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FinanceMTEB 6

Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.

dovish

The events of the last two years come on top of a huge expansion of global trade, competition and productive capacity--all of which have given American businesses less control over prices in the face of rising costs and benefited American consumers through low prices.

neutral

Members noted that most broad measures of inflation moved together over extended periods of time, but they did not always do so over short intervals.

neutral

For many years, forecasters could assume a modest, but stable, trend productivity growth rate and fairly predictable growth in the labor force.

neutral

I think we all agree that the economy is making progress, that we are close to an unemployment rate that is one that’s sustainable in the longer run.

hawkish

Just as in the earlier analysis of Ammer and Freeman, this analysis suggested that in all three countries the inflation targeting led to a drop in inflation and nominal interest rates.

dovish

Many would ask what challenges could monetary policymakers possibly face in the U.S., given the remarkable combination of consistent above-trend growth and declining inflation?

neutral

As a monetary policy maker, I am interested in these links because the prices of financial assets affect the spending decisions of firms and households and because these prices may reveal forward-looking information relevant for setting policy.

neutral

To be sure, the prices of assets and the level of debt seem to reflect expectations of a benign economic environment--one in which policy will tighten only gradually, the economy will continue to strengthen and inflation will remain low, and the demand for houses and equities will remain solid.

dovish

If labor demand cools, will separations increase and shift the curve outward, increasing unemployment further?

dovish

When the government runs deficits, it siphons off private savings (reducing national saving), leaving less available for capital investment.

dovish

Monetary policy decisions are judgment calls, informed by forecasts and discussions about how the economy is likely to evolve, alternative possibilities, and potential responses to policy actions.

neutral

Of course, we can’t do anything about long-run employment opportunities, but we can help the economy recover more quickly.

dovish

For example, for 2003 as a whole, growth in both the monetary base and M2 should be about equal to growth in nominal GDP.

dovish

The first is what to do about supply shocks, like large increases in oil prices, which tend to increase both inflation and unemployment.

hawkish

M2 growth dropped in the second quarter and remained modest in July, consistent with moderating growth of nominal income and rising opportunity cost.

hawkish

In the Committee’s discussion of monetary policy for the intermeeting period, nearly all members favored keeping the target federal funds rate at 5-1/4 percent at this meeting.

neutral

Moreover, the outlook for foreign economic activity also appeared a bit weaker.

neutral

Therefore, even in the case of personal computers, where we have made such great strides in measuring quality changes, I suspect that important phenomena still may not be adequately captured by our published price indexes.

neutral

Instead, an upturn in foreign economic activity would depend more on recovery in the United States.

neutral

In their review of the outlook for prices, members noted that incoming data over the intermeeting period had shown a slowing in core inflation from the high levels posted earlier in the year, consistent with the Committee's view that a portion of the earlier increase had reflected transitory factors.

neutral

In particular, we are closely monitoring the emergence of the coronavirus, which is likely to have a noticeable impact on Chinese growth, at least in the first quarter of this year.

dovish

So that’s in the low 20s, and that’s post the May employment report.

neutral

Some members commented, however, that the relationship between the output gap and inflation was quite loose and that the outlook for productivity remained uncertain.

neutral

Monetary policy seeks to buffer the economy from unexpected adverse disruptions, or "shocks."

neutral

Developments during the Second Period: 1998-2007 Research during the past ten years has been very fruitful in expanding the profession's understanding of the implications of uncertainty for the design and conduct of monetary policy.

neutral

Nevertheless, a number of participants cited notable declines in survey measures of consumer confidence since the onset of financial turbulence in mid-summer, along with sharply higher oil prices, declines in house prices, and tighter underwriting standards for home equity loans and some types of consumer loans, as factors likely to restrain consumer spending going forward.

dovish

Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) edged up, on net, remaining close to their pre-pandemic levels.

hawkish

The net effect could be steady, rising, or falling inflation--depending on whether productivity continues to accelerate and on how low the unemployment rate is driven in the process.

neutral

It is important to note, however, that although sound policy undoubtedly helped create the conditions for growth, macroeconomic policy cannot create growth itself.

neutral

For example, in the mid-1970s, just when the FOMC began to specify money growth targets, econometric estimates of M1 money demand relationships began to break down, predicting faster money growth than was actually observed.

neutral

By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion.

hawkish

This week, the Federal Open Market Committee (FOMC) took another significant step toward achieving our inflation objective by raising the Federal Funds rate target by 75 basis points.

hawkish

Al­though core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term.

neutral

A number of commodity price indexes have indeed risen sharply over the past couple of years, including a large jump in the past several months.

neutral

So you’re right, you’re seeing—I, I can’t remember the number, but it might be in the 3s—3, 3½ percent growth for next year.

neutral

In the Committee's discussion of current and prospective economic developments, members referred to the widespread statistical and anecdotal evidence that the surprising strength in economic activity over the closing months of 1996 was persisting in 1997.

hawkish

Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment.

dovish

However, some areas that were affected by the slowdown in the energy sector experienced house price declines or increases in mortgage delinquency rates.

dovish

The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and progress in reducing the unemployment rate was expected to be gradual.

dovish

Again, the FOMC has done just that through its commitment to adjust policy as required to keep inflation at bay.

hawkish

In part, the high inflation reflects supply chain disruptions associated with the economic effects of the pandemic and efforts made to contain it.

hawkish

With the Committee in the process of reviewing its monetary policy strategies and communication, and no additional accommodation being provided at this meeting, a few members indicated that they could support the Committee's decision even though they had not favored recent policy actions.

neutral

To quantify the importance of the shift in the balance of demand and supply and of the consequent change in the term premium, we can appeal to the research literature on the term structure of interest rates.

neutral

A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.

neutral

In the housing sector, demand had continued to display appreciable strength in recent months in association with relatively moderate mortgage rates and very positive consumer assessments of homebuying conditions.

neutral

Mortgage rates, corporate bond rates, and other yields and asset prices moved in sympathy, with important effects on the cost of borrowing and hence, presumably, on aggregate demand.

hawkish

The Federal Open Market Committee (FOMC) has been responsible for monetary policy decisions in the United States since it was established by the Banking Act of 1935, two decades after the founding of the Fed itself.2 The movement toward committees reflects the advantages of committees in aggregating a wide range of information, perspectives, and models.

neutral

Finally, I would like to note that the Committee strives to explain its monetary policy decisions as clearly as possible, and we continue to explore ways of enhancing the clarity of our public communications.

neutral

At this point, for me, it comes down to what the incoming data and other economic information will tell us about the outlook for inflation.

neutral

I would further say that I think it’s important to emphasize that we’re not going to mechanically take the interest rate projections that participants provide and just build policy off of that.

neutral

Factors pointing to potentially higher inflation included increased pressures on food prices stemming from disappointing harvests in some areas and relatively low grain supplies.

hawkish

As yields on inflation-indexed Treasury securities rose roughly in line with their nominal counterparts, longer-term inflation compensation remained about unchanged.

neutral

Job gains had remained solid, and the unemployment rate had stayed near its recent low.

hawkish

Most projected somewhat slower growth through next year, and a smaller reduction in unemployment, than they had projected in April.

dovish

Well, you know, if the economy were disappointing, we—you know, our actions wouldn’t purely be based on inflation, we would also take employment into account.

dovish

Given stable prices, savers and investors have more confidence about the ultimate value of their investments.

hawkish

However, participants remarked that the actual rise in inflation was larger than anticipated, with the 12-month change in the PCE price index reaching 3.

hawkish

Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals.

neutral

Besides influencing the near-term course of important economic variables, such as gross domestic product growth, inflation, and profits, productivity largely determines our society's long-term economic welfare.

neutral

Monetary policy has an ambiguous effect on trade imbalances.

neutral

Therefore, maximum employment (at least if interpreted as full employment or being at NAIRU) and price stability, the statutory mandate of the Federal Reserve, are compatible in the long run.

neutral

The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.

dovish

The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

dovish

Although inflation remained remarkably subdued and any increase in inflationary pressures likely would tend to emerge only slowly, the strength in demand had developed against the backdrop of financial conditions that, broadly considered, were not substantially different from those now prevailing.

dovish

I think that keeping interest rates low is still appropriate for our economy.

dovish

Looking beyond the near term, the members anticipated that as the prevailing uncertainties began to diminish, the economy's resiliency abetted by broadly accommodative monetary and fiscal polices and the continuation of a strong uptrend in productivity would underpin a gradual economic recovery.

dovish

The review of regional economic developments by the Federal Reserve Bank presidents pointed to moderate expansion in economic activity across much of the nation, though growth was described as modest in a few regions and relatively robust in some others.

neutral

And, in particular, I do personally believe that the slowdown is at least partly temporary, and that we’ll see greater growth going forward.

dovish

In particular, a surprise tightening of policy raises the risk premium, lowering current stock prices, and a surprise easing lowers the risk premium, raising current stock prices.

neutral

The second requirement contributes to the first and also to smoothing fluctuations in output around full employment.

dovish

In the Committee's discussion of current and prospective economic developments, members commented that the statistical and anecdotal information that had become available since the October meeting continued to point to robust growth in overall economic activity, despite some indications of softening in interest-sensitive sectors of the economy.

hawkish

However, with monetary policy assumed to remain highly accommodative, the staff continued to anticipate that real GDP growth would outpace that of potential over much of this period, leading to a decline in the unemployment rate to historically low levels.

dovish

These are, you know, this is—this is the economy at nearly full employment or in the range—in the neighborhood of full employment.

hawkish

The Outlook for Economic ActivityThe midpoint of the range of projections for real GDP growth declines noticeably from about 2-1/2 percent for 2007 to roughly 2 percent in 2008; then it returns to about 2-1/2 percent in 2009 and 2010.

neutral

As I mentioned, once you—once you’re, broadly speaking, in the range of neutral, I think it’s appropriate to be putting aside individual estimates of that and be looking at what the incoming data are telling you about the outlook, updating your estimates of what neutral might be, of what the natural rate of unemployment might be, of the state of the economy, so—and letting that lead you to adjust your outlook and, therefore, your appropriate path for policy.

neutral

Core consumer price inflation continued to slow, and inflation expectations remained subdued over the closing months of 2003.

dovish

And the maximum level of employment that’s consistent with price stability evolves over time within a—within a business cycle and over a longer period, in part reflecting [the] evolution of the factors that affect labor supply, including those related to the pandemic.

neutral

As a consequence, a sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation’s underlying productive capacity.

hawkish

In the household sector, the rise in home mortgage debt likely slowed a bit further in the first quarter, as home-price appreciation appeared to have remained sluggish.

neutral

Similarly, measures of underlying inflation continued to be somewhat low relative to levels seen as consistent with the dual mandate over the longer run.

neutral

Indeed, consumer expenditures appeared to have been expanding moderately over the previous few months, buoyed by increases in employment, personal income, and household wealth.

neutral

The October SLOOS suggested that the recent slowdown in mortgage originations for home purchases was partly attributable to weaker demand.

dovish

In the view of one member, however, aggregate final demand was so strong that, with economic activity and the associated demand for labor having expanded at an unsustainable pace for some time, one could be reasonably confident that inflation would most likely pick up in the absence of policy action.

hawkish

Fourth and finally, the statement codifies the key lesson from the Global Financial Crisis—that financial stability is necessary for the achievement of our statutory goals of maximum employment and price stability.

neutral

M2 expanded in February, however, as liquid deposits resumed their growth.

dovish

In their discussion of forward guidance about the target federal funds rate, a few members suggested that lowering the unemployment threshold to 6 percent could effectively convey the Committee's intention to keep the target federal funds rate low for an extended period.

dovish

Not surprisingly, the projected path of above-trend GDP growth in 2021 and 2022 translates into rapid declines in the projected path for the unemployment rate, which is projected to fall to 3.8 percent by the end of 2022 and 3.5 percent by the end of 2023.

hawkish

The implications of the spread of e-money for monetary policy would arise from the substitution of e-money for both currency and deposits, shrinking the size of the monetary base.

dovish

His conclusion is that only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use of knowledge and information.

neutral

The Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

neutral

Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while.

dovish

In dissenting, Mr. Meyer noted that although the money growth ranges do not play an important role in the conduct of monetary policy today, Congress has mandated that the FOMC set and report ranges for money and credit growth.

neutral

Participants thought that consumer expenditures likely would expand at a moderate pace in coming quarters, supported by solid gains in employment and real income.

hawkish

Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near zero for much of the period, and failures to deliver Treasury securities reached record highs.

dovish

Increased rates and a smaller balance sheet raise the cost of borrowing and thus reduce household and business demand.

neutral

But, certainly, we’ve had a lot of years in which interest rates have been low.

neutral

Participants generally agreed that the drag on U. S. economic activity from the appreciation of the dollar since the summer of 2014 and the slowdown in foreign economic growth, particularly in emerging market economies, was likely to continue to depress U. S. net exports for some time.

dovish

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

neutral

The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. "

hawkish