January 6, 2017 ]

    Do post-election economic developments have implications for monetary policy? Any significant shift in the fundamental factors underlying the economic outlook is likely to have monetary policy consequences. While there is currently tremendous uncertainty around the shape and size of any federal policy initiatives, the direction of the effect on monetary policy seems pretty clear. Pursuing our congressionally mandated objectives for price stability and employment means that, all other things equal, greater fiscal stimulus implies higher interest rates than would otherwise be warranted. Otherwise, inflation pressures are likely to become elevated, as we saw in response to expanded fiscal deficits in the late 1960s.

  • Loretta J. Mester “I’ve been a little more, seeing a little more strength in the economy,” she said. “I have a little more built-in inflation pressures in my forecast, so you know, I’m probably a little steeper than that in my forecasts but I think the three, the median path is a good summary of where the tenor of the committee is.”

    [ January 6, 2017 ]

    “My own view is that we’re basically at full employment from the point of view of the monetary policy goal, one of our dual mandate goals,” Mester told FOX Business Network’s Peter Barnes.

    When asked if her forecast for interest rate hikes was in line with the Fed forecast of three rate hikes in 2017, Mester said that, although her view differed a bit from the consensus, she was comfortable with the compromise.

    “I’ve been a little more, seeing a little more strength in the economy,” she said. “I have a little more built-in inflation pressures in my forecast, so you know, I’m probably a little steeper than that in my forecasts but I think the three, the median path is a good summary of where the tenor of the committee is.”

    “I wouldn’t be surprised if our forecast will be more variable this year just because we’re going to incorporate, as more information comes out about what those fiscal packages will look like in terms of tax policy and other policies that the new administration is promulgating.”

  • Patrick Harker I’m penciled in for three increases next year, however, that’s subject to a lot of uncertainty.

    [ January 6, 2017 ]

    "I’m penciled in for three increases next year, however, that’s subject to a lot of uncertainty,” referring to the current lack of clarity over Trump’s future fiscal proposals.

    Speaking on Sirius radio Friday, he said “as the policy uncertainty resolves itself, we’ll be able to see whether it’s 3, 2, 4.” Harker is also an FOMC voter this year.

  • John Williams The central tendency of the views of my colleagues is around three rate hikes. That's a pretty reasonable assumption.

    [ January 5, 2017 ]

    Clearly, if a number of countries have trade barriers, that would have a negative impact on growth and it would also raise inflation, too. So I mean, there's are a lot of factors that can come out of various policy actions, and, again, from my perspective we just try to analyze them all and what it means for the economy.

    ...

    My own view is it's very hard to know what fiscal policy will be over the next couple of years, but the way I viewed it was relative to a few months ago, I think the distribution of likely outcome in terms of fiscal policy is more stimulus that I was thinking a few months ago and I built that into my own forecast.

    ...

    I will say that i think that that's -- you know, the central tendency of the views of my colleagues is around three rate hikes. That's a reasonable view given unemployment is 4.6%, economy's growing at 2% and inflation going back to 2%. That's a pretty reasonable assumption.

  • John Williams I will say that my underlying view for next year is broadly consistent with the central tendency of the committee.

    [ December 20, 2016 ]

    Q: But surely the pace of future rate hikes will depend in part on fiscal policy?

    A: The thing about conducting monetary policy in this time, it’s really important to reiterate that we’re focused on our maximum employment and price stability goals. There are decisions that are made by the elected representatives in Congress and the administration, and that’s the process that should happen. What we need to do and what we will do is focus on any changes in the economic outlook, what does that mean for achieving our goals and for the right path of policy decisions to achieve those goals. I know everyone likes to talk about fiscal policy in terms of what does it mean for the outlook. In the last couple of years we’ve also had some big shocks to the economy that came from across the globe. There’s a lot of things that can change and we have to stay focused on our goals and continue to be data dependent in terms of analyzing what do these changes mean for our outlook.

    ...

    I will say that my underlying view for next year is broadly consistent with the central tendency of the committee. My view is that the economy is going to grow roughly as it did this year, unemployment is going to edge down a little bit, inflation moving back to 2 percent, and that calls for gradual removal of policy accommodation.

    ...

    Obviously I don’t have any particular insights into what the new Congress or the new administration is going to do around fiscal policy. There’s a lot of uncertainty about what policies are going to be enacted, and that matters a lot in terms of thinking about any effects on the economy. I do think, even though I’m definitely “wait and see” in terms of learning what happens, the main effect on my outlook is that my view on the risks to the outlook have shifted a little. Those risks used to be maybe balanced and if anything a little bit to the soft side because of global developments and other factors that might cause growth to weaken. And I think that the possibility of greater fiscal stimulus and other changes in policies would if anything move those risks a little bit to the right. But it’s not a big effect.

  • John Williams Stop thinking about this as a national issue. It’s really a global phenomenon driven by demographic trends and what economists call the global savings glut or heightened demand for safe assets.

    [ December 20, 2016 ]

    Q:  In an essay this summer, you argued that the Fed should be preparing for future crises. You suggested in particular that the Fed should consider targeting a higher inflation rate. Is that discussion happening?

    A:  There is definitely work going on in the economics community around these topics, among a lot of academics but also among central banks. Particular kudos to the Bank of Canada, who, through a process that the bank has with the government — every five years they review their framework for monetary policy – they have a very serious deep dive and thoughtful consideration of these issues. I think of them as conducting best practice in terms of the willingness to consider these issues and to think long term and to do it in a very open-minded way. So I think other central banks should follow the Bank of Canada’s lead here.

    I think the important thing to remember on this is that this is not an issue about the U.S. or Canada. It’s an issue that according to our research and an increasing number of researchers, this observation that the equilibrium interest rate appears to be at very low level and is likely to stay that way for a long time is more of a global phenomenon. The one piece of advice I give on this is: Stop thinking about this as a national issue. It’s really a global phenomenon driven by demographic trends and what economists call the global savings glut or heightened demand for safe assets. I think people around the world are starting to focus on this. The question of what’s the right remedy, that’s kind of the later discussion.

    Q:  If it’s a global issue, does it require a coordinated response?

    A:  If people came to the conclusion that given the equilibrium real rate [inflation targets should be increased], I do think there would be advantages: that the more countries that raised their target at the same time, I think the greater the benefit is...  When everybody is at the zero lower bound and they’re all being constrained, there’s a negative feedback loop.... And with a very low inflation target around the world, the likelihood of all of us hitting the zero lower bound is higher. And if everyone had a higher inflation target — a modestly higher target, a 3 or 4 percent target — then the likelihood of all us getting to the zero lower bound at the same time is much lower. My punch line is: Yes, countries can do it one by one. That would work. We’ve seen it happen. But I do think there are some benefits to a more, I wouldn’t say coordinated, but perhaps a more correlated approach.

  • Neel Kashkari Over time researchers have made various adjustments to try to improve the original Taylor rule to make up for its shortcomings. But the global and U.S. economies are complex and continuously evolving. No simple algebraic formula can take into account such a dynamic global economy. Google Maps is a brilliant application. Every once in a while it recommends driving into the middle of a lake.

    [ December 18, 2016 ]

    Advocates of rigid rules-based monetary policy are pursuing laudable goals that I share. In theory, stringently following simple rules has the potential to reduce policy uncertainty and unnecessary market volatility, increase the Federal Reserve’s credibility in pursuing its dual mandate and reduce potential vulnerability to political pressure.

    But to gain these benefits, the FOMC would need to specify the rule and then—this is the most important part—stick to it, regardless of economic conditions. If the FOMC were to make exceptions, even rarely and with good intentions, most of the benefits of mechanically following a rule would be lost. Uncertainty and volatility would return as soon as discretion re-entered the equation. Unfortunately, sticking to such a rule no matter how the economy evolves can be very damaging.

    Over time researchers have made various adjustments to try to improve the original Taylor rule to make up for its shortcomings. But the global and U.S. economies are complex and continuously evolving. Over the past 25 years the world has seen extraordinary technological innovations, the rise of China, the creation and strains of the eurozone, the financial crisis and U.S. inflation falling from around 4% to less than 2%. No simple algebraic formula can take into account such a dynamic global economy. Google Maps is a brilliant application. Every once in a while it recommends driving into the middle of a lake.

  • James Bullard It could be, once you get to 2018, that we’ll have to admit that something fundamental has changed in the economy, and then we’ll adjust our policy recommendations accordingly.

    [ December 17, 2016 ]

    MR. DERBY: Well, with the closing minutes that we have left to us here, I’d like to ask you about some – how you think the new model that you adopted last June – how’s that fared? Are you happy with how that – your new way of thinking about the economy and monetary policy? You know, with six months under that now, do you think that that’s been a good framework to interpret what’s going on and to make policy in?

    MR. BULLARD: I think it has been very good over the last – since we’ve used it, since last June. We said unemployment would be 4.7 at the end of the year. Right now it’s 4.6, so we’re looking good. And the – we said inflation would be right about 2 percent, and that’s looking pretty good as well. And we said that growth would be 2 percent. It probably won’t get all the way to 2 percent this year, but it’ll be close. So I think that part looks very good.

    I think the main issue for us is whether the new approach to fiscal policy represents a regime change, which’ll change our whole – you know, in our framework, if there is a regime change, then we’ve got to – we’ve got to shift our policy. And I think the answer to that is it’s too early to tell, but it’s possible that this new set of policies will really jolt the U.S. economy and you’ll switch out into some new regime, which will characterized by higher real interest rates, possibly higher productivity. And if that’s the – if that’s the world we’re headed to, then monetary policy will have to adjust.

    But it’s too early to make that prediction now. And so, for now, our baseline is that we’re going to stick in the old regime. And we’ve got upside risk that we might switch to a new regime going forward, especially for 2017, I think, where it would be hard to have – hard for fiscal policy to have too much impact on 2017. I think for there, we’re in – we’re in great shape. It could be, once you get to 2018, that we’ll have to admit that something fundamental has changed in the economy, and then we’ll adjust policy – our policy recommendations accordingly.

    MR. DERBY: I’m sorry, just to make – just to understand, so 2018 is probably the soonest that enough could have changed in the political landscape to do this re-evaluation of the general regime of the economy. Is that accurate?

    MR. BULLARD: Yeah, or maybe in the second half of 2017. In that time frame, then Congress would have had time to act, and you’d be through the first hundred days of the administration. You could see the details of what they’re proposing, which things actually got done and which things actually got delayed, those kind of things. And then we can reassess at that point.

  • James Bullard I’d be interested now in thinking about balance sheet policy and possibly allowing runoff in the balance sheet... It seems to me now might be a good time to – or 2017, possibly, would be a good time to play that card. 

    [ December 17, 2016 ]

    MR. BULLARD:  I would say one other thing, though, that I’d be interested now in thinking about balance sheet policy and possibly allowing runoff in the balance sheet. That’s something that I’ve advocated in the past, and it seems to me now might be a good time to – or 2017, possibly, would be a good time to play that card. And then we could start working the balance sheet down. And if we don’t want to allow a runoff of the balance sheet, another thing you could do is reverse the Operation Twist that we did earlier and go at a shorter – you know, replace maturing securities with shorter-term securities. You could do that as well. But –

    MR. DERBY: Would you do that – would you do that by way of the reinvestment process that’s still ongoing?

    MR. BULLARD: Yeah. The reinvestment process is ongoing right now. You could redirect that more toward shorter-term securities, or my preference would be just to allow some runoff in the – in the balance sheet. So this is something that the committee was thinking about doing before we started raising interest rates, and then it got put to the back burner. But it seems to me that you could at least think about that in 2017, and that’s something I would – I would be interested in looking at.

    MR. DERBY: Now, could you sort of sketch out how you – would this be in terms of, say, fading or tapering the reinvestment program, or stopping it? Would that be the first step along that path?

    MR. BULLARD: Yeah, you could either – you could just stop reinvestments, or you could do it in a more managed way that would smooth it out a little bit more. And the path I’ve advocated, you know, thinking about a way to be smooth and allow the – you know, the reinvestment runoff to be managed in an appropriate way. And so we could – we could look at that. I don’t think this is imminent, but it’s something I’d be interested in. So I guess my point in mentioning this is that that does not show up in the interest-rate forecast, but that’s something I would be interested in doing.

    MR. DERBY: Do you think the markets are ready for that? I know that would be kind of a real – for a lot of folks out there, that would be a real shot across the bow, and some folks would interpret that as a – as a real push towards tighter monetary policy.

    MR. BULLARD: Well, I think you put less downward pressure on longer-term yields, you probably get a steeper yield curve. But in the context of what I’m advocating, which is only one rate increase over the forecast horizon, I think it would probably give you the appropriate amount of policy tightening. If you combined it with a very aggressive rate policy, that would be a lot tighter than what the markets are currently expecting. But – so, I guess, you have to take this in the context of what I’m saying for the policy rate, which is not very many moves in the policy rate, but possibly look at reducing the size of the balance sheet.

  • James Bullard I would say all – for all of these possible changes [to fiscal policy], the effects on 2017 GDP [gross domestic product] growth will be hard to achieve. I think it’s just too soon. A government doesn’t get formed for a while.

    [ December 16, 2016 ]

    I would say all – for all of these possible changes [to fiscal policy], the effects on 2017 GDP [gross domestic product] growth will be hard to achieve. I think it’s just too soon. A government doesn’t get formed for a while. You know, they would have to pass legislation. There would be effective dates on the legislation. So I think the – for our forecasting exercise in the SEP [summary of economic projections], we’re talking about 2017 and then beyond, and I just didn’t think we could probably expect too much different in 2017 from what we thought before the election. So we kept that the same.

    For 2018 and 2019, it is possible that these kinds of things would have important effects on U.S. GDP growth. But we’ve – what we did is we didn’t put that into the baseline; we just treated that as an upside risk to the forecast at this point, because you just don’t have very many details. It’s not clear how the politics shake out and exactly what the details will be. A lot depends on what the details are. So we just kept our forecast the same for GDP, 2 percent over the forecast horizon. That’s exactly what it’s been since the financial crisis, so we think that will just continue. But there will be some upside risk to that if some of these political plans actually come to fruition in a way that can drive U.S. productivity growth. So, for us, we kept that the same.

  • Jeffrey Lacker There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year... My guess would be more than three [in 2017]

    [ December 16, 2016 ]

    “There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year,” he said. “We can get where we need to be with a pace of increases that qualifies as gradual.” His next scheduled turn as a Federal Open Market Committee voter is in 2018.
    ...
    “My guess would be more than three,” Lacker said. “I have been advocating for some time that we return -- that we raise rates.”

  • Jeffrey Lacker If we were to see a burst of demand growth, that would suggest a steeper path of rates to maintain price stability. There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year. My guess would be more than three.

    [ December 16, 2016 ]

    “If we were to see a burst of demand growth, that would suggest a steeper path of rates to maintain price stability,” the president of the Federal Reserve Bank of Richmond told reporters Friday after taking part in a panel discussion in Charlotte, North Carolina.

    “There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year,” he said. “We can get where we need to be with a pace of increases that qualifies as gradual.”
    ...
    “My guess would be more than three,” Lacker said. “I have been advocating for some time that we return -- that we raise rates.”

  • Janet L. Yellen I want to emphasize that the shifts that you see [in the dots] are really very tiny.

    [ December 14, 2016 ]

    Well, I would like to emphasize that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, you know, some of the participants.

    So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants. The unemployment rate is perhaps a touch -- as I said, a touch lower than previously you've seen some modest downward revisions in that -- in that projection. For this year, there was a slight upward revision to inflation.

    And some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections. And that may have been a factor that was one of several that occasioned these shifts. But I want to emphasize that the shifts that you see here are really very tiny.

     

  • Janet L. Yellen I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.

    [ December 14, 2016 ]

    QUESTION: I'm sorry, but if there was a rush of fiscal policy that did not increase the productive capacity of the economy, would that mean the Federal Reserve would have to move more quickly with raising rates?

    YELLEN: You know, it's something I really just can't generalize about because while it would be desirable to have tax policies that do increase the productive capacity of the economy, an increase in the pace of productivity changes one of the factors that does affect the economy's neutral rate, a boost to productivity could spur investment is -- we've been saying, we estimate that the value of the neutral federal funds rate is quite low, and one of the reasons for that is slow productivity growth.

    And so it's very hard to generalize about it because it could affect that neutral rate.

    ...

    I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack is diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.

  • Janet L. Yellen I do want to make clear that I have not recommended running a hot economy as some sort of experiment.

    [ December 14, 2016 ]

    YELLEN: So, I want to be clear that what I said in that speech in Boston is that an important research question is whether or not in an economy with a very strong labor market, there might be changes that took place that permanently raise the labor force participation, training and other things of the labor force, that would be positives for the productive potential of our economy on a long-lasting basis.

    I never said that I favor running a high-pressure economy. And, you know, as -- as you can see in the SEP (ph) projections of the participants, and this has long been true, not just in this forecast, but in earlier ones as well. You see a modest under-shooting. The unemployment rate is projected to modestly under-shoot for several years, levels that are deemed to be normal in longer run.

    That's an appropriate (ph) policy, purely on the grounds that inflation is running below our objective, and while we don't want to over-shoot our two percent objective, we also don't want a persistent under-shoot of our two percent objective. And that does involve a labor market that may succeed in attracting more people off the sidelines into the labor market. It's something we'll -- we will see as we examine experience over the next couple of years. We may adjust our views on this.

    But I do want to make clear that I have not recommended running a hot economy as some sort of experiment.

  • Charles L. Evans “At 4.6 percent unemployment and an expectation that the economy will continue to be strong, you don’t need explicit stimulus.”

    [ December 5, 2016 ]

    “At 4.6 percent unemployment and an expectation that the economy will continue to be strong, you don’t need explicit stimulus” from the government, according to Evans.