US Central Bank Statement

Author: | Published: 19 Oct 2018
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In the aftermath of the financial crisis, the FOMC went to extraordinary lengths to promote the recovery, support job growth, and prevent inflation from falling too low. As the recovery advanced, it became appropriate to begin reducing monetary policy support. Since monetary policy affects the economy with a lag, waiting until inflation and employment hit our goals before reducing policy support could have led to a rise in inflation to unwelcome levels. In such circumstances, monetary policy might need to tighten abruptly, which could disrupt the economy or even trigger a recession.

As a result, to sustain the expansion, the FOMC adopted a gradual approach to reducing monetary policy support. We began in December 2015 by raising our target for the federal funds rate for the first time in nearly a decade. Since then, with the economy improving but inflation still below target and some slack remaining, the Committee has continued to gradually raise interest rates. This patient approach also reduced the risk that an unforeseen blow to the economy might push the federal funds rate back near zero – its effective lower bound – thus limiting our ability to provide appropriate monetary accommodation.

In addition, after careful planning and public communication, last October the FOMC began to gradually and predictably reduce the size of the Fed's balance sheet. Reducing our securities holdings is another way to move the stance of monetary policy toward neutral. The balance sheet reduction process is going smoothly and is expected to contribute over time to a gradual tightening of financial conditions. Over the next few years, the size of our balance sheet is expected to shrink significantly.

At our meeting last month, the FOMC raised the target range for the federal funds rate by 1/4 percentage point, bringing it to 1.25% to 1.75%. This decision marked another step in the ongoing process of gradually scaling back monetary policy accommodation. The FOMC's patient approach has paid dividends and contributed to the strong economy we have today.

Over the next few years, we will continue to aim for 2% inflation and for a sustained economic expansion with a strong labour market. My FOMC colleagues and I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals. It remains the case that raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion. But raising rates too quickly would increase the risk that inflation would remain persistently below our 2% objective. Our path of gradual rate increases is intended to balance these two risks.

Of course, our views about appropriate monetary policy in the months and years ahead will be informed by incoming economic data and the evolving outlook. If the outlook changes, so too will monetary policy. Our overarching objective will remain the same: fostering a strong economy for all Americans – one that provides plentiful jobs and low and stable inflation.

This is an extract from The Outlook for the US Economy speech given by Chairman Jerome H Powell at The Economic Club of Chicago, Chicago, Illinois, April 6 2018. The full and original text is free to view at: www.federalreserve.gov.