United States Central Bank Statement

Author: | Published: 5 Sep 2017
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The healthy state of our economy and favourable outlook suggest that the Federal Open Market Committee (FOMC) should continue the process of normalising monetary policy. The Committee has been patient in raising rates, and that patience has paid dividends. While the recent performance of the labour market might warrant a faster pace of tightening, inflation has been below target for five years and has moved up only slowly toward 2%, which argues for continued patience, especially if that progress slows or stalls. If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates. I would also see it as appropriate to begin the process of reducing the size of the balance sheet later this year. Of course, both decisions will depend on the performance of the economy.

To put this process in context, consider where we have come from. Ten years ago, in the summer of 2007, we were just entering the most painful economic crisis since the Great Depression. The crisis and its aftermath prompted large-scale policy interventions by the Federal Reserve and other authorities to avert the collapse of the financial system and prevent the economy from spiralling into depression.

Most of the Federal Reserve's targeted financial measures – such as liquidity facilities to ensure the flow of credit to households and businesses – were withdrawn soon after the crisis as orderly conditions resumed in financial markets. In contrast, the FOMC's easing of monetary policy increased over time as the longer-term economic effects of the crisis gradually became clear. From 2007 through 2013, the FOMC added ever greater support for the economy. From late 2008, with rates pinned at the zero lower bound, the Committee resorted to unconventional policies to put additional downward pressure on long-term rates, including strong calendar-based forward guidance regarding the likely future path of the federal funds rate, and several rounds of large-scale asset purchases (often referred to as quantitative easing (QE)).

Both the federal funds rate and the balance sheet are currently set at levels intended to provide significant support to economic activity. Normalisation of the stance of monetary policy will return both tools to a more neutral setting over time. That process can be said to have begun in 2014, when the FOMC ended its asset purchases and began active discussions on lifting the federal funds rate from its lower bound. Our first rate hike came in December 2015, with another in December 2016, and one additional increase so far this year. The normalisation process is projected to have several years left to run.

This is an extract from the speech "Thoughts on the Normalization of Monetary Policy" given by Governor Powell at the Economic Club of New York, New York, June 1 2017. The full text can be accessed free of charge at www.federalreserve.gov.




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