Given these developments, the FOMC began adjusting the mix of its tools in December. The Committee, however, is maintaining the overall highly accommodative stance of policy. The Committee modestly reduced the pace of its monthly asset purchases from $ billion to $ billion in three separate $ billion steps. In addition, with the unemployment rate approaching the 6-1/2 percent threshold that was established in December 2012, the Committee decided it was time to update its forward guidance on the future path of shortterm interest rates. Our policy statement now emphasizes that when deciding how long short-term rates will remain at their current level, the Committee will use a wide range of information to assess the realized and expected progress toward our dual mandate goals of maximum employment and price stability. The statement also indicates that given the Committee’s current assessment of these factors, it likely will be appropriate to keep the fed funds rate at its current level for a considerable period after the asset purchase program ends. Furthermore, even after the economy lifts off and employment and inflation are near mandate-consistent levels, economic conditions likely will warrant keeping short-term rates below their typical long-run level for some time. The various asset purchases the Fed has undertaken since 2008 have expanded our balance sheet more than fourfold, to over $ trillion dollars. Moreover, according to the FOMC’s projections and the latest market expectations, by the time the policy rate increases, it will have been near zero for about seven years.
The very low inflation is prompting some to argue that policy normalization may have to wait still, but perverse effects need not be underplayed. But it is likely that policy normalization – understood as a return to positive real policy rates, will be quite a time consuming process, particularly in Europe. Major risks persist, or even grow, in the global economy; they are due to interconnectedness and synchronicity of business cycles, the search for yield that has stimulated big bubbles again, a propensity to resort to protectionism measures (which adds to fragmentation tendencies), the accumulation of systemic risks in non-banking markets. When it comes to monetary policy let me mention a few challenges. The models central banks use have baffled in quite a few instances; we still do not have clear answers as to why inflation is persistently so low in most of the Union, in spite of economic recovery. Financial stability concerns are increasingly on our radars. There are other puzzles, like the flattening of the Philips Curve and I would range here the fall of financial intermediation in some Non-member Sates –in Romania and Hungary in particular. This seems to be a clear case of credit-less recovery, but that may also be the outcome of financial integration – for international companies prefer to source credit on external markets (where these may be cheaper). The global financial cycle poses a major challenge.