In my remarks, I will discuss the U.S. economic outlook and the implications for U.S. monetary policy. I will focus primarily on last month’s Federal Open Market Committee (FOMC) “lift-off” decision – the first increase in the federal funds rate target range in nearly 10 years. I’ll explain what motivated my vote to begin to normalize U.S. monetary policy. I’ll also offer a preliminary assessment of how things are going so far – both with respect to how the U.S. bond market reacted to lift-off and how well our new tools are working as we begin to push up short-term interest rates. Both issues are pertinent, as money market rates have spent a very long time close to zero and we have never attempted to tighten monetary policy with such a large balance sheet and high level of excess reserves. To summarize my conclusions: Generally so far, so good on both fronts. Looking ahead, I’ll talk about what comes next. No surprises here – it depends on the data. As noted in the December FOMC statement, we expect that the normalization of monetary policy will be quite gradual. But, there is no commitment here. The flow of the data – broadly defined – will drive our actions as it influences our assessment of the economic outlook and our view of the stance of monetary policy best suited to achieve our dual mandate objectives of maximum sustainable employment and price stability.
Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired. The goal is the maximum sustainable level of employment – in other words, the most job opportunities for the most people over the long run. Some of you may be wondering whether the risk of a recession isn’t already quite high? And, if so, doesn’t this imply a need for special care in adjusting monetary policy? After all, the current economic expansion is more than six years old – a bit long in the tooth by post-war standards. Even so, recession risk did not play a major factor in my thinking. Economic expansions don’t simply die of old age. They primarily end either because monetary policy is kept too loose for too long, thereby necessitating a subsequent sharp tightening in monetary policy to prevent a significant inflation overshoot, or because some large adverse shock hits the economy that the central bank cannot easily offset. Mitigating the first risk of being forced to choke off the expansion argues for getting started with policy normalization now rather than holding off. With respect to the second risk of unanticipated shocks, this is obviously very difficult for the central bank to insulate the economy from.