It never crossed my mind back then that one day I would be working on the problem of how to provide monetary accommodation in an economy with massive unemployment, very low inflation (perhaps even too low) and a policy rate stuck at the zero lower bound. With the exception of scholars of the Great Depression, back in the 1980s today’s policy challenges were not on anyone’s radar screen. Of course, that changed with the developments in Japan during the 1990s. More macroeconomists began thinking about liquidity traps and the monetary policy tools to help escape from them. These analyses gained momentum following Paul Krugman’s Brookings paper in 1998.1 They focused both on the use of the central bank’s balance sheet to provide accommodation and on communication about policy goals and forward guidance about the path for policy instruments. Much of this latter work was done within the New Keynesian paradigm, since communications are central to the policy transmission mechanism in those models.2 For obvious reasons, such research has come back into vogue today. The nonstandard policies emphasized by these lines of research have been important elements in the Federal Reserve’s toolkit over the past four years. The Federal Reserve engaged in two waves of large-scale asset purchases (March 2009 and November 2010), and, more recently, extended the maturity of the assets on our books (September 2011).
As I will talk about shortly, I believe such policy could provide more clarity about our attitudes toward providing monetary accommodation – and would be more in line with a structure I would have preferred to have seen in our August 2011 and January 2012 actions. This policy also can be structured in a way that would represent a balanced risk-management approach to achieving the dual goals of maximum employment and stable prices that the United States Congress has mandated to the Federal Reserve. Communications enhancements First, though, I’d like to discuss the Fed’s latest initiatives to enhance communications. As an accountable central bank in a democratic society, the Federal Reserve has an obligation to clearly articulate what it is trying to achieve with monetary policy. I believe that our latest communications efforts are an important step in further increasing such accountability to the public, as they reaffirm our commitment to both legs of the dual mandate and describe the ways in which we will seek to achieve those objectives. The framework statement Let’s start with the framework statement of our policy goals and long-run strategy. The framework clarifies how the FOMC interprets our statutory responsibilities for facilitating maximum employment and price stability in terms of measurable and achievable economic goals that we aim for over the longer run. We say that the Committee sees a rate of inflation of 2 percent over the long run as being consistent with the price stability leg.