Monetary policy implications (1) The character of these shocks has important implications for monetary policy. It is a famous dictum that monetary policy affects inflation with ‘long and variable lags’. [7] While these lags are difficult to predict and likely to vary across time in concert with the broader state of the economy, we typically think that monetary policy actions taken today will have their maximum impact on inflation at a horizon of 18 – 24 months. [8] By implication, monetary policy cannot entirely offset the impact of external price shocks on UK inflation. [9] And attempting to do so may serve to add to rather than contain inflation volatility. As we have seen, higher energy prices feed through to CPI inflation within a matter of months, via both direct and indirect channels. If a rise in international oil or gas prices is a genuine shock – in other words, it could not have been anticipated – then even an immediate monetary policy response would not be able to offset its initial impact on UK inflation. The offset would only feed through as the lags in policy transmission unwind. As a result, even a very active employment of UK monetary policy cannot prevent the emergence of some short-term volatility in UK CPI inflation. What’s more, given the uncertainties surrounding (a) the lags in monetary policy transmission and (b) the direction and magnitude of further external price shocks, the danger exists that attempts to ‘fine tune’ inflation developments using monetary policy become a source of volatility themselves.
The FOMC consists of the Board of Governors plus the presidents of each of the 12 district Banks, and it meets in Washington, D.C., eight times per year to deliberate and vote on monetary policy. As the current New York Fed president, I am vice chairman at these meetings and have a permanent vote. At these meetings, the committee members and I each present our current outlook for the economy. For these assessments, we augment input from our research departments with critical information about local economic conditions supplied by our boards of directors, regional advisory councils and conversations with local stakeholders. My visit to Queens today is a part of these regional activities. One thing that makes my job even more interesting is that New York has some roles unique within the Fed. For example, the New York Fed is the Reserve Bank charged with implementing monetary policy. At the direction of the FOMC, we buy and sell Treasury securities. We are also the eyes and ears of the Fed on Wall Street, and we supervise many of the largest financial institutions in the country. We operate Fedwire® – the conduit for large money transfers between banks. And, we provide banking services to the U.S. Treasury, and central banks and governments from around the world.