Source: United States Federal Reserve
On August 27, the Federal Open Market Committee (FOMC) unanimously approved a revised Statement on Longer-Run Goals and Monetary Policy Strategy that represents a robust evolution of its monetary policy framework.1 The new framework has important implications for the way the FOMC going forward will conduct monetary policy in support of its efforts to achieve its dual-mandate goals in a world of low neutral policy rates and persistent global disinflationary pressures. At the September 16 FOMC meeting, the Committee made material changes to its forward guidance for the future path of the federal funds rate to bring the guidance into line with the new policy framework and, in so doing, provided transparent outcome-based guidance linked to the macroeconomic conditions that must prevail before the Committee expects to lift off from the effective lower bound (ELB). In my remarks today, I would like to look ahead and offer my individual perspective on the consequences of our new framework for the conduct of monetary policy over the business cycle, and I also want to provide some context that connects key elements of our new framework to the literature on optimal monetary policy subject to an ELB constraint that binds in economic downturns. Let me say at the outset that when I am not quoting directly from the consensus statement and the September FOMC statement, the views expressed are my own and do not necessarily express the views of other Federal Reserve Board members or FOMC participants.2
The plan of my talk is as follows. I will first highlight and discuss the five elements of the new framework that define how the Committee will seek to achieve its price-stability mandate over time and how, in September, it revised its forward guidance on the federal funds rate to bring the FOMC’s policy communications into line with the new framework. I will then provide my perspective on how these key elements of the new framework and the related forward guidance connect to the literature on conducting optimal monetary policy at—and after lifting off from—the ELB. I will next discuss how the Committee’s conception of its maximum-employment mandate, a sixth element of the new framework, has evolved since 2012, what this evolution implies for the conduct of monetary policy, and how I plan to factor in this information as I think about the appropriate path for setting the federal funds rate once the conditions for liftoff have been met. I will conclude with a brief recap of my thesis before joining David Wessel, Seth Carpenter, and Annette Vissing-Jørgensen in what I am sure will be an engaging virtual conversation.
The New Framework and Price Stability
In my remarks today, I will focus on six key elements of our new framework and the forward guidance provided by our September FOMC statement. Five of these elements define how the Committee will seek to achieve its price-stability mandate over time, while the sixth pertains to the Committee’s conception of its maximum-employment mandate. Of course, the Committee’s price-stability and maximum-employment mandates are generally complementary, and, indeed, this complementarity is recognized and respected in the forward-guidance language introduced in the September FOMC statement.3 However, for ease of exposition, I will begin by focusing on the five elements of the new framework that define how the Committee will seek to achieve over time its price-stability mandate, before discussing how maximum employment is defined in the new framework and what this definition implies for the conduct and communication of monetary policy under the new framework.
Five features of the new framework and September FOMC statement define how the Committee will seek to achieve its price-stability mandate over time:
- The Committee expects to delay liftoff from the ELB until PCE (personal consumption expenditures) inflation has risen to 2 percent on an annual basis and other complementary conditions, consistent with achieving this goal on a sustained basis and to be discussed later, are met.4
- With inflation having run persistently