Jerome Powell says the Fed is monitoring the fallout from trade issues

Channel: Fox Business
Published: 06/04/2019

Fed Chair Jerome Powell makes welcoming remarks at Conference on Monetary Policy Strategy, Tools, and Communication Practices FOX Business Network (FBN) is a financial news channel delivering real-time information across all platforms that impact both Main Street and Wall Street. Headquartered ...

The floor is yours, thanks very much, charlie and good morning. Everyone i'm very pleased to welcome you here today. This conference is part of a first-ever public review by the federal open market committee of our monetary policy strategy tools and communications. We have a distinguished group of experts from academics and other walks of life here to share perspectives on how monetary policy can ...
est serve the public. I'D first like to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the u. s. economic outlook and, as always, we will act as appropriateto sustain the expansion with a strong labor market and inflation near our symmetric 2 percent objective. My comments today, like this conference, will focus on longer-run issues that will remain, even as the issues of the moment evolve, while central bank's face a challenging environment. Today, these challenges are not entirely new. In fact, in 1999 the federal reserve system hosted a conference titled monetary policy in a low inflation environment, and i know some of you were at that conference as well.

20 years ago, conference participants discussed new challenges that were emerging after the then recent victory over the great inflation. They focused on many questions posed by low inflation and, in particular, on what unconventional toolsa central bank might use to support the economy. If rates fell to what we now call the effective lower bound or the elb or the lower bound, even though the bank of japan was grappling with a lower bound, as the conference met, the issue seemed remote for the united states. The conference received little coverage in the financial press, but a reuters, wire-service story, titled, fed conference timing on inflation odd, but useful emphasized the remoteness of the risk participants at that conference could not have anticipated that only 10 years later the world would be engulfed in a Deep financial crisis, with unemployment soaring and central banks around the world, making extensive use of new strategies, toolsand ways to communicate the next time policy rates hit the lower bound and there will be a next time. It will not be a surprise. We are now well aware of the challenges that the elb presents and we have the painful experience of the global financial crisis and it's aftermath to guide us. Our obligation to the public we serve is to take those measures. Now that will put us in the best position to deal with our next encounter, with the lower bound and with the economy, growing unemployment, low and inflation low and stable. This is the right time to engage the public broadly on these issues. The review has several parts, all of which areintended to open our monetary policy up to critical examination, we're holding a series of fed listens; events around the country to help us understand the perspectives of people from diverse backgrounds and with varied interests. This conference and many other engagements will help us bring to bear the best thinking from policymakers and experts. Beginning later this year, the fomc will devote time at a series of out regular meetings to assess lessons from these events, supported by staff analysis performed throughout the federal reserve system.

We will publicly report the outcome of our discussions and, in the meantime, anyone who is interested in participating or learning more can find information on the federal reserve boards website before turningto the specifics of the review. I want to focus a little more closely on the challenges we face today for a reference point. At the time of the 1999 conference, the united states was eight years into an expansion. Core inflation was running 1. 4 percent and the unemployment rate was 4. 1 percent, not so different. From today, macro economists were puzzling over the flatness of the phillips curve, the level of the natural rate of unemployment and a possible acceleration in productivity growth, questions that are also with us today. The big difference between now and then is that the federal funds rate was 5. 2 percent which, to underscore the point, put the rate twenty quarter point rate cutsaway from the lower bound. Since then, standard estimates of the longer-run neutral rate of interest have declined between two and three percentage points and some argue that the effective decline is even larger. The combination of lower real interest rates and low inflation translates into lower nominal rates and a much higher likelihood that rates will fall to the elb in a downturn. As the experience of the past decade showed extended, elb episodes can be associated with painfully high unemployment and slow growth or recession.

Economic weakness puts downward pressure on inflation, which can raise real interest rates and reinforce the challenge of supporting needed job growth. In addition, over time, inflation has become much less sensitive, totightness and resource utilization. This insensitivity can be a blessing in avoiding deflation when unemployment is high, but it also means that much greater labor market tightness may ultimately be required to bring inflation back to target in a recovery using monetary policy to push sufficiently hard on labor markets to lift inflation. Could pose risks of destabilizing excesses in financial markets or elsewhere? In short, the proximity of interest rates to the effect of lower bound has become the preeminent monetary policy challenge of our time, tainting all manner of issues with elb risk and imbuing many old challenges with greater significance. For example, the behavior of inflation now draws much sharper focus when nominal interest rates were fouror. Five percent a low side. Surprise of a few tenths on inflation, did not raise the specter of the lower bound, but the world's changed core. Inflation is currently running a bit below 2 % on a trailing 12 months basis in this setting. A similar low side, surprised, if it were to persist, would bring us uncomfortably lower closer to the effective, lower bound. My fomc colleagues and i must in to take seriously the risk that inflation shortfalls that persist even in a robust economy, could precipitate a difficult to arrest. Downward drift in inflation expectations. At the heart of the review is the evaluation of potential changes to our strategy, designed to strengthen the credibility of oursymmetric 2 % inflation objective.

The elb problem also complicates the fomc's efforts to achieve transparency and accountability. The fed, like most major central banks, is insulated from short-term political pressures in our democracy. That insulation carries with it an obligation for us to be transparent and publicly accountable when policy rates reached the effective lower bound during the crisis. Central bank's resorted to what were then new untested tools to pursue their mandated goals. These tools are no longer new, but their advocate. Efficacy costs and risks remain less well understood than the traditional approaches to central banking. My fomc colleagues and i are committed to explaining why the use of these tools, in the wake of the crisis, wasa, prudent and effective approach to pursuing our congressional mandate and why tools like these are likely to be leaden eated again, our review is but one part Of our efforts to engage with the public on these matters, let me turn now to the specifics of the review, which is focused on three questions. First, can the federal reserve best meet its statutory objectives with its existing monetary policy strategy or should consider strategies that aim to reversed past misses of the inflation objective? Second, are the existing monetary policy tools adequate to achieve and maintain maximum employment and stable prices, or should the toolkit be expanded and third, how can the fomc's communication of its policy framework andimplementation be improved? These questions are quite broad and my colleagues and i come to them with open minds. We believe that our current policy framework is working well and we've made no decisions about particular changes. In fact, the review is still in its early stages. The first question raises the issue of whether the fomc should use make up strategies in response to elb risks. By the time of the 1999 conference, research was beginning to show that in models, at least such strategies could substantially reduce the unemployment and other costs of elb spells.

The simplest version goes like this suppose that a spell with interest rates near the effective, lower bound leads to a persistent shortfallof inflation relative to the central bank's goal. But what if the central bank promised credibly that it would deliberately make up for any lost inflation by stimulating the economy and temporarily pushing inflation modestly above target in the models? The prospect of future stimulus promotes anticipatory consumption and investment that could greatly reduce the pain of being at the effective, lower bound policymakers discussed this reasoning in the wake of the crisis, but neither the fed nor any other major central bank chose to pursue such a policy. Why for makeup strategies to work, households and businesses must go out on a limb, so to speak, raising spending in the midst of a downturn. In theory, they would dothis based on their confidence that the central bank will deliver the makeup stimulus at some point, perhaps years in the future. This is quite a flattering assumption and in models. Great confidence is achieved by assumption, despite the flattering nature of the assumption crisis era era. Policymakers had major questions about whether their promise of good times to come would really have moved. The hearts minds and pocketbooks of the public part of the problem was that the groundwork had not been laid in advance of the downturn, a problem we could hope to fix well before the next time. Policymakers also had deeper concerns about the legitimacy and effectiveness of attempting to bind some future fomc to takeactions. That could be objectionable from a short-term perspective when the time came to deliver research. Research on makeup strategies has begun to grapple more seriously with the credibility questions, but important questions remain to achieve buy-in by households and businesses. A comprehensible, credible and actionable makeup strategy will need to be followed by years of central bank policy consistent with that strategy.

The second question asks about the adequacy of the feds toolkit for providing stimulus when, if, when facing the lower bound in the united states, we used several different formulations of both forward guidance and large-scale asset purchases of longer-term securities. While views differ on the effectiveness of these policies with their use, the unemployment rate, fellsteadily and inflation expectations remain well anchored outcomes that were favorable overall when viewed against the recoveries of many other advanced economies. My own view is that these policies provided meaningful support for demand, but they should, but that they should not be thought of as a perfect substitute for our traditional interest rate tool. In any case, we have a responsibility to thoroughly evaluate what mix of these tools is likely to work best when the next elb episode arrives. Perhaps it is time to retire the term unconventional when referring to tools that were used during the crisis. We know that tools like these are likely to be needed in some future form in future. Vlb spells whichwe hope will be rare. We now have a significant body of evidence regarding the effectiveness, costs and risks of these tools, including those those used by the fomc and others tried elsewhere. Our plans must take advantage of this growing understanding, as assessments are refined. The third question concerns improving communication, which i discussed earlier from the standpoint of governance and accountability, but transparency also plays a role, a central role in policy effectiveness through its effects on the expectations of households and businesses. Of course, this was the major insight behind the transparency revolution in central banking. Over the past few decades, today, central banks publicly share a large and ever-increasing amount of information of that policy.

Butpolicymakers and commentators inside and outside central banks, sometimes question whether all of the transparency adds up to effective communication. The fomc's dotplot is one example. A focus on the median forecast amounts to emphasizing what the typical fomc participant will do if things go as expected, but we've been living in times character by large, frequent and unexpected changes in the underlying structure of the economy in this environment. The most important policy message may be about how the central bank will respond to the unexpected, rather than what it will do if there are no surprises. Unfortunately, at times, the dot plant has distracted attention from the more important topic of how the fomc will react to unexpectedeconomic developments. In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome. Let me conclude by saying that i look forward to our discussions here and to the ongoing work of the review that lies ahead. We need the best tools and strategies possible for dealing with the challenges we now faced and we must communicate them in a clear and credible way. My colleagues and i welcome your best thinking on these issues. Thank you very much. [ applause, ]. Okay, thank you very much.

It'S time for the first panel to to come up.

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