We should be exceptionally patient in adjusting the stance of U.S. monetary policy – even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives. Conflicting signs in the labor market Of course, to judge the success of policy, you have to know when you’ve actually reached your targets. Knowing when we hit our inflation target is straightforward. After all, a 2 percent increase in PCE prices is an easily identifiable number. But full employment is a far more nuanced concept. As the FOMC’s annual January “Statement on Longer-Run Goals and Monetary Policy Strategy” recognizes, maximum employment can be influenced by a large number of structural factors that can change over time and may not be directly measureable. In light of this uncertainty, the Committee considers many factors in gauging maximum employment. As the extremely relevant research presented at this conference makes clear, judging the degree of slack along these many dimensions is a difficult and complex task. But it is one that is critical for the conduct of monetary policy – we must have a good idea of what constitutes achievement of our full employment target. Our Chicago Fed research staff has been working long and hard, and in my remarks today, I will briefly talk about some of our results that touch on several of the most contested labor market issues on the table today. These involve labor force participation, job openings and wages.
As a result, the ECB recently lowered policy rates to the ZLB, has started undertaking additional unconventional monetary policies, and is now encouraging fiscal expansion among eurozone countries that are able to do so. These lessons from monetary history strongly suggest that there are great risks to premature liftoff from the zero lower bound or near-ZLB conditions. Unless economic conditions are fundamentally strong and the previous impediments to growth have receded sufficiently, the odds remain high that monetary authorities will need to retreat right back into the ZLB. And the costs of being mired in the zero lower bound are simply very large. I have already talked about how the ZLB prevents using our very best policy tools to address negative shocks. The constraint also means that interest rates cannot fall low enough to equate the supply of saving with the demand for investment. This, of course, significantly impedes capital formation, future economic growth, and further employment expansion. Furthermore, the ZLB often comes hand in hand with undesirably low inflation or even a falling price level, carrying with it the associated costs of debt deflation on the real economy. The risk of too-high inflation What about the other risk to our policy goals that I mentioned – the risk that the U.S. economy could face pricing pressures that accelerate rapidly and ultimately leave inflation far above our 2 percent target for an unacceptably long period?