Monetary Policymaking in Today s Environment: Finding Policy Space in a Low-Rate World

Transcription

1 EMBARGOED UNTIL MONDAY, APRIL 15, 219, AT 8: P.M.; OR UPON DELIVERY Monetary Policymaking in Today s Environment: Finding Policy Space in a Low-Rate World Eric S. Rosengren President & CEO Federal Reserve Bank of Boston 33 rd Annual Cornelson Distinguished Lecture Davidson College Davidson, North Carolina April 15, 219

2 Figure 1: Overnight/Policy Rates for the Euro Area, Japan, and the U.S. January 2 - March U.S. - Federal Funds Target Rate Japan - Uncollateralized Overnight Call Rate Euro Area - Deposit Facility Rate Jan-2 Jan-25 Jan-21 Jan-215 Note: Rates are as of end of period. U.S. target rate is the midpoint of the target range, beginning in 28. Source: Bank of Japan, European Central Bank, Federal Reserve Board, Haver Analytics

3 Figure 2: Change in the Federal Funds Rate from Rate Peak to Rate Trough during the Last 3 Recessions January March Recession Federal Funds Rate 1 8 Reduction in the Federal Funds Rate during Recession Current Federal Funds Rate Jan-1989 Jan-1999 Jan-29 Jan-219 Mar Dec-1992 Jul-2 - Dec-23 Jul-27 - Jul-211 Current Rate Source: Federal Reserve Board, NBER, Haver Analytics

4 Figure 3: Central Bank Assets Relative to GDP 24:Q1-218:Q Japan Euro Area U.S :Q1 28:Q1 212:Q1 216:Q1 Source: Bank of Japan, Cabinet Office of Japan; European Central Bank, Eurostat; Federal Reserve Board, BEA; Haver Analytics

5 Figure 4: Ten-Year Government Bond Yields January 2 - March U.S. Germany Japan Jan-2 Jan-23 Jan-26 Jan-29 Jan-212 Jan-215 Jan-218 Source: Deutsche Bundesbank, Federal Reserve Board, Japan s Ministry of Finance, Haver Analytics

6 Figure 5: Components of Nominal Interest Rate Real Interest Rate Core PCE Inflation Expectations.5. Note: Core PCE excludes food and energy. The proxy for Core PCE inflation expectations is the median forecast for core PCE inflation for 219 measured on a fourth-quarter to fourth-quarter basis from the most recent Survey of Professional Forecasters. Source: Federal Reserve Board; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters, March 22, 219; Haver Analytics

7 Figure 6: Inflation Rate: Change in Core Personal Consumption Expenditures (PCE) Price Index December December Change from Year Earlier Core PCE % Dec-1999 Dec-24 Dec-29 Dec-214 Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics

8 Figure 7: Distribution of Quarterly Changes in Core Personal Consumption Expenditures (PCE) Price Index over 2 Years 1999:Q1-218:Q4 14 Number of Observations Under Over 2.9 Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics

9 Are We Reaching a Symmetric 2 Inflation Target? Hard to argue that the target has been symmetric Observations of inflation have tended to undershoot target Would expect observations to be more symmetric around 2 percent The 2 percent goal has acted more like a ceiling Provides a key reason to hold rates steady Symmetric 2 percent inflation target has been elusive over the past 2 years Should we alter the monetary policy framework to get more policy space? If inflation expectations slip, we will have less policy space Would a change in the framework improve the Fed s ability to reach its 2 percent goal?

10 Figure 8: Symmetric Inflation over the Business Cycle Peak Peak Trough Trough

11 Figure 9: Average Inflation Rate: Change in Personal Consumption Expenditures (PCE) Price Indices PCE Core PCE 2% Year Average Year Average Year Average Year Average Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics

12 Figure 1: Core PCE Inflation Rate and Price Level Target of 2 January January Index 2% Line Core PCE Jan-1999 Jan-22 Jan-25 Jan-28 Jan-211 Jan-214 Jan-217 Note: Core PCE excludes food and energy. Index level January 1999=1. Source: BEA, Haver Analytics

13 Figure 11: Federal Reserve System Asset Composition January 24 and March Other Assets 6 Mortgage-Backed Securities 4 Other Treasury Securities 2 Treasury Bills January-24 March-219 Source: Federal Reserve Board, Haver Analytics