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FinanceMTEB 6

A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long.

dovish

In addition, U.S. inflation remains muted.

dovish

In any case, we, our job is to deliver price stability, and I think—you can think of price stability as an asset that just delivers large benefits to society over a long period of time.

hawkish

Funding of our current account deficit likely will become more difficult when home bias approaches its practical minimum.

hawkish

Staff Review of the Financial Situation On balance, financial conditions in the United States remained supportive of growth in economic activity and employment: The expected path of the federal funds rate was slightly lower in the long run, yields on longer-term Treasury securities moved down modestly, equity prices rose, corporate bond spreads narrowed, and the foreign exchange value of the dollar was little changed.

dovish

Despite further declines in vacancy rates and rising real estate prices, business spending on nonresidential construction also seemed to have been lackluster, with such activity not having changed much since last summer.

neutral

So you’re going to have different perspectives from Committee participants about how fast growth will be, how fast the labor market will heal, or how fast—sorry, inflation will move up.

hawkish

In the circumstances, most members endorsed a proposal to delete as no longer necessary the previous summary statement relating to the risks to growth and inflation taken together.

neutral

Computing power may not be falling in price quite so rapidly now as in the late 1990s, but a dollar nevertheless buys a great deal more computational capacity today than it did even five years ago.

neutral

Risks to the inflation projection also were seen as balanced.

neutral

The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth.

hawkish

Flexible inflation averaging would bring some of the benefits of a formal average-inflation-targeting rule, but it could be more robust and simpler to communicate and implement.

neutral

Nonetheless, on balance, most members currently considered the upside risks to inflation to be a bit less pressing than those on the downside for the next few quarters.

dovish

But in our new century, the simple notion of price has turned decidedly ambiguous.

neutral

Now suppose that, in an economy experiencing a stable deflation, the central bank leadership announces a fixed inflation target but then makes no progress toward that target during a given period.

neutral

Several commented that an asymmetric directive did not imply a commitment to tighten monetary policy at some point, whether during the intermeeting period or at a future meeting, but it did imply the need for special vigilance.

hawkish

As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from "flexible inflation targeting" to a "flexible form of average inflation targeting.

hawkish

I believe the current move can be justified in a forward-looking variant of the Taylor Rule, where today's policy depends on the forecast of future output gaps and inflation.

neutral

Pursuant to the Committee's instructions in March, the staff had activated its study of the possible employment of mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Maes) in outright System open market operations.

neutral

In contrast, economic activity declined in Japan during the third quarter after a surge in the first half of the year.

neutral

Communications about monetary policy over the intermeeting period generally had little effect on Treasury yields or the expected path of the federal funds rate.

neutral

While great uncertainty regarding the path of fiscal policy and its economic effects will remain for some time, with the economy getting closer to full employment, the prospect of a material increase in fiscal stimulus over a sustained period could reasonably be expected to shift somewhat greater probability toward stronger inflation outcomes.

hawkish

Despite the progress to date and the signs of acceleration in the recovery, employment is still considerably short of where it was when the pandemic disrupted the economy and it is well below where it should be, considering the pre-pandemic trend.

dovish

A few participants judged that the expectations regarding the path of the federal funds rate implied by prices in financial markets were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate and that it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers' own expectations for that path.

dovish

And so when asset prices went back up, probably there’ll be a swing around there, a positive contribution.

neutral

Moreover, anecdotal evidence suggested that most firms had little ability to raise their prices in the current economic environment.

hawkish

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

neutral

A variety of indicators, along with anecdotal reports, suggested that employment was expanding at a fairly good pace and labor compensation was rising moderately.

hawkish

The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions.

hawkish

Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant.

dovish

In the near term, 12-month measures of PCE inflation are expected to move above 2 percent as the very low readings from early in the pandemic fall out of the calculation and past increases in oil prices pass through to consumer energy prices.

hawkish

Participants discussed the open market operations that the Federal Reserve had undertaken since September to implement monetary policy, as well as forthcoming operational measures.

neutral

You can get to 20, if you wanted to, easily, but labor force participation, the unemployment rate, different age groups of—you know, prime-age labor force participation, in particular, gets a lot of focus, the JOLTS data get a lot of focus.

neutral

To the extent the global economy is weak and the United States is strong, it’ll—we’ll wind up, you know, we’ll wind up exporting some of our demand through, through imports rather than having, having a lot of exports.

hawkish

To do this will demand not only greater specialized knowledge, but also an ability to deal with risk and uncertainty.

neutral

The federal funds rate averaged a little higher than the level expected with an unchanged policy stance, in part because of unexpectedly high demand for reserves in late July and early August.

hawkish

There should be able to be an adjustment that would have lower than—perhaps lower-than-expected increases in unemployment—lower than would be expected in the ordinary course of events because the level—the ratio of, of vacancies to unemployed is just out of keeping with historical experience.

neutral

Economic data releases were mixed, on balance, over the intermeeting period, but market participants were especially attentive to incoming information on the labor market--most notably, the private payroll figures in the employment report for May, which were considerably weaker than investors expected.

dovish

In the staff forecast prepared for this meeting, the economy was seen as likely to expand at a moderate pace, supported by accommodative monetary policy and financial conditions.

dovish

Implications of Economic Theory I am going to assert some conclusions based on economic theory that help to understand the potential for monetary policy to achieve these objectives and the consistency among them.

neutral

With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.

hawkish

But I have seen little direct evidence on the extent to which globalization may have boosted aggregate productivity growth in the United States in recent years.

neutral

As of this month, the maximum monthly reduction in the balance sheet will be nearly double the level of the previous cycle.10 Together, the increase in the policy rate and the reduction in the balance sheet should help bring demand into alignment with supply.

hawkish

One of the things we’ve learned from our financial crisis and from a series of financial crises in history and around the globe is that, very commonly, when the economy takes a hit and falls into a recession, that productivity doesn’t pick up to pre-recession levels and that there looks like there is a permanent hit to the path of potential output for the economy, which is called “hysteresis.” And I raised the question as to whether or not this might operate in the opposite direction as well.

neutral

To this end, the new statement conveys the Committee's judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it "seeks to achieve inflation that averages 2 percent over time," and—in the same sentence—that therefore "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

dovish

In addition to the headwinds facing demand, there could be persistent effects on the supply side of the economy.

dovish

The steepening of the yield curve was due mostly to sharply lower short- and intermediate-term forward rates, consistent with investors' apparently more pessimistic outlook for economic growth.

dovish

Many participants noted that they expected household spending to be a primary contributor to economic growth going forward.

neutral

The shock that the—from the pandemic was unprecedented both in its nature and in its size and in the amount of unemployment that it created and in the shock to economic activity.

dovish

M3 growth slowed less than that of M2 in November, in part because of stepped-up issuance of large time deposits as banks reduced their reliance on funding from overseas offices.

hawkish

Participants' Views on Current Economic Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of the federal funds rate.

neutral

The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at or near 2 percent in recent months.

neutral

Survey and market measures of long-term inflation expectations did not suggest that the earlier higher inflation readings were going to persist.

neutral

Some may see a monetary policy that actively addresses episodes of financial instability along the lines that I have just described as promoting excessive risk-taking and thus increasing the probability of future crises.

hawkish

Martin Baily and Robert Lawrence (2004) present a much more thorough analysis of this issue and come to a similar conclusion.4 To investigate further the relationship between restructuring and labor productivity, we compared the performance of industry employment to the performance of industry productivity for the period from 2000 to 2002 (chart 5).

neutral

Indicators of supply and demand conditions for small business credit were generally unchanged over the past quarter, with demand appearing to remain weak.

neutral

This term has been interpreted by many observers to mean that the Committee's reaction function aimed to be symmetric on either side of the 2 percent inflation goal, and that the FOMC set policy with the (ex ante) aim that the 2 percent goal should represent an inflation ceiling in economic expansions following economic downturns in which inflation falls below target.

hawkish

Although your papers concentrate on the equity premium, I would like to take a few minutes today to broaden the discussion to encompass risk premiums in other markets and to highlight the connections between risk premiums and monetary policy.

neutral

A higher rate of technical change that raises the productivity and hence the profitability of capital should elevate the value of equities.

hawkish

As long as the Federal Reserve is required to set and report ranges for money and debt growth, it should update them as appropriate.

neutral

The reserve conditions contemplated at this meeting were expected to be consistent with some moderation in the growth of M2 and M3 over coming months.

neutral

Economic Outlook and Monetary Policy Now I would like to turn to the current economic scene and this week's FOMC decision.

neutral

For example, if financial market participants thought that the Federal Reserve were not dedicated to maintaining long-run price stability, they would be less willing to hold dollar-denominated assets and the resulting decline in the exchange value of the dollar would tend to add to inflationary pressures.

hawkish

At the same time, business firms generally were not raising their prices sufficiently to compensate for faster increases in their labor costs, to the extent that the latter were occurring, evidently because of the persistence of intense competition in most markets.

hawkish

In our FOMC statements, we have indicated we expect to maintain the target range at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.

neutral

The U.S. economy is in a good place, and we will continue to use our monetary policy tools to help keep it there.

hawkish

M2 growth picked up appreciably during December and January, evidently reflecting extra demands for liquidity and safety during the century-date-change period.

dovish

But we are also searching for an absolute concept, the point of balance between supply and demand in the respective markets that divides excess demand from excess supply--in effect, the origin in a diagram relating inflation to excess demand and supply.

neutral

Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy.

dovish

For the United States, for example, the figure highlights the long run-up and subsequent fall in asset prices before the 2001 recession.

neutral

While the current episode has not yet concluded, it appears that, responding vigorously in a relatively flexible economy to the aftermath of bubbles, as traumatic as that may be, is less inhibiting to long-term growth than chronic high-inflation monetary policy.

hawkish

In terms of the performance of inflation and unemployment, the experience of the past few years has not been unlike a mirror image of the 1970s.

neutral

Turning now to monetary policy, at both its July and September meetings, the FOMC voted to lower the target range for the federal funds rate by 25 basis points.3 With these decisions, the current target range for the federal funds rate is 1.75 to 2 percent, which compares with the range of 2.25 to 2.5 percent that prevailed between December 2018 and July 2019.

dovish

During the past several years, workers across the wage distribution--not just at the upper end--have seen noticeable increases in the inflation-adjusted value of their wages.

hawkish

Econometric methods were also refined to improve estimation and to accommodate more-complex dynamics in money demand equations.

neutral

About two years after the onset of the financial crisis, the ECI moved up slightly in 2010 and then remained essentially flat at an annual growth rate of 2 percent over a five-year period between 2010 and 2015.

neutral

In their discussion of considerations related to asset purchases, various participants noted that these purchases were an important part of the monetary policy toolkit and a critical aspect of the Federal Reserve's response to the economic effects of the pandemic, supporting smooth financial market functioning and accommodative financial conditions, which aided the flow of credit to households and businesses and supported the recovery.

dovish

Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information bearing on the medium-term outlook before initiating the process of policy normalization.

neutral

Job gains had been solid, on average, in recent months, and the unemployment rate had remained low.

hawkish

In furtherance of these objectives, the Committee at its meeting in February established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1998 to the fourth quarter of 1999.

neutral

As a result, consistent with the policy implication of Bill's 1970 model, the Federal Reserve (like most other central banks) today uses the overnight interbank rate as the principal operating target of monetary policy.

neutral

Committee Policy Action In their discussion of monetary policy for the period ahead, Committee members agreed that the stance of monetary policy should not be changed at this meeting.

neutral

In their discussion of developments in asset markets, the participants' comments focused on two related issues: the low level of long-term interest rates and the continued run-up in home prices.

hawkish

Some participants also noted that recent readings on some survey measures of consumers' inflation expectations had declined or stood at historically low levels.

dovish

Returns on indexed bonds are tied to forecasts of specific published price indexes, which may or may not reflect the market's judgment of the future purchasing power of money.

neutral

I have downplayed the role of the U.S. federal budget deficit today, and I disagree with the view, sometimes heard, that balancing the federal budget by itself would largely defuse the current account issue.

neutral

In its accompanying statement, the Committee indicated that, despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appeared solid.

hawkish

The producer price index for core intermediate materials dropped for a fifth month in February, reflecting, in part, weaker global demand and steep declines in the prices of a wide variety of energy-intensive goods, such as chemicals and plastics.

dovish

This monetary expansion could generate domestic inflation unless it is sterilized with other open market sales of securities--and the mere scale of present and expected future debt stocks may make continued sterilization impossible.

hawkish

In preparation for the Federal Reserve's semiannual report to the Congress on the economy and monetary policy, the members of the Board of Governors and the presidents of the Federal Reserve Banks submitted individual projections of the growth of GDP, the rate of unemployment, and core consumer price inflation for the years 2006 and 2007.

neutral

Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was below 2 percent in July.

dovish

There are also asymmetric price effects from cost shocks—prices go up very quickly but often tend to come down more slowly, as consumers slowly learn that the bottlenecks have gone away.

hawkish

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

dovish

Unfortunately, I suspect that this call would often come so late in the day that, given the lags in the monetary transmission mechanism and uncertainty about the duration of bubbles, raising interest rates might actually risk exacerbating instability.

dovish

This change has led many governments to be more willing to adopt institutional changes to improve central bank governance that have bolstered central bank credibility for maintaining low inflation.

hawkish

In a traditional growth accounting setup, these effects would show up in multifactor productivity growth.

neutral

Another example of deficit targets comes from the balanced-budget requirements of the states, which can be viewed as deficit targets with the target set at zero.

neutral

The changes—the financial market changes that you described, particularly the increase in stock prices, the increase in longer-term rates, and the strengthening of the dollar, suggest that many market participants anticipate expansionary fiscal policies that would raise interest rates somewhat in the United States relative to abroad and would cause a strengthening in the dollar.

dovish

Credit conditions in the commercial real estate (CRE) sector continued to ease, and growth in CRE loans at banks stayed solid.

hawkish

Members also agreed that there was only a remote possibility that the process of disinflation would cumulate to the point of a decline for an extended period in the general price level.

neutral