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Recent FedSpeak Highlights

  • 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.

  • William C. Dudley I favor automatic, rather than discretionary, fiscal actions because they would typically go into effect more quickly and would be better anticipated.

    [ December 5, 2016 ]

    I favor automatic, rather than discretionary, fiscal actions because they would typically go into effect more quickly and would be better anticipated. Expectations matter greatly in affecting economic behavior. For example, if the economy were to weaken, the anticipation that strong fiscal stabilizers would kick in to support incomes should lead workers to be less fearful about losing their jobs, and businesses to be less concerned that demand for their products might fall precipitously. This, in turn, would make workers more confident that they could sustain their spending, and would make businesses more confident that they could keep workers on their payrolls.

    What type of fiscal stabilizers would be most effective? I would turn first to those that Congress has implemented on a discretionary basis during past economic downturns, such as extensions of unemployment compensation and cuts in payroll taxes. For example, when the unemployment rate climbs, extensions of the duration of eligibility for unemployment compensation could be triggered automatically, helping to stabilize household income. Similarly, when the unemployment rate breaches certain thresholds, payroll tax cuts could be triggered, helping to support the disposable income of workers facing reductions in hours. Payroll tax cuts also have the advantage of skewing more toward low- and moderate-income workers, who typically have a higher propensity to consume out of current income.

    Obviously, it is up to the incoming Administration and Congress to decide on the appropriate fiscal measures. But, the point that I want to highlight is that robust automatic fiscal stabilizers would complement monetary policy, and take some pressure off of the Federal Reserve to undertake extraordinary measures in situations where there is little scope for cutting short-term interest rates.

  • Daniel K. Tarullo As I have suggested, there is surely a healthy debate to be had as to whether additional strengthening of resiliency measures is appropriate for the largest institutions. But I do not think there is a sound economic case for generally weakening the regulatory requirements applicable to the largest banks. And I certainly do not think the taxpayers should bear the risk that would be entailed by any such weakening.

    [ December 2, 2016 ]

    There are surely refinements that can be made to the regulatory regime that has emerged, particularly--though not exclusively--with respect to smaller banks that pose neither systemic nor macroprudential risks. And, as I have suggested, there is surely a healthy debate to be had as to whether additional strengthening of resiliency measures is appropriate for the largest institutions. But I do not think there is a sound economic case for generally weakening the regulatory requirements applicable to the largest banks. And I certainly do not think the taxpayers should bear the risk that would be entailed by any such weakening.

  • Robert S. Kaplan We are – we are trillions underinvested. We are underinvested in U.S. infrastructure.

    [ December 1, 2016 ]

    We are – we are trillions underinvested. We are underinvested in U.S. infrastructure. China, you might argue, is overinvested. We’re underinvested, and there’s varying studies about the amount of underinvestment in the United States. But it certainly, you know, could easily be in excess of a couple of trillion dollars, and I’ve seen estimates higher – as high as 3 trillion. And I think improving our infrastructure, if it’s done intelligently where there’s a need, should help bolster growth. Yes, it does in the near term create jobs, but it also may help improve productivity over the longer term. That’s an important structural thing.
    ...
    And so we need to look at these. And so those are the ones that are high up on my list of things that, you know, would be helpful. Anything that improves growth in the workforce and productivity of the workforce, and in addition incentives that help encourage capital spending – which has been very sluggish – those are all things that help push back against these big secular headwinds of aging demographics, globalization, end of the debt supercycle, and technology-enabled disruption.

    And so monetary policy can’t really do that. We’ve done our part, but you need other, broader economic policies.

  • Loretta J. Mester I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion. We know that monetary policy affects the economy with long and variable lags, so policy actions have to be taken before our policy goals are fully met. The lesson that policy should be forward looking is based on the history of poor outcomes when that strategy hasn’t been followed and we’ve fallen far behind the curve.

    [ November 30, 2016 ]

    When the Committee met in early November, it assessed that the case for moving the policy rate up had continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward the dual-mandate objectives. I, and one of my colleagues, dissented from that decision, preferring to see a 25-basis-point rise.

    I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion. We know that monetary policy affects the economy with long and variable lags, so policy actions have to be taken before our policy goals are fully met. The lesson that policy should be forward looking is based on the history of poor outcomes when that strategy hasn’t been followed and we’ve fallen far behind the curve. If we delay too long and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive, and we have to move rates up steeply, we could risk a recession, a bad outcome that disproportionately harms the more vulnerable parts of our society. Delaying for too long might also induce investors to search for yield, raising risks to financial stability. I do not think we are behind the curve yet, but I think the risks to macroeconomic stability and to financial stability will grow over time should we fail to take appropriate action given where we are on our goals and the current low level of our policy rate. I view another increase in interest rates as a prudent step to take.

    I anticipate that a gradual upward path of policy is likely to be appropriate given economic developments. That means that the policy rate won’t be moving up at each meeting and that policy will remain accommodative for some time, continuing to lend support to the economic expansion going forward. It will allow us to recalibrate policy over time as we gain more insight into the underlying structural aspects of the post-crisis economy and as the economy evolves.

  • Stanley Fischer For several years, the Fed has been close to being "the only game in town," as Mohamed El-Erian described it in his recent book. But macroeconomic policy does not have to be confined to monetary policy. Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges.

    [ November 21, 2016 ]

    For several years, the Fed has been close to being "the only game in town," as Mohamed El-Erian described it in his recent book. But macroeconomic policy does not have to be confined to monetary policy. Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges. While there is disagreement about what the most effective policies would be, some combination of improved public infrastructure, better education, more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and living standards. By raising equilibrium interest rates, such policies may also reduce the probability that the economy, and the Federal Reserve, will have to contend more than is necessary with the effective lower bound on interest rates.

  • Esther L. George As a voting member of the Committee, I dissented in favor of a modest 25-basis point increase. My view is that monetary policy should avoid deliberately stoking the risks that come with overheating the U.S. economy and instead, slowly raise the federal funds rate to promote maximum employment commensurate with the economy’s long-run potential to increase production.

    [ November 18, 2016 ]

    As a voting member of the Committee, I dissented in favor of a modest 25-basis point increase. My view is that monetary policy should avoid deliberately stoking the risks that come with overheating the U.S. economy and instead, slowly raise the federal funds rate to promote maximum employment commensurate with the economy’s long-run potential to increase production.

    Supporting conditions that bring more people into the workforce is certainly a desirable objective. However, over the last 55 years, there have been occasions where the unemployment rate has fallen below a level that is consistent with the maximum sustainable level of employment. In these cases, the U.S. economy soon after faced a period of substantial and prolonged increases in unemployment. The effect of allowing the economy to overheat in these cases produced short-term gains, but ultimately with longer-term costs. Consequently, I see moving sooner, rather than later, as taking into account the long and variable lags with which monetary policy operates, and reduces the potential for “go-stop” types of policies that create volatility, rather than subdue it.

  • James Bullard “It is better to see the Fed as approximately on hold, with just very small moves upward,” he told reporters. “One change a year, with the [Fed’s] balance sheet still big, is really not much of a change in U.S. monetary policy.”

    [ November 18, 2016 ]

    “Markets are currently [pricing in a] high probability of a December move, I’m leaning toward supporting that,” Mr. Bullard said at a banking conference [in Frankfurt]. “The question now is about 2017.”
    ...
    “It is better to see the Fed as approximately on hold, with just very small moves upward,” he told reporters.

    “One change a year, with the [Fed’s] balance sheet still big, is really not much of a change in U.S. monetary policy,” he said.

  • Janet L. Yellen The longer-run deficit problem needs to be kept in mind. In addition, with the debt-to-GDP ratio at around 77 percent, there's not a lot of fiscal space, should a shock to the economy occur, an adverse shock, that did require fiscal stimulus.

    [ November 17, 2016 ]

    It's clearly up to Congress and the administration to weigh the costs and benefits of fiscal policies that you will be considering. My advice would be that several principles should be taken into account as you make these judgments.

    First of all, the economy is operating relatively close to full employment at this point. So in contrast to where the economy was after the financial crisis, when a large demand boost was needed to lower unemployment, we're no longer in that state.

    You mentioned the longer-term fiscal outlook; the CBO's assessment, as you know, is that there are longer-term fiscal challenges that the debt-to-GDP ratio at this point looks likely to rise as the age -- as the Baby Boomers retire and population aging occurs.

    And that longer-run deficit problem needs to be kept in mind. In addition, with the debt-to-GDP ratio at around 77 percent, there's not a lot of fiscal space, should a shock to the economy occur, an adverse shock, that did require fiscal stimulus.

    More From:

    See Also:

    Source:

    http://www.federalreserve.gov/newsevents/testimony/yellen20161117a.htm

    Venue:

    Testimony to the Joint Economic Committee
  • Janet L. Yellen I was confirmed by the Senate to a four- year term, which ends at the end of January of 2018, and it is fully my intention to serve out that term.

    [ November 17, 2016 ]

    I was confirmed by the Senate to a four- year term, which ends at the end of January of 2018, and it is fully my intention to serve out that term.

    More From:

    See Also:

    Source:

    http://www.federalreserve.gov/newsevents/testimony/yellen20161117a.htm

    Venue:

    Testimony to the Joint Economic Committee