E jackson hole 2014

Three Big Events in Fed History  The Great Depression (1929-1938)

– “Inept monetary policy” failed to adequately combat credit contraction, deflation, and depression  The Great Inflation (1965-1980)

– Monetary policy failed to recognize structural changes and expectational dynamics that led to double-digit inflation  The Treasury Accord (1951)

– An example highlighting the importance of central bank independence

1

Long-Run Strategy for Monetary Policy (January 2012, reaffirmed thereafter every January)

ď Ž đ??…∗ = 2% PCE inflation ď Ž đ?’–đ?’? đ?’• ~ 5.2% – 5.5%

time-varying

– Central tendency of long-run sustainable level from the Summary of Economic Projections (SEP) ď Ž Balanced approach to reducing deviations of inflation

and employment from long-run objectives

2

Persistently Low Inflation and Wage Growth PCE Inflation

(%) QE1

QE2

MEP QE3

3 Total PCE (36-mo. Average)

2

1 Core PCE (12-mo. Change)

0 2000

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'10

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Wage and Compensation Growth (percent change, year-over-year) 6 Average Hourly Earnings Employment Cost Index

3.5% = 1.5% productivity growth + 2% inflation

3

0 2000

'02

'04

'06

'08

'10

'12

Source: Inflation forecasts are from the June 18, 2014 FOMC Summary of Economic Projections

'14

'16 3

Inflation Expectations Expected Future Three-Year Ahead Inflation (percent) 2.00 Total PCE

Expected Inflation for 2014-2017 (as of 2014)

Core PCE

1.50 Expected Inflation for 2021-2024 (as of 2021)

1.00 2014

2015

2016

Source: FRB-Chicago Staff Models

2017

2018

2019

2020

2021

4

Inflation is Low Globally Consumer Inflation (year-over-year percent change, deviation from target) 2

1 Latest

0 Japan prior to consumption tax increase

-1

2008-2013 avg.

-2 2000-2007 avg.

-3 U.K.

U.S.

Eurozone

Switzerland

Sweden

Norway

Japan

Consumer inflation in the U.S. is as measured by the total price index for Personal Consumption Expenditures; in other countries, it is measured by the Consumer Price Index. Latest data are year-over-year changes in the most recently published monthly price index.

5

Bull’s-Eye Accountability for Fed’s Dual Mandate Loss Function (percent)

đ?‘ł = đ??… − đ??…∗ đ?‘ł= đ??…−đ?&#x;?

đ?&#x;?

đ?&#x;?

+ đ?&#x;Ž. đ?&#x;?đ?&#x;“ đ?’š − đ?’šâˆ—

+ đ?’– − đ?’–đ?’?

đ?&#x;?

đ?&#x;?

đ??… = 5.6%

Inflation

đ?’– = 9%

đ??…∗

2015 2016

2014 2012 Current

đ?’–đ?’?

September 2011

2013

Unemployment

2014 – 2016 values are midpoints of FOMC participants’ Summary of Economic Projections as of June 18, 2014.

The current dot shows the three-month average of the unemployment rate and year-over-year change in the three-month average of core PCE prices.

6

Bull’s-Eye Accountability for Fed’s Dual Mandate Loss Function

đ?‘ł= đ??…−đ?&#x;?

đ?&#x;?

+ đ?’– − đ?’–đ?’?

đ?&#x;?

(percent)

Inflation đ??… = 3.2%

đ?’– = 6.5%

đ??…

2015

∗

2012

2014 2016 2013 Current

đ?’–đ?’?

Unemployment

2014 – 2016 values are midpoints of FOMC participants’ Summary of Economic Projections as of June 18, 2014.

The current dot shows the three-month average of the unemployment rate and year-over-year change in the three-month average of core PCE prices.

7

Bull’s-Eye Accountability for Fed’s Dual Mandate Loss Function (percent)

đ?‘ł= đ??…−đ?&#x;?

đ?&#x;?

đ?‘ł=đ?&#x;? đ??…−đ?&#x;?

+ đ?’– − đ?’–đ?’? đ?&#x;?

đ?&#x;?

+ đ?’– − đ?’–đ?’?

đ?&#x;?

Inflation 3.2%

đ??… = 3.0%

đ?’– = 6.8%

đ??…

2015

∗

2012

2014 2016 2013 Current

đ?’–đ?’?

Unemployment

2014 – 2016 values are midpoints of FOMC participants’ Summary of Economic Projections as of June 18, 2014.

The current dot shows the three-month average of the unemployment rate and year-over-year change in the three-month average of core PCE prices.

8

Why Has Achieving Dual Mandate Been So Hard?

 Deleveraging in the aftermath of the financial crisis  Global risks  Unusually restrictive fiscal policy  Monetary policy constrained by zero lower bound

9

Policy Rate Constrained by Zero Lower Bound Fed Funds Rate (percent) 8

6 4 History

2 Q1-2014

0 Taylor Rule (1999) based on CBO output gap

-2 -4 -6 1999

'01

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In the period prior to the explicit inflation target set by the FOMC, the Taylor Rule is constructed using long-run inflation 10 forecasts from the Survey of Professional Forecasters, or when available, from the Summary of Economic Projections.

After 2012, the Taylor Rule is constructed using the FOMC’s 2 percent long-run inflation target.

Policy Tools at the Zero Lower Bound  Constrained optimal policy approach (Taylor 1979)

 Two ways to approximate optimal policy at the ZLB

– LSAPs – Forward guidance and inertial policy rule

11

FG and FOMC “Appropriate� Policy Rates 5

4 Taylor '93: đ?&#x;? + đ?›‘đ?’• + đ?&#x;Ž. đ?&#x;“ đ??…đ?’• − đ?&#x;? + (đ?’– đ?’?đ?’•âˆ’đ?’–đ?’• )

3 Inertial Taylor '99: đ?&#x;Ž. đ?&#x;– đ?‘°đ?’•âˆ’đ?&#x;? + đ?&#x;Ž. đ?&#x;? [đ?&#x;? + đ??…đ?’• + đ?&#x;Ž. đ?&#x;“ đ??…đ?’• − đ?&#x;? + đ?&#x;? đ?’–đ?’?đ?’• − đ?’–đ?’• ] 2 Market Expectations

1

0 2014

2015

2016

Long-Run

Source: Interest rate forecasts are from the June 18, 2014 FOMC Summary of Economic Projections.

Market expectations are from OIS futures as of July 7, 2014

12

Interest Rates are Low Globally 10-year Government Bond Yield (percent) 8

U.S. 6 U.K.

4

Germany 2 Japan 0 2000

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