"Fed Listens", How Does Monetary Policy Affect Your Community? "Our goal is to keep inflation around 2 percent over time"

*Photo created on December 7, 2018 Governor Brainard giving a speech on Assessing Financial Stability over the Cycle, Peterson Institute for International Economics in Washington, DC.*

Governor Lael Brainard At the Federal Reserve Bank of Richmond, Richmond Community Listening Session, Richmond, Virginia:

Today's community listening session [May 8, 2019] is part of a series called "Fed Listens." The Federal Reserve is undertaking a review to make sure we are carrying out the monetary policy goals assigned to us by the Congress in the most effective way we can.2 In conducting this review, we are reaching out to communities around the country in sessions like this to understand how you are experiencing the economy day to day.

Two Goals
So what are the monetary policy goals the Congress assigned us? Congress has assigned the Federal Reserve to use monetary policy to achieve maximum employment and price stability. These two goals are what we refer to as our dual mandate. By price stability we mean moderate and stable inflation. Specifically, the Federal Open Market Committee (FOMC) — the group at the Fed responsible for determining monetary policy — has announced that our goal is to keep inflation around 2 percent over time. The maximum employment part of our dual mandate is straightforward: The Congress has directed us to achieve the highest level of employment — and thus the lowest level of unemployment — that is consistent with price stability.

While the Congress has specified the goals for monetary policy and a set of tools or authorities to pursue them, it has allowed the FOMC to determine how to best go about achieving those goals.

Reviewing How We Conduct Monetary Policy
Last year, core inflation was very close to our goal. And the unemployment rate is at a 50-year low. We are undertaking our review to ensure we are well positioned to meet our goals for many years to come.

We also want to make sure that the way we are setting monetary policy is keeping up with the way the economy is changing, which I have been referring to as the "new normal."3 There are a few key features of that new normal. For example, interest rates have stayed very low in recent years not only in the United States, but also in many other advanced economies. For a variety of reasons, it seems likely that equilibrium interest rates will remain low in the future. Low interest rates present a challenge for the traditional ways of conducting monetary policy. That is especially true in recessions when, in the past, the Federal Reserve has typically cut interest rates by 4 to 5 percentage points in order to support household spending and business investment. But when equilibrium interest rates are low, we have less room to cut interest rates and thus less room to buffer the economy using our conventional tool. For example, following the most recent recession in 2008 and 2009, we kept interest rates as low as the Committee thought they could go, which was close to zero, for many years.

Another big change in the economy is that inflation doesn't move as much with economic activity and employment as it has in the past. This is what economists mean when they say the Phillips curve is very flat. In many ways, the flatter Phillips curve has advantages: It means that the labor market can strengthen a lot and pull many workers that may have been sidelined back into productive employment without an acceleration in inflation, unlike what we saw in the 1960s and 1970s. Similarly, inflation doesn't fall as much in recessions.

But there is an important risk with today's low sensitivity of inflation to slack: It makes it more difficult to boost inflation to our objective of 2 percent on a sustainable basis. And, as we know from other countries, if inflation consistently falls short of the central bank's objective, lower inflation tends to get embedded in people's expectations. Expectations that inflation will remain low in turn can create a self-fulfilling dynamic with actual inflation, making it even more difficult for the central bank to boost inflation. And because inflation is reflected in nominal interest rates, that, in turn, can also reduce the amount of policy space the central bank has available to prevent the economy from slipping into recession.

In fact, in recent years, central banks around the world have had to use a larger variety of policy tools than they traditionally used to respond to the financial crisis and support economic expansion.

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"Fed Listens", How Does Monetary Policy Affect Your Community? "Our goal is to keep inflation around 2 percent over time"

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