[as prepared for delivery]
Good afternoon. Welcome.
In my opening remarks I'd like to briefly first review today's policy decision. I'll then turn next to the Federal Open Market Committee's quarterly economic projections -- also being released today -- and I'll place today's policy decision in the context of the committee's projections and the Federal Reserve's statutory mandate to foster maximum employment and price stability. I'll then be glad to take your questions.
Throughout today's briefing, my goal will be to reflect the consensus of the committee, while taking note of the diversity of views as appropriate. Of course, my remarks and interpretations are my own responsibility.
In its policy statement released earlier today, the committee announced first that it is maintaining its existing policy of reinvesting principal payments from its securities holdings; and second, that it will complete its planned purchases of 600 billion dollars of longer-term Treasury securities by the end of the current quarter. Of course, going forward, the committee will regularly review the size and composition of its securities holdings in light of incoming information, and is prepared to adjust those holdings as needed to meet the Federal Reserve's mandate. The committee made no change today in the target range of the federal funds rate, which remains at 0 to 1/4 percent. The committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
In conjunction with today's meetings, FOMC participants submitted projections for economic growth, the unemployment rate, and the inflation rate for the years 2011 to 2013, and over the longer run. These projections are conditional on each participant's individual assessment of the appropriate path of monetary policy needed to best promote the committee's objectives. A table showing the projections has been distributed. I'm going to focus today on the central tendency projections, which exclude the three highest and three lowest projections for each variable in each year.
I call your attention first to the committee's longer-run projections, which represent participants' assessments of the rates to which economic growth, unemployment, and inflation will converge over time, under appropriate monetary policy, and assuming no further shocks to the economy. As the table shows, the longer run projections for output growth have a central tendency of 2.5 to 2.8 percent, the same as in the January survey. The longer-run projections for the unemployment rate have a central tendency of 5.2 to 5.6 percent, somewhat narrower than in January.
These figures may be interpreted as participants' current estimates of the economy's normal or trend rate of growth, and its normal unemployment rate over the longer run respectively. The economy's longer-term rate of growth and unemployment are determined largely by nonmonetary factors -- such as the rate of growth of the labor force, and the speed of technological change. And it should be noted that estimates of these rates are inherently uncertain and subject to revision over time. The central tendency of the longer run projection for inflation, as measured by the price index for personal consumption expenditures, is 1.7 to 2.0 percent.
In contrast to economic growth and unemployment, the longer run outlook for inflation is determined almost entirely by monetary policy. Consequently, and given that these projections are based on the assumption that monetary policy is appropriate, these longer run projections can be interpreted as indicating the inflation rate that committee participants judge to be most consistent with the Federal Reserve's mandate to foster maximum employment and stable prices. At 1.7 percent to 2.0 percent, the mandate-consistent rate of inflation is greater than zero for a number of reasons. Perhaps most important, attempting to maintain inflation at zero would increase the risks of experiencing an extended bout of deflation or falling wages and prices, which in turn could lead employment to fall below its maximum sustainable level for a protracted period. Hence, the goal of literally zero inflation is not consistent with the Federal Reserve's dual mandate. Indeed, most central banks around the world aim to set inflation above zero, usually at about 2 percent.
I turn now to the committee's economic outlook. As indicated in today's policy statement, the committee sees the economic recovery as proceeding at a moderate pace. Household spending and investment in equipment and software continue to expand -- supporting the recovery -- but nonresidential investment is still weak, and the housing sector is depressed. In the labor market, overall conditions continue to improve gradually. For example, the unemployment rate moved down a bit further and payroll employment increased in March. New claims for unemployment insurance and indicators of hiring plans are also consistent with continued improvement.
Looking ahead, committee participants expect a moderate recovery to continue through 2011, with some acceleration of growth projected for 2012 and 2013. Specifically, as the table shows, participants' projections for output growth have a central tendency of 3.1 percent to 3.3 percent for this year -- but rise to 3.5 to 4.2 percent in 2012, and about the same in 2013. These projections are a little below those made by the committee in January. The mark-down of growth in 2011, in particular, reflects the somewhat slower than anticipated pace of growth in the first quarter.
The outlook for above-trend growth is associated with the projected reduction in the unemployment rate, which is seen as edging down to 8.4 to 8.7 percent in the fourth quarter of this year, and then declining gradually to 6.8 to 7.2 percent in the fourth quarter of 2013, still well above the central tendency of participants' longer-run projections for unemployment of 5.2 to 5.6 percent. The projected decline in the unemployment rate is relatively slow, largely because economic growth is projected to be only modestly above the trend growth rate of the economy.
On the inflation front, commodity prices have risen significantly recently, reflecting geopolitical developments and robust global demand, among other factors. Increases in commodity prices are in turn boosting overall consumer inflation. However, measures of underlying inflation, though having increased modestly in recent months, remain subdued, and longer-term inflation expectations have remained stable. Consequently, the committee expects the effects on inflation of higher commodity prices to be transitory. As the increases in commodity prices moderate, inflation should decline toward its underlying level. Specifically, participants' projections for inflation have a central tendency of 2.1 to 2.8 percent for this year, noticeably higher than in the January projections, before declining to1.2 percent to2.0 percent in 2012, and then running at1.4 to 2.0 percent in 2013, both about the same as in January.
The committee's economic projections provide important context for understanding today's policy action, as well as the committee's general policy strategy. Monetary policy affects output and inflation with a lag. So current policy actions must be taken with an eye to the likely future course of the economy. Thus, the committee's projections of the economy, not just current conditions alone, must guide its policy decisions. The lags with which monetary policy affects the economy also imply that the committee must focus on meeting its mandated objectives over the medium term, which can be as short as a year or two, but may be longer, depending on how far the economy is initially from conditions of maximum employment and price stability.
To foster maximum employment, the committee sets policy to try to achieve sufficient economic growth to return the unemployment rate over time to its long-term, normal level. At 8.8 percent, the current unemployment rate is elevated relative to that level and progress toward more normal levels of unemployment seems likely to be slow. The substantial on-goings lack in the labor market and the relatively slow pace of improvement remain important reasons that the committee continues to maintain a highly accommodative monetary policy.
In the medium term, the committee also seeks to achieve a mandate-consistent inflation rate, which participants longer-term projections for inflation suggest is 2 percent or a bit less. Although the recent surge in commodity prices has led inflation to pickup some what in the near-term, the committee continues to project inflation to return to mandate-consistent levels in the medium term, as I have discussed.
Consequently, the short-term increase in inflation has not prompted the committee to tighten policy at this juncture.
Importantly however, the committee's outlook for inflation is predicated on longer-term inflation expectations remaining stable. If house holds and firms continue to expect inflation to return to a mandate-consistent level in the medium term, then increased commodity prices are unlikely to induce significant second round effects in which inflation takes hold in non-commodity prices and in nominal wages. Thus, besides monitoring inflation itself, the committee will pay close attention to inflation expectations and to possible indications of second round effects.
In providing extraordinary monetary policy accommodation in the aftermath of the crisis, the committee has not only reduced its target for federal funds rate to a very low level, but has also expanded the Federal Reserve's balance sheet substantially.
The committee remains confident that it has the tools that it needs to tighten monetary policy when it is determined that economic conditions warrant such a step. And in choosing the time to begin policy normalization, as well as the pace of that normalization, we will carefully consider both parts of our dual mandate.
Thank you, again, and I'd be glad to take your questions.
Book/CDs by Michael E. Eidenmuller, Published by
McGraw-Hill (2008)
Audio Note: AR-XE = American Rhetoric Extreme Enhancement
Page Updated: 12/14/23
U.S. Copyright Status: Text and Audio = Public domain.