The period of low US policy rates during 2004–5 was in part the result of the FOMC’s desire to make good on its earlier promise during the 2001–3 downturn to maintain low interest rates for a considerable period in order to head off deflation worries. While I do not believe that the evidence supports the view that this was the sole cause of the pre-crisis build-up in financial imbalances in the United States, it is plausible that they made some contribution.11 Maintaining very low interest rates long after the economy has recovered must run the risk of encouraging a new credit/asset-price boom and the reappearance of financial imbalances. While macro-prudential policies, such as the application of the counter-cyclical capital buffer in Basel III, are intended to be the primary instrument to head off such excesses, it seems unwise to place too great a burden on them. For that reason, I believe one should be cautious about committing to monetary policies that remain loose for a very long period after the economy has normalised. Let me conclude with a few more general remarks about the role of monetary policy at the current juncture. The sluggishness of the recovery has led some to question whether the framework is flexible enough to allow for sufficiently expansionary policies to support the recovery. Conversely, others suggest that the persistent overshoot of the inflation target indicates that if anything the MPC has interpreted its mandate too flexibly.
BIS central bankers’ speeches  9  Nominal Income Targets: an Old Wine in a New Bottle The State of the Economy The Institute of Economic Affairs’ 30th Conference  Charlie Bean, Deputy Governor Monetary Policy 27 February 2013  Chart 1: Nominal GDP growth Percentage changes on a year earlier 8 6 4 2 0 -2 Nominal GDP (a)  Nominal GDP expected 1 year earlier  -4  (a)  Nominal GDP expected 2 years earlier  -6 1999  2001  2003  2005  2007  2009  2011  (a) Sums the Monetary Policy Committee’s mean forecasts for real GDP and inflation. The Committee’s forecast for RPIX inflation is used prior to February 2004, adjusted for the difference in the inflation target.