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FinanceMTEB 6

Slump in foreign domestic demand I would like to turn now to developments at the global level that may have helped to widen the U.S. current account deficit.

hawkish

The members viewed the outlook for core price inflation as still quite benign, largely reflecting the ample availability of labor and other producer resources to accommodate rising economic activity and the favorable prospects for further robust growth in productivity.

neutral

Indeed, given the externalities involved, it seems plausible that a monopoly central bank that issued fiat money would not respond optimally to crises (it would charge too much for liquidity) or to cyclical variations (it would be maximizing the present discounted value of its seigniorage income rather than minimizing some weighted sum of discounted inflation and output losses).

neutral

Pure bubbles--increases in asset prices that are 100 percent air--are, I suspect, rare.

neutral

Members cited greater, albeit still occasional, indications of heightened worker demands in labor negotiations that likely were encouraged in part by ample job opportunities.

hawkish

So the Committee estimates that the longer-run normal level of the unemployment rate is 5.0 to 5.2.

neutral

Construction employment posted another large increase, probably owing in part to hurricane-related activity.

neutral

Job gains had been robust in recent months, and the unemployment rate had declined substantially.

hawkish

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

neutral

In a nutshell, I believe that the factors of globalization, deregulation, and financial innovation, arising partly in response to episodes of high inflation, have effectively eroded the central bank monopoly on the provision of monetary services and have enhanced global competition among currencies.

neutral

An understanding of a likely long-run level of the equilibrium real rate is useful, even though the level is not directly observable, because it provides a general sense of the level that would, over that longer period, allow aggregate supply and demand to move into balance, given the evaluation of secular forces such as productivity and population growth.

neutral

Financial factors also seemed likely on balance to accommodate continuing growth in consumer spending, in particular the marked increases that had occurred in the value of stock holdings and a still-ample availability of credit to most households.

neutral

September 01, 2020 Bringing the Statement on Longer-Run Goals and Monetary Policy Strategy into Alignment with Longer-Run Changes in the Economy Governor Lael Brainard At "How the Fed Will Respond to the COVID-19 Recession in an Era of Low Rates and Low Inflation," an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington, D.C. (via webcast) Share Watch Live I want to thank David Wessel for hosting this event.

neutral

In December 1996, before my time at the Board, John Campbell of Harvard and Robert Shiller of Yale made a presentation at the Fed, in which they used dividend-price ratios and related measures to argue that the stock market was overvalued.

neutral

The large current account deficit was seen as a factor pointing to potential depreciation of the dollar over time, with adverse repercussions on domestic inflation albeit favorable effects on exports.

hawkish

While deflation appears to have eased in Japan recently, it is difficult to know how much of the improvement is due to monetary policy, and, of the part due to monetary policy, how much is due to the zero-interest-rate policy and how much to quantitative easing.

dovish

Moreover, survey data on labor market attitudes of both consumers and businesses had not signaled a significant deterioration in employment prospects.

neutral

The Chairman testifies frequently before the Congress, with the one-year record being twenty-five appearances in 1995, although only seven were directly about monetary policy.

neutral

For example, as table 1 shows, the collective current account surplus of the Middle East and Africa rose more than $40 billion between 1996 and 2003; it continued to swell in 2004 as oil prices increased yet further.

hawkish

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.

hawkish

Higher productivity is unambiguously good.

neutral

Using more-conventional specifications of Phillips curves, the research at the Federal Reserve Board (Ihrig and others, 2007) and the OECD (Pain, Koske, and Sollie, 2006), as well as Ball (2006), finds that foreign output gaps are not important determinants of domestic inflation.

neutral

The associated range for growth of total domestic nonfinancial sector debt was provisionally set at 3 to 7 percent for 1999.

neutral

The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash.

neutral

Although the unemployment rate edged up to 5.

dovish

Also, in the view of a number of participants, the economy was possibly producing in the neighborhood of its potential, and the persistent strength in spending of late suggested that resource markets could tighten further and inflation pressures build.

hawkish

European equity prices were also lower over the period.

neutral

As technical change increases demand for skilled relative to unskilled labor, the unskilled workers must acquire new skills, find new jobs at lower relative wages, or become unemployed.

dovish

The remarkable coming together of technologies that we label IT has allowed us to move beyond efficiency gains in routine manual tasks to achieve new levels of productivity in routine information-processing tasks that previously depended upon other facets of human input--computing, sorting and retrieving information, and acting on pieces of information.

neutral

In their discussion of monetary policy for the intermeeting period, Committee members agreed that the Federal Reserve's large-scale securities purchases were providing financial stimulus that would contribute to the gradual resumption of sustainable economic growth in a context of price stability.

dovish

This is modeled by assuming that wage change depends on q*, while the inflation equation (based on the markup equation) depends on q.

neutral

Indicators of longer-term inflation expectations are little changed, on balance.

neutral

In the residential real estate sector, home sales, prices, and construction had shown signs of stabilization in many areas and were increasing modestly in others, but a still-sizable inventory of unsold existing homes continued to restrain homebuilding.

neutral

And, as I went into detail in Jackson Hole and won’t repeat all of that there, there are other ways in which we see underutilization—high levels that have come down only very marginally of part-time employment for economic—or involuntary part-time employment, perhaps some remaining shortfall of labor force participation as a result of cyclical factors.

neutral

In its March forecast, the staff's projection for real GDP growth over the medium term was somewhat higher than the one presented in January, mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar, and a higher projected path of equity prices.

neutral

Put another way, the FOMC could have "preemptively" tightened monetary policy, based on forecasts, but recognizing the uncertainties about empirical relationships chose not to do so.

neutral

However, it is not yet clear how high we will need to raise the federal funds rate and how much time will pass before we begin to see inflation moving back down in a consistent and lasting way.

hawkish

More fundamentally, however, the members believed that current growth in aggregate demand, should it persist, would continue to exceed the expansion of potential output and, by putting added pressure on already tight labor markets, would at some point foster inflationary imbalances that would undermine the economic expansion.

hawkish

However, nothing prevents a central bank from switching its focus from the price of reserves to the quantity or growth of reserves.

neutral

Some contacts indicated that while input costs were higher, it appeared that the pass-through of these higher costs to consumer prices was limited.

neutral

The early days of stabilization policy in the 1950s taught monetary policymakers not to attempt to offset what are likely to be temporary fluctuations in inflation.15 Indeed, responding may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times.

dovish

These decisions can then push up prices even more and make inflation harder to get under control.

hawkish

Several participants noted the increase in agricultural crop prices over 2020 and the associated improvement in farm revenues.

neutral

Residential MBS yields and residential mortgage interest rates declined, on net, over the intermeeting period to historically low levels, but their spreads to yields on long-term Treasury securities increased.

neutral

Several participants commented that the factors that had contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected.

dovish

The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction.

dovish

But even this relation--between the unemployment rate and the concept of economic slack--is not necessarily constant, and thus a given unemployment rate may not indicate the same level of slack at two separate times.

neutral

The strongest case for a link between monetary policy and changes in inflation dynamics is in the greater stability of inflation.

neutral

And I'm pleased to have the opportunity to share with you, the students of South Dakota State University (SDSU), my experience as a member of the Federal Reserve Board of Governors and my outlook for the U.S. economy.1 Today I will speak to you about my outlook for the U.S. economy and what the Federal Reserve has been doing to support economic activity during the COVID-19 pandemic recovery.

neutral

This supports the view that there has been an increase in trend productivity growth.

dovish

The underlying rate of consumer price inflation in recent months was lower than the staff expected at the time of the November meeting, and the staff forecast anticipated that core PCE prices would rise a bit more slowly in 2011 and 2012 than previously projected.

dovish

That said, many of my colleagues and I would see a portion of the decline in the unemployment rate as perhaps not representing a diminution of slack in the labor market.

hawkish

Total nonfarm payroll employment was reported to have decreased in September, consistent with a substantial increase in the number of people who reported themselves as being absent from work due to bad weather and with payroll declines in the hurricane-affected states of Texas and Florida.

dovish

Nonetheless, those restraining influences were expected to abate over time and economic activity strengthen gradually.

neutral

The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

neutral

In light of these significant policy actions, the risks to growth were now thought to be more closely balanced by the risks to inflation.

neutral

Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate was intended to foster trading in the federal funds market at rates well within the FOMC's target range.

neutral

Several participants noted that the unseasonably warm weather of recent months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing.

neutral

The staff's forecast for core PCE price inflation this year was revised down a little in response to recent data.

dovish

But monetary policy has little ability to affect inflation this year.

neutral

While a constant rate of money growth will not always be optimal, if money demand is sufficiently stable, and not particularly interest sensitive, it will pin down inflation in the long run and help smooth the business cycle in the short run.

dovish

Even so, the growth rate of the ECI did not return to the levels experienced before 2008.

neutral

To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.

neutral

With underlying inflation running below 2 percent for many years and COVID contributing to a further decline, it is important that monetary policy support inflation expectations that are consistent with inflation centered on 2 percent over time.

dovish

Consumer price inflation was being held down by weaker demand and significantly lower oil prices.

dovish

A widespread view that the Federal Reserve would take whatever steps were needed to hold down inflation over time probably had contributed to the persistence of subdued long-run inflation expectations during an extended period when rapidly rising demand was pressing on limited supply resources.

neutral

As a result, growth of spending on consumer durables was expected to be appreciably below the rapid pace in the first half of last year, and housing demand would increase only a little from its recent level.

neutral

Mr. Kocherlakota dissented because, in his view, the new forward guidance in the fifth paragraph of the statement would weaken the credibility of the Committee's commitment to its inflation goal by failing to communicate purposeful steps to more rapidly increase inflation to the 2 percent target and by suggesting that the Committee views inflation persistently below 2 percent as an acceptable outcome.

dovish

The presidents' reports often include anecdotal updates from businesses or other sources to provide real-time information on regional economic activity.

neutral

Or the 1990s could be used as an illustration of how monetary policy could lower inflation, with concomitant gains in terms of full employment and long-term economic growth.

hawkish

At the same time, however, the staff increased the growth rate forecast for 2006 to reflect the boost to economic activity from the rebuilding effort.

hawkish

As the economy approached full employment, the Federal Open Market Committee (FOMC), the monetary policymaking arm of the Federal Reserve System, was faced with the classic problem of managing the mid-cycle slowdown--that is, of setting policy to help guide the economy toward sustainable growth without inflation.

hawkish

So, as you know, the ultimate focus that we have is on the real economy: maximum employment and price stability.

neutral

When long-term rates rise in response to a cyclical strengthening, it reflects, in large part, the expectation of higher short-term interest rates.

neutral

Nevertheless, the role of this consideration in inflation dynamics should not be overlooked or underestimated.

neutral

Potentially, waiting could require more disruptive policy tightening actions later and could risk the credibility of the System's anti-inflation policy.

hawkish

Key factors that influence consumer spending--including a low unemployment rate, ongoing gains in real labor compensation, and still elevated measures of households' net worth--were supportive of a pickup in consumer spending to a solid pace in the near term.

hawkish

They would account for the effects of higher energy prices on the real disposable income and spending demands of the household sector.

hawkish

The rapid pace of investment also helped to hold down inflationary pressures by increasing the growth of productive capacity.

hawkish

In contrast to price inflation, labor costs appeared to have remained quiescent.

neutral

At these low rates, the central bank is poorly positioned to respond to further negative demand shocks.

hawkish

Price inflation had picked up a little but, abstracting from energy, had remained relatively subdued.

neutral

In addition, the maximum sustainable levels of output and employment cannot be known with any assurance (Mishkin, 2007b).

neutral

Nonetheless, considerable uncertainty surrounded expectations of rising inflation.

neutral

Given the substantial uncertainty still attached to projections of money growth consistent with the Committee's basic objectives for monetary policy, the members agreed that there was no firm basis for changing the tentative ranges set in July 1996.

neutral

The authors’ principal empirical finding is that the onset and, to a lesser degree, the end of the Great Inflation were closely synchronized across a number of countries.

neutral

Together these structural changes would imply that the economy can now operate at a lower unemployment rate and at a higher growth rate than previously without inflationary consequences.

dovish

Moreover, theory and intuition tell us that monetary credibility will be greatest when the central bank does what it is supposed to do: offset economic shocks to keep price pressures from building and thereby keep inflation itself low and stable.

hawkish

In any case, the real federal funds rate is now lower than prior to the easings, at the same time that the unemployment rate is lower and projected growth higher than it was prior to the easings.

hawkish

Expectations of greater and longer-lasting slack in labor and product markets than anticipated earlier had led to downward revisions to forecasts of wage and price inflation.

dovish

With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace based on the performance of the economy, and a 50-basis point hike would help do that.

hawkish

So, what are the implications for monetary policy?

neutral

In the absence of such shocks, and assuming appropriate monetary policy, participants' economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year.

hawkish

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. "

hawkish

Some Reasons for the Decline in Far-Forward Rates Why have the far-forward rates implied by the term structure of interest rates declined in recent years?

neutral

PCE core is at about 2, and I think we see that, you know, the temporary increase in headline inflation as being a function of oil prices probably, and we expect inflation to go back down to 2 percent.

hawkish

So we view maximum employment as the maximum sustainable level of employment, meaning it’s not so much that it will cause the economy to overheat.

neutral

The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer—are not exhausted, there are still other things that the central bank can do to create additional accommodation.

dovish

President George dissented because she believed that an unchanged setting of policy was appropriate based on the incoming data and the outlook for economic activity over the medium term.

neutral

While accommodative financial conditions and reduced income tax rates should continue to undergird consumer spending and the data on retail sales for July displayed relatively impressive gains, negative wealth effects from falling stock market prices, declining payrolls, and sluggish income gains--should they persist--might well depress consumer expenditures over coming months.

dovish