The forecasts for growth, the unemployment rate, and inflation that FOMC participants have been submitting since 1979 have always been conditioned on each participant’s views of the future path of policy most likely to foster outcomes consistent with our dual mandate responsibilities – what we refer to as the appropriate path for policy. As of last January, our quarterly Summary of Economic Projections (SEP) now include the projected paths for the federal funds rate and qualitative information about the balance sheet that make up these views. I believe this move significantly enhances policy accountability. For example, suppose inflation were running higher than we would like, and the economic projections in the SEP showed it coming down over the next couple of years. In the absence of policy projections, the public would not know whether the FOMC thought inflation would simply come down on its own or whether it thought that a monetary tightening would be required to reduce inflationary pressures. The inclusion of participants’ policy projections will help communicate such judgments. Furthermore, households and businesses will be able to make better informed decisions if they have a clearer notion of future policy rates; the potential for reduced uncertainty could also lower the risk premium embedded in longer-term interest rates. Now, clearly, our forecasts of what rates are going to be three years from now will often be wrong – and sometimes by a good deal.
The unemployment rate is 8-1/4 percent – well above the rate anyone on the FOMC sees as being consistent with our longer-run goal; in my view, this is a substantially higher rate than one might attribute to supply-side factors, such as extended unemployment insurance and a heightened degree of mismatch in labor markets. Realistically, this is a 2-1/4 to 3 percentage point deviation from our current maximum employment objective. Because this occurred with nominal interest rates stuck at the zero lower bound since December 2008, I believe it’s hard to say that we are not in a liquidity trap. Recently, the U.S. data have been more encouraging, with the labor market improving and private demand showing a little more traction. Without a doubt, these are welcome developments. But even the more optimistic forecasts see output increasing only moderately above its potential growth rates; no one has an expectation for a surge in activity that would quickly close resource gaps. At the same time, the outlook for inflation is subdued, with most FOMC participants’ forecasts for increases in total personal consumption expenditures prices averaging roughly between 1-1/2 and 2 percent over the next three years. Furthermore, private sector long-run inflation expectations are quite well anchored.