Category Archives: FOREX

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.

The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. Global trade has picked up and commodity prices have increased over recent months. Even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

The positive news on vaccines together with the prospect of further significant fiscal stimulus in the United States has seen longer-term bond yields increase considerably over the past month. This increase partly reflects a lift in expected inflation over the medium term to rates that are closer to central banks’ targets. Reflecting these global developments, there have been similar movements in Australian bond markets. Changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates. The Australian dollar remains in the upper end of the range of recent years.

In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.4 per cent. Retail spending has been strong and most of the households and businesses that had deferred loan repayments have now recommenced repayments. The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.

Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years. Further progress in reducing spare capacity is expected, but it will be some time before the labour market is tight enough to generate wage increases that are consistent with achieving the inflation target. In the central scenario, the unemployment rate will still be around 6 per cent at the end of this year and 5½ per cent at the end of 2022. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions.

The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy are supporting the recovery in aggregate demand and the pick-up in employment.

Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently. Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.

The Bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary. Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market. The Bank is prepared to make further adjustments to its purchases in response to market conditions. To date, a cumulative $74 billion of government bonds issued by the Australian Government and the states and territories have been purchased under the initial $100 billion program. A further $100 billion will be purchased following the completion of the initial program and the Bank is prepared to do more if that is necessary. Authorised deposit-taking institutions have drawn $91 billion under the Term Funding Facility and have access to a further $94 billion. Since the start of 2020, the RBA’s balance sheet has increased by around $175 billion.

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

Jerome H. Powell: Semiannual Monetary Policy Report to the Congress

Chairman Brown, Ranking Member Toomey, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report.

At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities. Today I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. The resurgence in COVID-19 cases, hospitalizations, and deaths in recent months is causing great hardship for millions of Americans and is weighing on economic activity and job creation. Following a sharp rebound in economic activity last summer, momentum slowed substantially, with the weakness concentrated in the sectors most adversely affected by the resurgence of the virus. In recent weeks, the number of new cases and hospitalizations has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.

Household spending on services remains low, especially in sectors that typically require people to gather closely, including leisure and hospitality. In contrast, household spending on goods picked up encouragingly in January after moderating late last year. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. The overall recovery in economic activity since last spring is due in part to unprecedented fiscal and monetary actions, which have provided essential support to many households, businesses, and communities.

As with overall economic activity, the pace of improvement in the labor market has slowed. Over the three months ending in January, employment rose at an average monthly rate of only 29,000. Continued progress in many industries has been tempered by significant losses in industries such as leisure and hospitality, where the resurgence in the virus and increased social distancing have weighed further on activity. The unemployment rate remained elevated at 6.3 percent in January, and participation in the labor market is notably below pre-pandemic levels. Although there has been much progress in the labor market since the spring, millions of Americans remain out of work. As discussed in the February Monetary Policy Report, the economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers and for African Americans, Hispanics, and other minority groups. The economic dislocation has upended many lives and created great uncertainty about the future.

The pandemic has also left a significant imprint on inflation. Following large declines in the spring, consumer prices partially rebounded over the rest of last year. However, for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft. Overall, on a 12-month basis, inflation remains below our 2 percent longer-run objective.

While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities. In the meantime, we should continue to follow the advice of health experts to observe social-distancing measures and wear masks.

Monetary Policy

I will now turn to monetary policy. In the second half of last year, the Federal Open Market Committee completed our first-ever public review of our monetary policy strategy, tools, and communication practices. We undertook this review because the U.S. economy has changed in ways that matter for monetary policy. The review’s purpose was to identify improvements to our policy framework that could enhance our ability to achieve our maximum-employment and price-stability objectives. The review involved extensive outreach to a broad range of people and groups through a series of Fed Listens events.

As described in the February Monetary Policy Report, in August, the Committee unanimously adopted its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Our revised statement shares many features with its predecessor. For example, we have not changed our 2 percent longer-run inflation goal. However, we did make some key changes. Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”1 This change means that we will not tighten monetary policy solely in response to a strong labor market. Regarding our price-stability goal, we state that we will seek to achieve inflation that averages 2 percent over time. This means that, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. With this change, we aim to keep longer-term inflation expectations well anchored at our 2 percent goal. Well-anchored inflation expectations enhance our ability to meet both our employment and inflation goals, particularly in the current low interest rate environment in which our main policy tool is likely to be more frequently constrained by the lower bound.

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve’s balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

Since the onset of the pandemic, the Federal Reserve has been taking actions to support more directly the flow of credit in the economy, deploying our emergency lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and the Treasury. Although the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) facilities are no longer open to new activity, our other facilities remain in place.

We understand that our actions affect households, businesses, and communities across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.

Jerome H. Powell: Getting Back to a Strong Labor Market

Chair Jerome H. Powell

At the Economic Club of New York 

Today I will discuss the state of our labor market, from the recent past to the present and then over the longer term. A strong labor market that is sustained for an extended period can deliver substantial economic and social benefits, including higher employment and income levels, improved and expanded job opportunities, narrower economic disparities, and healing of the entrenched damage inflicted by past recessions on individuals’ economic and personal well-being. At present, we are a long way from such a labor market. Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity.

The Labor Market of a Year Ago

We need only look to February of last year to see how beneficial a strong labor market can be. The overall unemployment rate was 3.5 percent, the lowest level in a half-century. The unemployment rate for African Americans had also reached historical lows (figure 1). Prime-age labor force participation was the highest in over a decade, and a high proportion of households saw jobs as “plentiful.”1 Overall wage growth was moderate, but wages were rising more rapidly for earners on the lower end of the scale. These encouraging statistics were reaffirmed and given voice by those we met and conferred with, including the community, labor, and business leaders; retirees; students; and others we met with during the 14 Fed Listens events we conducted in 2019.2

Many of these gains had emerged only in the later years of the expansion. The labor force participation rate, for example, had been steadily declining from 2008 to 2015 even as the recovery from the Global Financial Crisis unfolded. In fact, in 2015, prime-age labor force participation—which I focus on because it is not significantly affected by the aging of the population—reached its lowest level in 30 years even as the unemployment rate declined to a relatively low 5 percent. Also concerning was that much of the decline in participation up to that point had been concentrated in the population without a college degree (figure 2). At the time, many forecasters worried that globalization and technological change might have permanently reduced job opportunities for these individuals, and that, as a result, there might be limited scope for participation to recover.

Fortunately, the participation rate after 2015 consistently outperformed expectations, and by the beginning of 2020, the prime-age participation rate had fully reversed its decline from the 2008-to-2015 period. Moreover, gains in participation were concentrated among people without a college degree. Given that U.S. labor force participation has lagged relative to other advanced economy nations, this progress was especially welcome (figure 3).3

As I mentioned, we also saw faster wage growth for low earners once the labor market had strengthened sufficiently. Nearly six years into the recovery, wage growth for the lowest earning quartile had been persistently modest and well below the pace enjoyed by other workers. At the tipping point of 2015, however, as the labor market continued to strengthen, the trend reversed, with wage growth for the lowest quartile consistently and significantly exceeding that of other workers (figure 4).

At the end of 2015, the Black unemployment rate was still quite elevated, at 9 percent, despite the relatively low overall unemployment rate. But that disparity too began to shrink; as the expansion continued beyond 2015, Black unemployment reached a historic low of 5.2 percent, and the gap between Black and white unemployment rates was the narrowest since 1972, when data on unemployment by race started to be collected. Black unemployment has tended to rise more than overall unemployment in recessions but also to fall more quickly in expansions.4 Over the course of a long expansion, these persistent disparities can decline significantly, but, without policies to address their underlying causes, they may increase again when the economy ultimately turns down.

These late-breaking improvements in the labor market did not result in unwanted upward pressures on inflation, as might have been expected; in fact, inflation did not even rise to 2 percent on a sustained basis. There was every reason to expect that the labor market could have strengthened even further without causing a worrisome increase in inflation were it not for the onset of the pandemic.

The Labor Market Today

The state of our labor market today could hardly be more different. Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared. Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath (figure 5).

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.5 Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January (figure 6).

Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans. Aggregate employment has declined 6.5 percent since last February, but the decline in employment for workers in the top quartile of the wage distribution has been only 4 percent, while the decline for the bottom quartile has been a staggering 17 percent (figure 7). Moreover, employment for these workers has changed little in recent months, while employment for the higher-wage groups has continued to improve. Similarly, the unemployment rates for Blacks and Hispanics have risen significantly more than for whites since February 2020 (figure 8). As a result, economic disparities that were already too wide have widened further.

In the past few months, improvement in labor market conditions stalled as the rate of infections sharply increased. In particular, jobs in the leisure and hospitality sector dropped over 1/2 million in December and a further 61,000 in January. The recovery continues to depend on controlling the spread of the virus, which will require mass vaccinations in addition to continued vigilance in social distancing and mask wearing in the meantime.

Since the onset of the pandemic, we have been concerned about its longer-term effects on the labor market. Extended periods of unemployment can inflict persistent damage on lives and livelihoods while also eroding the productive capacity of the economy.6 And we know from the previous expansion that it can take many years to reverse the damage.

At the start of the pandemic, the increase in unemployment was almost entirely due to temporary job losses.7 Temporarily laid-off workers tend to return to work much more quickly, on average, than those whose ties to their former employers are permanently severed. But as some sectors of the economy have continued to struggle, permanent job loss has increased (figure 9). So too has long-term unemployment. Still, as of January, the level of permanent job loss, as a fraction of the labor force, was considerably smaller than during the Great Recession. Research shows that the Paycheck Protection Program has played an important role in limiting permanent layoffs and preserving small businesses.8 The renewal of the program this year in the face of another surge in COVID-related job cuts is an encouraging development.

Of course, in a healthy market-based economy, perpetual churn will always render some jobs obsolete as they are replaced by new employment opportunities. Over time, workers and capital move from firm to firm and from sector to sector. It is likely that the pandemic has both increased the need for such movements and brought forward some movement that would have occurred eventually.9

Getting Back to a Strong Labor Market

So how do we get from where we are today back to a strong labor market that benefits all Americans and that starts to heal the damage already done? And what can we do to sustain those benefits over time? Experience tells us that getting to and staying at full employment will not be easy. In the near term, policies that bring the pandemic to an end as soon as possible are paramount. In addition, workers and households who struggle to find their place in the post-pandemic economy are likely to need continued support. The same is true for many small businesses that are likely to prosper again once the pandemic is behind us.

Also important is a patiently accommodative monetary policy stance that embraces the lessons of the past—about the labor market in particular and the economy more generally. I described several of those important lessons, as well as our new policy framework, at the Jackson Hole conference last year.10 I have already mentioned the broad-based benefits that a strong labor market can deliver and noted that many of these benefits only arose toward the end of the previous expansion. I also noted that these benefits were achieved with low inflation. Indeed, inflation has been much lower and more stable over the past three decades than in earlier times.

In addition, we have seen that the longer-run potential growth rate of the economy appears to be lower than it once was, in part because of population aging, and that the neutral rate of interest—or the rate consistent with the economy being at full employment with 2 percent inflation—is also much lower than before. A low neutral rate means that our policy rate will be constrained more often by the effective lower bound. That circumstance can lead to worse economic outcomes—particularly for the most economically vulnerable Americans.

To take these economic developments into account, we made substantial revisions to our monetary policy framework, as described in the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy.11 This revised statement shares many features with its predecessor, including our view that longer-run inflation of 2 percent is most consistent with our mandate to promote maximum employment and price stability. But it also has some innovations.

The revised statement emphasizes that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities. Recognizing the economy’s ability to sustain a robust job market without causing an unwanted increase in inflation, the statement says that our policy decisions will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”12 This means that we will not tighten monetary policy solely in response to a strong labor market. Finally, to counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means that following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

Our January postmeeting statement on monetary policy implements this new framework.13 In particular, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities by $80 billion and $40 billion per month, respectively, until substantial further progress has been made toward our maximum-employment and price-stability goals.

The Broad Responsibility for Achieving Maximum Employment
Seventy-five years ago, in the wake of WWII, the United States faced the challenge of reemploying millions amid a major restructuring of the economy toward peacetime ends.14 Part of Congress’s response was the Employment Act of 1946, which states that “it is the continuing policy and responsibility of the federal government to use all practicable means . . . to promote maximum employment.”15 As later amended in the Humphrey-Hawkins Act, this provision formed the basis of the employment side of the Fed’s dual mandate. My colleagues and I are strongly committed to doing all we can to promote this employment goal.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation’s workforce are immense. Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families.16 I am confident that with our collective efforts across the government and the private sector, our nation will make sustained progress toward our national goal of maximum employment.

Stefan Ingves at the Riksdag Committee on Finance: Hearing on financial stability

“The pandemic has had a major impact on the economy, both in Sweden and abroad.” This comment was made by Governor Stefan Ingves today when he took part in the Riksdag Committee on Finance’s annual open hearing on financial stability. In addition to the Riksbank Governor, others taking part in the hearing included Minister for Financial Markets and Housing Per Bolund, Finansinspektionen’s Director General Erik Thedéen, and Swedish National Debt Office Director General Hans Lindblad.

Mr Ingves emphasised how the extensive support from central banks, governments and public authorities around the world has contributed to avoiding a global financial crisis. Although the spread of infection is still at a high level and continues to slow down the economic recovery, it is positive that vaccination has begun, as this is important for future prospects. However, Mr Ingves also pointed out that although the challenges arising from the pandemic have been handled well so far, the way forward remains uncertain.

Continued interaction between fiscal and monetary policy is important

Mr Ingves further pointed out that it is important that the different policy areas continue cooperating to aid the recovery. He emphasised that the Riksbank’s measures contribute to a functioning credit supply and to interest rates remaining low. If the crisis becomes more prolonged, more fiscal policy support may be needed, both general measures and measures targeting particularly vulnerable sectors and industries. The Riksbank stands ready to provide with the liquidity necessary to support credit supply. In addition, it is important that banks do what they can to supply sufficient credit to companies and households.

Stefan Ingves: Several risks to financial stability

Mr Ingves also discussed risks in the longer term. These include risks linked to the support measures implemented during the crisis, for instance, both private sector and public sector indebtedness have increased in several countries. Moreover, the support measures can lead to the financial sector counting on always being rescued by governments, central banks and other public authorities, which can lead to greater risk taking. Some risks are in certain aspects greater abroad, for instance, the banking sector in the euro area is in worse condition and the public finances are weaker than in many other countries. But there are also tangible risks in Sweden. Mr Ingves explained that the high level of household indebtedness makes the economy very vulnerable and reducing this vulnerability requires a more extensive review of taxation and housing policy, rather than patching over when problems arise.

The pandemic highlights the importance of good resilience in the financial system

“When the economic situation permits, resilience needs be strengthened again,” said Mr Ingves. If banks have used parts of their capital and liquidity buffers, they will need to gradually build them up again when the crisis is over. In addition, it is important that the established regulatory frameworks are retained and not undermined. It is therefore important that, for instance, the exemption from the amortisation requirement remains temporary. Finally, concluded Mr Ingves, climate-related risks should remain an important part of the supervision of financial institutions and be integrated into the financial stability analysis.

Statement by Philip Lowe, Governor: Monetary Policy Decision

RBA Board decided to maintain the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility. It also decided to purchase an additional $100 billion of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid-April. These additional purchases will be at the current rate of $5 billion a week.

The outlook for the global economy has improved over recent months due to the development of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. That recovery, however, remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.6 per cent. Retail spending has been strong and many of the households and businesses that had deferred loan repayments have now recommenced repayments. These outcomes have been underpinned by Australia’s success on the health front and the very significant fiscal and monetary support.

The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is now expected to return to its end-2019 level by the middle of this year. Even so, the economy is expected to operate with considerable spare capacity for some time to come. The unemployment rate remains higher than it has been for the past 2 decades and while it is expected to decline, the central scenario is for unemployment to be around 6 per cent at the end of this year and 5½ per cent at the end of 2022.

Wage and price pressures remain subdued. The CPI increased by just 0.9 per cent over the year to the December quarter and wages (as measured by the Wage Price Index) are increasing at the slowest rate on record. Both inflation and wages growth are expected to pick up, but to do so only gradually, with both remaining below 2 per cent over the next couple of years. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022.

In addition to the central scenario, the Board considered upside and downside scenarios related to the virus and the rollout of vaccines. Disappointing news on the health front would delay the recovery and the expected progress on reducing unemployment. On the other hand, it is possible that further positive health outcomes would boost consumer spending and investment, leading to stronger growth than is currently expected. An important near-term issue is how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending.

Financial conditions remain highly accommodative, with lending rates for most borrowers at record lows and asset prices, including housing prices, mostly increasing. Housing credit growth to owner-occupiers has picked up recently, but investor and business credit growth remain weak. The exchange rate has appreciated and is in the upper end of the range of recent years.

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off. The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets. The decision to extend the bond purchase program will ensure a continuation of this monetary support.

To date, authorised deposit-taking institutions have drawn $86 billion under the Term Funding Facility and have access to a further $99 billion. The Bank has bought a cumulative $52 billion of government bonds issued by the Australian Government and the states and territories under the bond purchase program. It has not purchased bonds in support of the 3-year yield target since early December. Since the start of 2020, the RBA’s balance sheet has increased by around $160 billion.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

The Riksbank’s new reference rate is called SWESTR

The Riksbank’s new transaction-based reference rate for the shortest maturity in Swedish krona has been given the name SWESTR (Swedish krona Short Term Rate). The test period for SWESTR commences on 27 January 2021. During the approximately six-month test period, SWESTR will be published as a preliminary rate on the Riksbank’s website. The Riksbank will also begin the work on designing average rates for SWESTR.

As the Riksbank has notified earlier, the test period for the new transaction-based SWESTR reference rate begins on 27 January. During the test period, a preliminary reference rate for the shortest maturity in Swedish krona will be published on the Riksbank’s website at 11.00 hours (CET) every banking day. During the test period, SWESTR shall not be used in financial contracts. The official reference rate will begin to be published after the test period has been completed.

During the test period, the Riksbank will also begin the work on designing average rates for SWESTR (SWESTR compounded averages). It is common international practice for central banks supplying a transaction-based reference rate for the shortest maturity to also publish historical averages for this rate. Central banks that do so include the Bank of England (SONIA compounded) and the Federal Reserve (SOFR averages).

The Riksbank will in future publish average rates calculated on the historical daily listings for Swedish krona Short Term Rate. These average rates will, in common with international practice, be retrospective and compounded.

The average rates for Swedish krona Short Term Rate will be an important part of the so-called fallback solution for STIBOR, which means that the average rates for SWESTR can comprise the base for an alternative interest rate to use if STIBOR were to cease during the contract period.

When designing the calculation method for average rates, the Riksbank will take into account international guidelines and practice regarding transaction-based reference rates. At the same time, the calculation method needs to be well-adapted to current conventions on the Swedish money market. During the work on designing averages for SWESTR in the spring, the Riksbank intends to gather comments and views from market participants in the Swedish financial markets.

Richard H. Clarida: The Federal Reserve’s New Framework: Context and Consequences

Vice Chair Richard H. Clarida

At the “The Road Ahead for Central Banks,” a seminar sponsored by the Hoover Economic Policy Working Group, Hoover Institution, Stanford, California (via webcast)

On August 27, 2020, the Federal Open Market Committee (FOMC) unanimously approved a revised Statement on Longer-Run Goals and Monetary Policy Strategy, which represents a robust evolution of its monetary policy framework.1 At its September and December FOMC meetings, the Committee made material changes to its forward guidance to bring it into line with the new policy framework.2 Before I discuss the new framework in detail and the policy implications that flow from it, please allow me to provide some background on the reasons the Committee felt that our framework needed to evolve.

Motivation for the Review

As my FOMC colleagues and I indicated from the outset, the fact that the Federal Reserve System chose to conduct this review does not indicate that we believed we were poorly served by the framework in place since 2012.3 Indeed, I would argue that over the past eight years, the framework served us well and supported the Federal Reserve’s efforts after the Global Financial Crisis (GFC) first to achieve and then, for several years, to sustain—until cut short this spring by the COVID-19 pandemic—the operation of the economy at or close to both our statutorily assigned goals of maximum employment and price stability in what became the longest economic expansion in U.S. history. Nonetheless, both the U.S. economy—and, equally importantly, our understanding of the economy—have clearly evolved along several crucial dimensions since 2012, and we believed that in 2019 it made sense to step back and assess whether, and in what possible ways, we might refine and rethink our strategy, tools, and communication practices to achieve and sustain our goals as consistently and robustly as possible in the global economy in which we operate today and for the foreseeable future.

Perhaps the most significant change since 2012 in our understanding of the economy is our reassessment of the neutral real interest rate, r*, that, over the longer run, is consistent with our maximum-employment and price-stability mandates. In January 2012, the median FOMC participant projected a long-run r* of 2.25 percent, which, in tandem with the inflation goal of 2 percent, indicated a neutral setting for the federal funds rate of 4.25 percent. However, in the eight years since 2012, members of the Committee—as well as outside forecasters and financial market participants—have repeatedly marked down their estimates of longer-run r* and, thus, the neutral nominal policy rate. Indeed, as of the most recent Summary of Economic Projections (SEP) released in December, the median FOMC participant currently projects a longer-run r* equal to just 0.5 percent, consistent with a neutral setting for the federal funds rate of 2.5 percent.4 Moreover, as is well appreciated, the decline in neutral policy rates since the GFC is a global phenomenon that is widely expected by forecasters and financial markets to persist for years to come.

The substantial decline in the neutral policy rate since 2012 has critical implications for the design, implementation, and communication of Federal Reserve monetary policy because it leaves the FOMC with less conventional policy space to cut rates to offset adverse shocks to aggregate demand. With a diminished reservoir of conventional policy space, it is much more likely than was appreciated in 2012 that, in economic downturns, the effective lower bound (ELB) will constrain the ability of the FOMC to rely solely on the federal funds rate instrument to offset adverse shocks. This development, in turn, makes it more likely that recessions will impart elevated risks of more persistent downward pressure on inflation and upward pressure on unemployment that the Federal Reserve’s monetary policy should, in design and implementation, seek to offset throughout the business cycle and not just in downturns themselves.

Two other, related developments that have also become more evident than they appeared in 2012 are that price inflation seems less responsive to resource slack, and also, that estimates of resource slack based on historically estimated price Phillips curve relationships are less reliable and subject to more material revision than was once commonly believed. For example, in the face of declining unemployment rates that did not result in excessive cost-push pressure to price inflation, the median of the Committee’s projections of u*—the rate of unemployment consistent in the longer run with the 2 percent inflation objective—has been repeatedly revised lower, from 5.5 percent in January 2012 to 4.1 percent as of the December 2020 SEP. Projections of u* by the Congressional Budget Office and professional forecasters show a similar decline during this same period and for the same reason. In the past several years of the previous expansion, declines in the unemployment rate occurred in tandem with a notable and, to me, welcome increase in real wages that was accompanied by an increase in labor’s share of national income, but not a surge in price inflation to a pace inconsistent with our price-stability mandate and well-anchored inflation expectations. Indeed, this pattern of mid-cycle declines in unemployment coincident with noninflationary increases in real wages has been evident in the U.S. data since the 1990s.

With regard to inflation expectations, there is broad agreement among academics and policymakers that achieving price stability on a sustainable basis requires that inflation expectations be well anchored at the rate of inflation consistent with the price-stability goal. This is especially true in the world that prevails today, with flat Phillips curves in which the primary determinant of actual inflation is expected inflation. The pre-GFC academic literature derived the important result that a credible inflation-targeting monetary policy strategy that is not constrained by the ELB can deliver, under rational expectations, inflation expectations that themselves are well anchored at the inflation target. In other words, absent a binding ELB constraint, a policy that targets actual inflation in these models delivers long-run inflation expectations well anchored at the target “for free.” But this “copacetic coincidence” no longer holds in a world of low r* in which adverse aggregate demand shocks are expected to drive the economy in at least some downturns to the ELB. In this case, which is obviously relevant today, economic analysis indicates that flexible inflation-targeting monetary policy cannot be relied on to deliver inflation expectations that are anchored at the target, but instead will tend to deliver inflation expectations that, in each business cycle, become anchored at a level below the target. This is the crucial insight in my colleague John Williams’s research with Thomas Mertens. This downward bias in inflation expectations under inflation targeting in an ELB world can in turn reduce already scarce policy space—because nominal interest rates reflect both real rates and expected inflation—and it can open up the risk of the downward spiral in both actual and expected inflation that has been observed in some other major economies.

The New Framework and Price Stability

Six features of the new framework and fall 2020 FOMC statements define how the Committee will seek to achieve its price-stability and maximum-employment mandates over time. First, the Committee expects to delay liftoff from the ELB until PCE (personal consumption expenditures) inflation has risen to 2 percent and other complementary conditions, consistent with achieving this goal on a sustained basis, have also been met.5

Second, with inflation having run persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time in the service of keeping longer-term inflation expectations well anchored at the 2 percent longer-run goal.6

Third, the Committee expects that appropriate monetary policy will remain accommodative for some time after the conditions to commence policy normalization have been met.7

Fourth, policy will aim over time to return inflation to its longer-run goal, which remains 2 percent, but not below, once the conditions to commence policy normalization have been met.8

Fifth, inflation that averages 2 percent over time represents an ex ante aspiration of the FOMC, but not a time-inconsistent ex post commitment.9

As I highlighted in a speech at the Brookings Institution in November, I believe that a useful way to summarize the framework defined by these five features is temporary price-level targeting (TPLT, at the ELB) that reverts to flexible inflation targeting (once the conditions for liftoff have been reached).10 Just such a framework has been analyzed by Bernanke, Kiley, and Roberts (2019) and Bernanke (2020), who in turn build on earlier work by Evans (2012), Reifschneider and Williams (2000), and Eggertsson and Woodford (2003). Each of these five elements of the new framework is consequential. I now discuss each in turn and provide some context for how I understand them to relate to the monetary economics literature on TPLT.

A policy that delays liftoff from the ELB until a threshold for average inflation has been reached is one element of a TPLT strategy. Starting with our September FOMC statement, we communicated that inflation reaching 2 percent is a necessary condition for liftoff from the ELB. This condition refers to inflation on an annual basis. TPLT with such a one-year memory has been studied by Bernanke, Kiley, and Roberts (2019). The FOMC also indicated in these statements that the Committee expects to delay liftoff until inflation is “on track to moderately exceed 2 percent for some time.” What “moderately” and “for some time” mean will depend on the initial conditions at liftoff (just as they do under other versions of TPLT), and the Committee’s judgment on the projected duration and magnitude of the deviation from the 2 percent inflation goal will be communicated in the quarterly SEP for inflation.

In the TPLT studies I cited earlier, policy is assumed to revert to an inertial Taylor rule after liftoff, and therefore policy remains accommodative for some time thereafter, which depends on the degree of policy inertia in the reaction function. Our three most recent FOMC statements also call for policy to remain accommodative for some time after liftoff, and, once the conditions to commence policy normalization have been met, the SEP “dot plot” will convey the Committee’s projections for the pace of liftoff as well as the ultimate destination for the policy rate.

Our new framework is asymmetric. That is, as in the previously cited TPLT studies, the goal of monetary policy after lifting off from the ELB is to return inflation to its 2 percent longer-run goal, but not to push inflation below 2 percent. In the case of the Federal Reserve, we have highlighted that making sure that inflation expectations remain anchored at our 2 percent objective is just such a consideration. Speaking for myself, I follow closely the Fed staff’s index of common inflation expectations (CIE) as a relevant indicator that this goal is being met (see the figure).11 Other things being equal, my desired pace of policy normalization post-liftoff to return inflation to 2 percent—as well as the projected pace of return to 2 percent inflation—would be somewhat slower than otherwise if the CIE index is, at time of liftoff, below the pre-ELB level. Another factor I will consider in calibrating the pace of policy normalization post-liftoff is the average rate of PCE inflation since the new framework was adopted in August 2020—a time, as it happened, when the federal funds rate was constrained at the ELB.

Our framework aims ex ante for inflation to average 2 percent over time, but it does not make a (time-inconsistent) commitment to achieve ex post inflation outcomes that average 2 percent under any and all circumstances. The same is true for the TPLT studies I cited earlier. In these studies, the only way in which average inflation enters the policy rule is through the timing of liftoff itself. Yet in stochastic simulations of the FRB/US model under TPLT with a one-year memory that reverts to flexible inflation targeting after liftoff, inflation does average very close to 2 percent (see the table). The model of Mertens and Williams (2019) delivers a similar outcome: Even though the policy reaction function in their model does not incorporate an ex post makeup element, it delivers a long-run (unconditional) average rate of inflation equal to target by aiming for a moderate inflation overshoot away from the ELB that is calibrated to offset the inflation shortfall caused by the ELB.

The New Framework and Maximum Employment

Regarding our maximum-employment mandate—a sixth element—an important evolution in our new framework is that the Committee now defines maximum employment as the highest level of employment that does not generate sustained pressures that put the price-stability mandate at risk.12 As a practical matter, this definition means to me that when the unemployment rate is elevated relative to my SEP forecast of its long-run natural level, monetary policy should, as before, continue to be calibrated to eliminate such employment shortfalls so long as doing so does not put the price-stability mandate at risk. Indeed, in our September and subsequent FOMC statements, we indicated that we expect it will be appropriate to keep the federal funds rate in the current 0 to 25 basis point target range until inflation has reached 2 percent (on an annual basis) and labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment. In our new framework, when in a business cycle expansion labor market indicators return to a range that, in the Committee’s judgment, is broadly consistent with its maximum-employment mandate, it will be data on inflation itself that policy will react to, but going forward, policy will not tighten solely because the unemployment rate has fallen below any particular econometric estimate of its long-run natural level. This guidance has an important implication for the Taylor-type policy reaction function I will consult. Consistent with our new framework, the relevant policy rule benchmark I will consult once the conditions for liftoff have been met is an inertial Taylor-type rule with a coefficient of zero on the unemployment gap, a coefficient of 1.5 on the gap between core PCE inflation and the 2 percent longer-run goal, and a neutral real policy rate equal to my SEP forecast of long-run r*. Such a reference rule, which becomes relevant once the conditions for policy normalization have been met, is similar to the forward-looking Taylor-type rule for optimal monetary policy derived in Clarida, Galí, and Gertler (1999).

Concluding Remarks
In closing, I think of our new flexible average inflation-targeting framework as a combination of TPLT at the ELB with flexible inflation targeting, to which TPLT reverts once the conditions to commence policy normalization articulated in our most recent FOMC statement have been met. In this sense, our new framework indeed represents an evolution, not a revolution. Thank you very much, and I now look forward—as always—to the discussion with the participants in this virtual Hoover event.

References
Ahn, Hie Joo, and Chad Fulton (2020). “Index of Common Inflation Expectations,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, September 2.

Bernanke, Ben S. (2020). “The New Tools of Monetary Policy,” American Economic Review, vol. 110 (April), pp. 943–83.

Bernanke, Ben S., Michael T. Kiley, and John M. Roberts (2019). “Monetary Policy Strategies for a Low-Rate Environment,” AEA Papers and Proceedings, vol. 109 (May), pp. 421–26.

Clarida, Richard H. (2020a). “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution,” speech delivered at the Peterson Institute for International Economics, Washington (via webcast), August 31.

——— (2020b). “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16.

Clarida, Richard H., Jordi Galí, and Mark Gertler (1999). “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature, vol. 37 (December), pp. 1661–707.

Eggertsson, Gauti B., and Michael Woodford (2003). “The Zero Bound on Interest Rates and Optimal Monetary Policy (PDF),” Brookings Papers on Economic Activity, no. 1, pp. 139–233.

Evans, Charles L. (2012). “Monetary Policy in a Low-Inflation Environment: Developing a State-Contingent Price-Level Target,” Journal of Money, Credit and Banking, vol. 44 (February, S1), pp. 147–55.

Mertens, Thomas M., and John C. Williams (2019). “Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates,” Staff Report 887. New York: Federal Reserve Bank of New York, May (revised August 2019).

Reifschneider, David L., and John C. Williams (2000). “Three Lessons for Monetary Policy in a Low-Inflation Era,” Journal of Money, Credit and Banking, vol. 32 (November), pp. 936–66.


1. The statement is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htmReturn to text

2. The views expressed are my own and not necessarily those of other Federal Reserve Board members or FOMC participants. I would like to thank Chiara Scotti for assistance in preparing these remarks. Return to text

3. For studies and references on the elements that motivated the launch of the review, see Clarida (2020a). Return to text

4. The most recent SEP, released following the conclusion of the December 2020 FOMC meeting, is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

5. The Statement on Longer-Run Goals and Monetary Policy Strategy articulates the inflation objective: “The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate” (paragraph 4). The FOMC statements starting with September 2020 indicate the conditions for liftoff: “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” (paragraph 4). The statements are available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

6. The FOMC statements starting with September 2020 read: “With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent” (paragraph 4). A similar sentence appears in the Statement on Longer-Run Goals and Monetary Policy Strategy. Return to text

7. The FOMC statements starting with September 2020 read: “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved” (paragraph 4). Return to text

8. The Statement on Longer-Run Goals and Monetary Policy Strategy articulates the inflation objective (see note 5). Return to text

9. The Statement on Longer-Run Goals and Monetary Policy Strategy says: “In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time” (paragraph 4). Return to text

10. See Clarida (2020b). Return to text

11. See Ahn and Fulton (2020) for a discussion of the CIE index. Return to text

12. The Statement on Longer-Run Goals and Monetary Policy Strategy articulates this concept with the following: “The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments” (paragraph 3). Return to text

Richard H. Clarida: U.S. Economic Outlook and Monetary Policy

Vice Chair Richard H. Clarida

At the C. Peter McColough Series on International Economics Council on Foreign Relations, New York, New York 

It is my pleasure to meet virtually with you today at the Council on Foreign Relations.1 I regret that we are not doing this session in person, as we did last year, and I hope the next time I am back, we will be gathering together in New York City again. I look forward to my conversation with Steve Liesman and to your questions, but first, please allow me to offer a few remarks on the economic outlook, Federal Reserve monetary policy, and our new monetary policy framework.

Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019) pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. Economic activity rebounded robustly in the third quarter and has continued to recover in the fourth quarter from its depressed second-quarter level, though the pace of improvement has moderated. Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level, supported in part by federal stimulus payments and expanded unemployment benefits. In contrast, spending on services remains well below pre-pandemic levels, particularly in sectors that typically require people to gather closely, including travel and hospitality. In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained, as many people were able to return to work. Inflation, following large declines in the spring of 2020, picked up over the summer but has leveled out more recently; for those sectors that have been most adversely affected by the pandemic, price increases remain subdued.

While gross domestic product growth in the fourth quarter downshifted from the once-in-a-century 33 percent annualized rate of growth reported in the third quarter, it is clear that since the spring of 2020, the economy has turned out to be more resilient in adapting to the virus, and more responsive to monetary and fiscal policy support, than many predicted. Indeed, it is worth highlighting that in the baseline projections of the Federal Open Market Committee (FOMC) summarized in the latest Summary of Economic Projections (SEP), most of my colleagues and I revised up our outlook for the economy over the medium term, projecting a relatively rapid return to levels of employment and inflation consistent with the Federal Reserve’s statutory mandate as compared with the recovery from the Global Financial Crisis (GFC).2 In particular, the median FOMC participant projects that by the end of 2023—a little less than three years from now—the unemployment rate will have fallen below 4 percent, and PCE (personal consumption expenditures) inflation will have returned to 2 percent. Following the GFC, it took more than eight years for employment and inflation to return to similar mandate-consistent levels.

While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished. The two new SEP charts that we released for the first time following the December FOMC meeting speak to these issues by providing information on how the risks and uncertainties that surround the modal or baseline projections have evolved over time. While nearly all participants continued to judge that the level of uncertainty about the economic outlook remains elevated, fewer participants saw the balance of risks as weighted to the downside than in September. Although a little more than half of participants judged risks to be broadly balanced for economic activity, a similar number continued to see risks weighted to the downside for inflation.

The Latest FOMC Decision and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases, and that also provided unprecedented information about our policy reaction function. As announced in the September statement and reiterated in November and December, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved. We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

In addition, in the December statement, we combined our forward guidance for the federal fund rate with enhanced, outcome-based guidance about our asset purchases. We indicated that we will continue to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum-employment and price-stability goals.

The changes to the policy statement that we made over the fall bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of “shortfalls [emphasis added] of employment from its maximum level”—not “deviations.” This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it “seeks to achieve inflation that averages 2 percent over time,” and—in the same sentence—that therefore “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from “flexible inflation targeting” to “flexible average inflation targeting.”5 While this new framework represents a robust evolution in our monetary policy strategy, this strategy is in service to the dual-mandate goals of monetary policy assigned to the Federal Reserve by the Congress—maximum employment and price stability—which remain unchanged.6

Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to the economy and will continue to do so as the recovery progresses, it will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.


1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. I would like to thank Chiara Scotti for her assistance in preparing these remarks. Return to text

2. The most recent SEP is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

3. See the FOMC statements issued after the September, November, and December meetings, which are available (along with other postmeeting statements) on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

4. The statement is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htmReturn to text

5. See Jerome H. Powell (2020), “New Economic Challenges and the Fed’s Monetary Policy Review,” speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast), August 27. Return to text

6. See Richard H. Clarida (2020), “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution,” speech delivered at the Peterson Institute for International Economics, Washington (via webcast), August 31; and Richard H. Clarida (2020), “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16. 

Federal Court Orders North Carolina Man to Pay Over $255,000 in Futures and Forex Fraud Scheme

The Commodity Futures Trading Commission today announced that Judge Max O. Cogburn Jr., of the U.S. District Court for the Western District of North Carolina, entered a consent order against Mark N. Pyatt, of North Carolina, imposing a permanent injunction and ordering Pyatt to make restitution in the amount of $255,850. The order also permanently bans Pyatt from registering with the CFTC and from trading commodity futures and retail foreign exchange contracts (forex). In the order, Pyatt admitted to fraudulently soliciting individuals to place funds in a commodity pool and to misappropriating most of the funds he solicited.

The consent order resolves a CFTC case against Pyatt that was filed in the Western District of North Carolina on February 10, 2020. [See CFTC Press Release No. 8120-20] The CFTC’s litigation continues against Pyatt’s company, Winston Reed Investments LLC.

The consent order finds that from at least April 2017 to February 2019, Pyatt accepted $276,850 from pool participants to trade commodity futures and forex. The consent order also finds that Pyatt misappropriated most of pool participants’ funds for business expenses and personal use, and to make Ponzi-like payments to other pool participants, while using only a fraction of the funds to trade. In addition, despite overall net trading losses, Pyatt sent reports to investors claiming profits of between 18.8 percent to 86.5 percent per month.

Related Criminal Action

In a parallel criminal action, the U.S. Attorney for the Western District of North Carolina announced that Pyatt pleaded guilty to wire fraud in connection with the scheme. On October 27, 2020, Pyatt was sentenced to 37 months in federal prison and ordered to pay restitution to his victims. [See United States v. Mark Nicholas Pyatt, Case No. 1:20-cr-00016, ECF No. 42 (W.D.N.C. Nov. 5, 2020)]

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office for the Western District of North Carolina in this matter.

The Division of Enforcement staff members responsible for this case are Michael Loconte, James A. Garcia, Erica Bodin, and Rick Glaser.

* * * * * *

CFTC’s Foreign Currency (Forex) Fraud Advisory

The CFTC has issued several customer protection fraud advisories, including the Forex Fraud Advisory, which provides information about a type of fraud involving the trading of foreign currencies and how customers can detect, avoid, and report these scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

Federal Reserve issues FOMC statement – December 16, 2020

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Implementation Note issued December 16, 2020