Regional President Speech

Federal Reserve Bank • of San Francisco ABOUT US OUR PEOPLE JOIN US What We Study Our District Research & Insights News & Media » » » » c 5 4 / NEWS & MEDIA / SPEECHES / MARY C. DALY’S SPEECHES 1 Monetary Strategies in Practice SPEECH INFO Slides for the Hoover Institution: Monetary Policy Conference 2019 Stanford, CA By Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco For delivery on May 3, 2019 ➔ DOWNLOAD PDF ] (1 MB) Monetary Strategies in Practice 2019 Hoover Monetary Policy Conference May 3, 2019 Mary C. Daly President and CEO The views expressed here are mine alone and do not necessarily reflect those of anyone else in the Federal Reserve System. Why Review Our Framework? • Good practice to reassess our strategies, tools and communications (Bank of Canada does this regularly) • More likely to hit effective lower bound in the future • Frequently will be fighting inflation from below target • Inflation expectations matter 2 More Limited Space for Funds Rate Cuts R-star estimates (median of SEP) Percent 4.0 3.5 3.0 2.5 2.0 1.5 -- R-star 1.0 0.5 0.0 2012 2013 2014 2015 2016 2017 2018 2019 Source: Haver 3 Inflation Consistently Short of 2% Target Core & Headline PCE Inflation, 12-month change Percent 3.0 -- PCE -- PCE excluding energy goods & services 2.5 - - - - - - - - - - FOMC Inflation Target 2.0 1.5 1.0 0.5 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Haver 4 Inflation Expectations Matter More Now Coefficient on Lagged Inflation and Inflation Expectations 0.6 0.4 0.2 0.0 Persistence Expectations 1997Q 1-2007Q4 2008Q1-2018Q1 Source: BLS, BEA, CBO, SPF Note: Specification uses headline CPI inflation. One-year ahead inflation expectations from the Survey of Professional Forecasters. 5 Source: Jordà, Marti, Nechio, and Tallman (FRBSF Economic Letter, 2019). Achieving Target Inflation in the Future Three viable alternative strategies at the ELB • Nominal income targeting • Price-level targeting • Average-inflation targeting 6 All Designed to “Make Up” For Misses % Inflation 3 2.5 Symmetric Inflation 2 Targeting 1.5 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 % 3 Average 2.5 Inflation targeting 2 1.5 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Period 7 All Designed to “Make Up” For Misses % Inflation 3 2.5 Symmetric Inflation 2 Targeting 1.5 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 % 3 Average 2.5 Inflation targeting 2 1.5 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Period 8 Focus on Average Inflation Targeting • Good make-up properties • Easier to communicate than NIT or PLT • But important questions remain: • Is the required averaging window of “reasonable” length? • Is AIT effective if expectations are backward looking? • Does AIT work well if some households do not participate in financial markets? • Would AIT be credible? • Should it be a temporary policy at the ELB? 9 A Framework to Assess AIT • New Keynesian economy (Amano, Gnocchi, Leduc) • 20% of households with no access to financial markets • 75% of firms with backward-looking expectations • ELB binds 20% of the time • CB minimizes inflation and output gaps using rule: 1 𝑛 𝑖 = 𝑟 + 𝜙 σ ( 𝜋 − 𝜋ത) 𝑡 𝑡 𝑘=0 𝑡−𝑘 𝑛 • With 𝜙=1.5, n=6 quarters 10 Evaluating Monetary Frameworks Output Inflation Percent* Percent* 1.0 0 0.5 -1 0.0 -2 -0.5 -3 -1.0 -4 -1.5 -5 -2.0 -6 -2.5 -7 -3.0 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 - IT Quarters - IT Quarters • Deviation from steady state • Deviation from steady state Amano, Gnocchi, and Leduc (2019) 11 Evaluating Monetary Frameworks Output Inflation Percent* Percent* 1.0 0 / 0.5 -1 0.0 -2 -0.5 -3 -1.0 -4 -1.5 -5 -2.0 -6 -2.5 -7 -3.0 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 ,-AIT - IT Quarters + AIT - IT Quarters • Deviation from steady state • Deviation from steady state Amano, Gnocchi, and Leduc (2019) 12 Evaluating Monetary Frameworks Output Inflation Percent* Percent* 1.0 0 / 0.5 -1 0.0 -2 -0.5 -3 -1.0 -4 -1.5 -5 -2.0 -6 -2.5 -7 -3.0 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 + + AIT - IT - PLT Quarters AIT - IT - PL T Quarters • Deviation from steady state • Deviation from steady state Amano, Gnocchi, and Leduc (2019) 13 Credibility: Make-up Work Both Ways • Credibility is critical • Need to adopt regime before ELB episodes • Implies a willingness to disinflate if necessary % Inflation 3 2.5 2 Make-up 1.5 1 1 2 3 4 5 14 Credibility of IT Regime Achieved Over Time Inflation and long-term inflation expectations Percent 16 14 12 10 8 6 4 2 0 -2 1979 1984 1989 1994 1999 2004 2009 2014 2019 -- CPI inflation (12-month percent change) -- Inflation expectations (10-year annual average) Source: Haver 15 Summary • With Fed objectives met, good time to review framework • AIT is an attractive option, but credibility would be key • Still, bar for change is high • A lot of analysis, discussion, and debate is still needed 16

Mary C. Daly (2019, May 2). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20190503_mary_c_daly

@misc{wtfs_regional_speeche_20190503_mary_c_daly,
  author = {Mary C. Daly},
  title = {Regional President Speech},
  year = {2019},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20190503_mary_c_daly},
  note = {Retrieved via When the Fed Speaks corpus}
}