Instead, if you pay attention to the incoming economic news and listen to our assessment about how the outlook is evolving, then I think you will be able to judge for yourself when liftoff is likely. What also matters for financial asset prices is the likely post-lift-off trajectory of short-term rates over the medium- to longer-term. In fact, this should be more important than the particular month in which the normalization process starts. On this score, I think it is hard to be precise about the expected path of short-term rates. That is because it depends on two important factors: (1) how the economic outlook evolves, which depends, in part, on how loose or tight monetary policy actually is at a given level of short-term rates, and (2) how financial conditions broadly react to changes in the level of short-term rates. My own view is that the upward trajectory of short-term rates is likely to be relatively shallow. This reflects several factors. First, the lack of strong forward momentum in the economy despite the low level of short-term interest rates suggests that U.S. monetary policy is not as accommodative as one might think. In particular, the lack of strong momentum suggests that the real equilibrium federal funds rate today is considerably lower than the 2 percent rate assumed in the standard Taylor Rule formulation.
Moreover, in the unlikely event that the rates we initially selected for the IOER and ON RRP were insufficient to move the federal funds rate into the desired range, we could alter the level of these rates and/or the spread between these rates so as to move the federal funds rate into the desired range. Finally, we also have other tools, such as the Term Deposit Facility and term reverse repo that could be used if needed to help achieve the targeted range for the federal funds rate. While I don’t expect that these tools will prove necessary, it is nice to have them available should we need to deal with unanticipated contingencies. How will financial markets react to the onset of normalization? My own view is that there likely will be some turbulence. After all, lift-off will represent a regime change after more than six years at the zero lower bound. Recognizing this, we have a responsibility to minimize the amount of potential turbulence by communicating clearly in order to reduce uncertainty about conditions surrounding lift-off and the likely aftermath of lift-off. This means being clear about what factors are important in driving the timing of lift-off. However, this does not mean providing advance notice about precisely when lift-off will occur because the timing should depend on the incoming economic news and how this influences the economic outlook.