Thus, I conclude that the risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the economy were to strengthen considerably. 4  BIS central bankers’ speeches  With inflation well below its longer-run goal and high unemployment, the FOMC decided at its March meeting to maintain a “highly accommodative” policy stance: a federal funds rate in a range of 0 to 25 basis points with forward guidance based on economic thresholds. Moreover, to support a stronger economic recovery, the FOMC is purchasing long-term Treasury securities at a rate of $ billion per month and agency mortgage-backed securities (MBS) at a rate of $ billion per month, and will continue purchasing assets until it sees substantial improvement in the outlook for the labor market, conditional on ongoing assessment of benefits and costs. Combined, these actions are intended to ease financial conditions and thereby help to establish a self-sustaining economic expansion. As I stated in my recent Economic Club speech, the benefits of our asset purchases – as reflected in improving financial conditions and the quickening pace of interest-sensitive spending such as that on consumer durable goods, housing, and capital goods – exceeds the costs. Furthermore, the labor market outlook has yet to show substantial improvement. Consequently, I see the current pace of asset purchases as appropriate. At some point, I expect that I will see sufficient evidence of improved economic momentum to lead me to favor gradually dialing back the pace of asset purchases.
The increase in payroll tax rates, the rise in high income tax rates, the increase in taxes associated with the Affordable Care Act, and the sequester will result in fiscal drag of about 1¾ percentage points of GDP in 2013, an unusually large amount of fiscal restraint when the economy doesn’t have strong forward momentum and unemployment is still elevated. In terms of the labor market, we have seen only a moderate improvement in labor market conditions over the past six months or so. After an encouraging pick up in the pace of job creation around the turn of the year, the employment report for March showed a gain of only 88,000 jobs. While I don’t want to read too much into a single month’s data, this underscores the need to wait and see how the economy develops before declaring victory prematurely. I’d note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious. Since September, payroll employment has increased an average of 188,000 per month, compared with an average of 172,000 per month over the previous two years. The unemployment rate has declined from a peak of 10 percent in October 2009 to 7.6 percent in March; however, much of the decrease is due to a fall in the number of people actively looking for a job.