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
Figure 1: Overnight/Policy Rates for the Euro Area, Japan, and the U.S. January 2 - March 219 8 6 U.S. - Federal Funds Target Rate Japan - Uncollateralized Overnight Call Rate Euro Area - Deposit Facility Rate 4 2-2 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
Figure 2: Change in the Federal Funds Rate from Rate Peak to Rate Trough during the Last 3 Recessions January 1989 - March 219 1 8 9.85 Recession Federal Funds Rate 1 8 Reduction in the Federal Funds Rate during Recession 6.54 6 5.26 6 Current Federal Funds Rate 4 4 2 2.92 2.98.7 Jan-1989 Jan-1999 Jan-29 Jan-219 Mar-1989 - Dec-1992 Jul-2 - Dec-23 Jul-27 - Jul-211 Current Rate Source: Federal Reserve Board, NBER, Haver Analytics
Figure 3: Central Bank Assets Relative to GDP 24:Q1-218:Q4 125 1 Japan Euro Area U.S. 75 5 25 24: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
Figure 4: Ten-Year Government Bond Yields January 2 - March 219 8 6 U.S. Germany Japan 4 2-2 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
Figure 5: Components of Nominal Interest Rate 3. 2.5 2. Real Interest Rate 1.5 1. 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
Figure 6: Inflation Rate: Change in Core Personal Consumption Expenditures (PCE) Price Index December 1999 - December 218 3. Change from Year Earlier Core PCE 2.5 2. 2% 1.5 1..5. Dec-1999 Dec-24 Dec-29 Dec-214 Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics
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 12 1 8 6 4 2 Under 1.1 1.1-1.3 1.3-1.5 1.5-1.7 1.7-1.9 1.9-2.1 2.1-2.3 2.3-2.5 2.5-2.7 2.7-2.9 Over 2.9 Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics
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?
Figure 8: Symmetric Inflation over the Business Cycle 3. 2.5 Peak Peak 2. 1.5 Trough Trough 1.. 1. 2. 2.9 3.9 4.9 5.9 6.9 7.9 8.8 9.8 1.8 11.8
Figure 9: Average Inflation Rate: Change in Personal Consumption Expenditures (PCE) Price Indices 1999-218 2.5 2. PCE Core PCE 2% 1.5 1..5. 5-Year Average 214-218 1-Year Average 29-218 15-Year Average 24-218 2-Year Average 1999-218 Note: Core PCE excludes food and energy. Source: BEA, Haver Analytics
Figure 1: Core PCE Inflation Rate and Price Level Target of 2 January 1999 - January 219 16 14 Index 2% Line Core PCE 12 1 8 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
Figure 11: Federal Reserve System Asset Composition January 24 and March 219 1 8 Other Assets 6 Mortgage-Backed Securities 4 Other Treasury Securities 2 Treasury Bills January-24 March-219 Source: Federal Reserve Board, Haver Analytics