I think it is helpful at this point to note some similarities to the period following the recession of late 1990 and early 1991. You might recall that after the deregulation of the Savings and Loan industry, many S&Ls made imprudent real estate loans. The ensuing losses substantially reduced the lending capacity of the industry as insolvent S&Ls went out of business and others were forced to recapitalize. In addition, banks were reluctant to lend as they struggled to bring their capital in line with the then new risk-based standards set by the Basel I Accords. These restructurings created financial headwinds that made the recovery from recession frustratingly slow. In fact this period was later characterized as a "jobless recovery."
Today, banks again are recapitalizing after making imprudent loans; and again, they are doing so in the face of a sluggish economy. However, one key difference is that today much more overall lending activity is securitized. This has spread losses among a wider swath of financial institutions and has made it more difficult to quantify losses. As a result, we have seen a broader disruption of credit flows, even than those of the early 1990s. This suggests we may again be in for a period of weak growth.
Now let's consider the stance of policy. Today, the nominal funds rate is at 2 percent. In January, projections FOMC members made for PCE inflation in the medium term were in the range of 1-3/4 to 2-1/4 percent. This means the real fed funds rate is close to zero or perhaps slightly negative. Looking back at the early 1990s, the nominal funds rate bottomed out at 3 percent in 1992. Given the higher inflation expectations at the time, this also translated into a real funds rate that probably was close to zero—just like today.
In normal times, a real funds rate near or below zero would be considered highly accommodative. However, then, as now, the boost to aggregate demand from the accommodative funds rate was offset to some degree by financial market turmoil. Because we think the disruptions today are more significant than in the early 1990s, this offset also is larger today. In contrast, today we have in place the various additional measures that provide extra liquidity. No such facilities were in place in the early 1990s. It is difficult to weigh the various factors. But with this difficulty in mind, and given my reading today of economic prospects, my judgment is that the current net stance of monetary policy is accommodative—and this is appropriate in order to address the way we currently see the sluggish economy unfolding in 2008. I also believe that the current stance roughly balances out substantial risks to the outlooks for both growth and inflation—which I see as being to the downside for growth and to the upside for inflation.